Thursday, March 10, 2011

Money Management Part Four - Setting Up a First Budget and Using Cash



Richard pulled out a paper.  "Here's a template for you to start with.  Let's fill in some blanks.

First let's fill in your fixed expenses - your mortgage, loan payments, things that are always the same.  Next we add in the bills - take an average over the last year and fill in that amount.  Now put the rest in order of priority and allocate a realistic amount to each one.

You guys tithe, right?"

"Yes."

"Okay then - you have 10% going to tithing, so all the numbers we put in here need to add up to 90% of your income or less.  How are we doing?"  Richard looked over the page where Jill was filling in numbers.

"Um.... well, I think I see why our line of credit and credit cards keep creeping up."

"Oh?"

"Yeah... with the tithing included we're at 110% of Jack's paycheck."

"That would do it.  Now, we need to make this work.  Ultimately we want to see you reach the place where you're living on 70% of your income, saving 20% and giving 10% - but for now, let's just see what we can do."

Now Jane spoke up.  "Along with the budget, the next thing to do is to switch over to cash spending."

Jack looked interested.  "Cash?  No one uses cash anymore."

"We do."  Richard nodded as Jane explained.  "That has been an essential part of our getting securely on track.  When you only spend cash, you can't spend more than you have.  But if you're using plastic, it's really easy to pick up a few extra things and go over budget without even realizing it.  Did you know that statistically people spend 12-18% more when they pay with plastic?  So even if you're paying off your card faithfully every month to avoid interest, it's still costing you to use the card."

Jill nodded.  "Yeah... I can see that.  But really - how is it practical?  How do you make it work?"

"Well, there are a lot of systems you can use.  Envelopes, jars, a bank account and a tally book.  You choose the system that works for you.  When payday comes, you go to the bank and take out the amount of money to cover your cash spending categories, leaving the money in the bank to cover your automatic withdrawals.  You divide the money into the spending categories for the pay period, and when it's gone, it's gone."  Jane gave Jill another spreadsheet.  "Here is a list of categories that work well for the cash system.  Use it to get you started"

Jill looked at the list.

Gas
Groceries
Miscellaneous
Clothing
Kids
Jack/Jill
Gifts
Medical/Dental
Giving
Car Maintenance

"Now what you do this week is, you take your budget and figure out what you should put into each of these.  You decide what kind of cash system you want to use. Then next week on payday, you put it to work.   Now, let's see what we can do with that budget to give you a head start while we still have some free play time left."  Jane picked up her pencil and scooted closer to Jill.  "We'll just start out with the categories you already have, and add some cash figures.  Our goal this week is just to get you on a budget where your spending doesn't exceed your income.   Not accumulating any more debt is the first step toward getting out of debt."

They worked out a new budget that Jack and Jill both agreed looked manageable to start out with.

Jack and Jill's New Budget - August
Food
 $    500.00
Mortgage
 $    827.00
Property Tax
 $    150.00
House Insurance
 $    100.00
Utilities (Heat, Electricity)
 $    100.00
Other Bills (Phone, Internet, Cable, Cellular)
 $    200.00
Clothing
 $      40.00
Automobile Costs (Gas, Repair, Licenses)
 $    100.00
Car Payment
 $    280.00
Health/Dental Care
 $    140.00
Recreation/Hobbies/Entertainment
 $    100.00
Household (including furniture, supplies, repairs, lawn care, etc)
 $    100.00
Miscellaneous
 $      40.00
Gifts 
 $      40.00
Payroll Deductions (Tax, EI, CPP)
 $ 1,168.59
Debt Payments
Line of Credit
 $    270.00
MasterCard
 $    162.00
Visa
 $      90.00
Student Loan
 $    155.00
Jill's Allowance
 $      20.00
Jack's Allowance
 $      40.00
Charitable Giving
 $    393.14
 $ 5,015.73

Noticing several 'cash account' notes, Jack hesitated.  "You can't mean you want us to have this much cash in our wallets or laying around the house?!?  It will get spent in a week!"  Jack gasped.

"You can choose the system that works for you.  Some people like to have it there in envelopes or jars in a safe and keep tally slips in each one.  Others like to set up a separate bank account to be their 'cash account' and keep a ledger sheet for each account.  It's up to you to decide how to do it.  The important thing is, you have a finite amount of money to cover these expenses.  If you spend all of it in one shot, then you're broke for the rest of the month.  And you've got kids to feed and clothe.  I think you'll be able to keep your priorities straight."  Richard remembered how uncertain he had been when they first started on this journey, but he had the perspective of one who'd come a long way.  "You'll be fine.  Now listen - when you get home, you take your credit cards and you hide them away.  Freeze them in a block of ice, or put them in a box in the attic.  Hide them somewhere that will make you really think before you swipe that card or punch in that number, understand?"

Jack nodded slowly, then more decisively.  "Will do."

"Great.  How's Friday for you guys?  That's your payday, isn't it Jack?  Let's get together and put this plan into action!"  Richard stood up, waved to their kids and headed over to collect them.  Jane gave Jill a hug and encouraged her, "You guys can do this.  Trust me, if we can, you can!"


Friday came, and Richard walked Jack and Jill through setting up their cash system.  They also worked out a spreadsheet with all of August's scheduled bank payments and planned cash payments in place according to their due date.  There was plenty of room at the bottom to record additional payouts through the month, and a balance at the bottom.   Managing this record would be Jill's job, as she was the one who actually enjoyed working with numbers while Jack preferred to keep an advisory role.

They opted to try the envelope system for a month or two, thinking that the visual impact of cash on-hand would be helpful in trying to get a handle on their spending.  Jane had told Jill that it became something of a game for her after a while, to see how much money she could have left in a particular envelope at the end of the month.  For her, that personal challenge gave her motivation to turn away from the little purchases here and there that had once added up to so much money out the window.  Jill nodded politely, not entirely convinced but willing to give it a go.

They divided the cash into the various labeled envelopes and put the envelopes and a printout of the spreadsheet all together in a locking file carrier.   "Now, where are those cards?" Richard asked.

"Hidden."  Jack replied.  "I hid Jill's and she hid mine, so we each have to enlist the other if we want to break out the plastic."

"Not going to happen!"  Jill laughed.

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