Budgeting

“I don’t even have enough money to budget.”

Actually, you do and you can. Even if you are living in your parents’ house, with transportation taking up 90% of your money, you can still budget. In fact, you’ve already done most of the prep work.

In the previous chapters you identified your income sources and how often they arrive. You know what your bills are each week. Now all we have to do is mash them together and make:

A – B = C

Budgeting is a cash flow analysis. This means:

1. We see when and how much you take home in cash/income on a monthly basis, and apply that to
2. Your regular monthly bills;
3. The remainder or net balance, is what you are able to spend (over and above your regular monthly bills for groceries, clothing, entertainment, etc.) and save (for emergencies, vacation, college, retirement, etc.)

That’s a financially literate way of saying that income and expenses drive what you are able to spend.

What You Do & How You Do It

If you got paid once a month and you had to stretch that money all the way out for the rest of the month, how difficult would that be? When would you run out? Week 2? Week 3? Would you make it all the way through? Maybe?

The smartest thing you can do is be aware of what you do and how you do it.

You use your money to save, invest, pay bills, purchase things and give.

Once you understand when these bills are due, you can structure them based on the way you get paid.

Picture Your Bills

When are your bills due? Sporadically? How many are due on the first? The majority?

Years ago, bills were basically all due on the first of the month. Today, they can be due on the 1st, the 20th, the 8th—any day of the month.

Creditors recognize that they need to adjust somewhat to how people get paid. Some even offer a grace period to encourage customers to pay. Once you understand when your bills are due, you can structure them based on the way that you get paid. And that can keep you from running a series of overdrafts every month because you can’t balance your income to your bills.

Money Tool: Weekly Income Statement

Remember when we looked at your income sources?

Now, we’ll use a scenario where one earner receives $500/week and the second income earner is paid $1,000 on the 1st and 15th of each month to compare to how their bills come due.

From the example, you can see that Week 2 and Week 4 do not have as much cash on hand as the other two weeks. Let’s compare to their weekly bills.

Knowing Your Bills Each Week

Your net balance is what you have left for the rest of your expenses (purchasing, saving, giving and investing). From this scenario, you can see that the lowest amount of money is available in Week 1 (actually, you’re in the hole $500!) and Week 4 ($150). Now you know when money is going to be tight and you can time your other expenses accordingly. You can also look at ways to shift bills so they fall into Week 3, when your account is the most flush, or examine ways to put your bills on level pay to avoid the spikes and dips. From the chart, you also know that, if you’re going to spend money (on a date, clothes, food …) you’ll have to adjust your purchasing pattern to fit the week.

Bills vs. Purchases

I recommend setting up one account and dedicating it just to paying your bills. Make sure you have free bill-pay services associated with your bill paying account (more on this later). Use this account for all of the payments that you can schedule automatically. This includes:

• Utilities
• Mortgage
• Car Payment
• Insurance

In my house, anything that we purchase with a credit card does not come out of our bills account. We use separate purchase accounts for these (in our case, reloadable bank cards).

Leveling Things Out

Or… if you would like to have some excess every week, so you don’t have to live on such a tight budget in other weeks, you can try to level out your bills.

Leveling out can be accomplished by contacting your creditors to:

(1) request a budget plan for bills that tend to spike up and down (like how your air conditioning cranks your electric bill up in the summer and the furnace jacks up your gas bill in the winter);

and

(2) reschedule your payments to hit when your account is more flush (auto loans can be particularly flexible here).

Money Tool: Bill Pay

Overdraft fees happen at two points: when you make purchases (with credit-card overage/late fees) and when you pay bills (through late fees and checking overdrafts). We’ll take a hard look at purchases shortly. Right now, we can focus on eliminating half of your overdraft vulnerability by focusing on payments. By setting up just one account that only bills get paid from, you are in control. You control the money that goes in and the money that goes out.

I don’t write checks. I use my bank’s bill-pay services. Bill pay is a fantastic tool. Not only can you schedule your payments so you never pay an overdraft fee again, but you can use your bank’s dime to do it.

I also set up my bills to be paid automatically. This eliminates human error (on my part). We are bombarded by interruptions each day, so it’s easy to overlook a payment or forget to push money into an account. Recently, I promised someone that I would pick up a lightweight vacuum on my way home from Des Moines. I then got a phone call, got to thinking about other things, and drove right past the hardware store. I didn’t realize I’d forgotten until I got home. These kinds of distractions interfere with the best-laid plans. This is exactly why I prefer automatic bill pay. My bills are taken care of whether I’m on a business trip, at one of my kids’ concerts, on vacation, or in the hospital.

Push‐Me Pull‐You

Dr. Doolittle¹ had a gazelle-unicorn creature called a pushmi-pullyu (pronounced “push-me-pull-you”), with a head on each end of its body. When it tried to move forward, each head strained to move in the opposite direction.

Similarly, in setting up your bill-pay system, you have a choice to make. Do you let the bank push the money to your creditors? Or do you give your creditors permission to pull the money from your bank?

For maximum control of your money, push money out rather than letting a vendor “help themself” because:

• Your bank becomes your one-stop shop for making payment, deposit, and transfer changes;
• You are not furnishing others with your ABA number, routing number, and checking account number
• There is only one password and account to manage
• Only your bank has access to your funds; if there is a mistake, you don’t have to sort out the players who have access to your account.

Cushioning Flexible / Variable Bills

For bills that you can’t level out with a budget plan, create a “cushion” to protect yourself from overdrafts. Take your vendor’s average bill and subtract it from the highest bill. This is the cushion you need to build into your bill-pay account for this bill. Divide the difference by 12 months (if this is a monthly bill) and deposit that amount extra into your bill pay account each month. For instance, if you put an extra $20 into your bill-pay account each month, you’ll build a big enough cushion so when the higher monthly bill comes due, you’ll have enough money in the account to cover it.

Cushioning is a great tool for avoiding overdraft situations. If your bills come to $1,000/month and you cushion yourself by putting $1,001 into your bill-pay account each month, at the end of the month, you have $1 left. Want a Christmas savings plan? Cushion $10 extra each month. You’ll have a built-in holiday savings account, because nothing but your bills touches this account.

Want to use your cushion to pay your utility bill in December, to free up those funds for gift expenses? Put an additional 1/11th of your utility bill in each month starting in January. By December, you’ll have built up enough to pay your December utility bill payment.