Easier Said Than Done - Part II

Continued from part 1...

So here's the budgeting experience so far:

I'm using Quicken to track all our expenses. It really helps to see trends and quickly check previous numbers. Turns out just entering in the purchases isn't enough though. So, I went in and updated the budget number so that I could more easily track how we're doing.

The first thing I noticed was that that I hadn't updated some of the expenses. It makes a big difference when my actual Life Insurance expense is twice the budgeted amount for example.

The second thing I noticed was that while we were mostly on budget for the budgeted items, we added some non-budgeted items. These weren't accounted for elsewhere, so we ended up overspending for the month. For example, we bought some movies earlier this month, but there is no budget for it. So if we stick to the budget for everything else, we're still left going over budget. Buying the movies is fine as long as we recognize that something else has got to give.

The third thing I realized was the importance of categorizing items properly. The two biggest examples of this were vacation spending and loans. When we went away for my wife's birthday, we bought alcohol and food for the trip. We also bought a few items that some friends had asked us to pick up. The problem was that these items were all categorized as food. You can just imagine what that did to our food budget. So to track these expenses more accurately, I actually created two new categories: Vacation:Food and Loans.

Lastly, I noticed that our small "savings accounts" weren't being tracked at all. Haircuts, car maintenance, eye glasses, etc. These are expenses that I've broken down into monthly payments, so I that I'm not hit with a huge bill when the time comes. This month was the time we buy the cat his 20lb bag of cat food for example. That kind of throws that budget out.

Once I get this under control, I should be able to find more money to throw at the debt. For example, I budget 250/month for gas. If I only spent 200 one month it's not likely I'll need 300 for the next month, so I can then throw this extra money towards the debt. Also, the next time the car maintenance comes around I'll actually have some money set aside for it.

So, I'm going to keep working at it and I'll let you know how it goes. Overall, I say I appreciate more now than ever the importance of watching your spending closely.

So how do you keep track of your finances? What's working what's not? Do you think it's worth the effort?

Easier Said Than Done Part I

The reason I created a spending plan in the first place was so that I could pay my debts down faster and to not have to go into more debt in the future. Having the budget gave me that general framework, but it ended up being quite easy to just forget about the money at the end of the month. Then money like my poker savings just disappeared.

So now that I've said I want to budget my money, here comes the tough part. Actually doing it.

I don't currently have a lot of wiggle room in my budget. About the only number I can play with is the amount of debt repayment that I make. With both my wife and I in school (and some previous poor choices) we've managed to get a substantial debt built up. We're not really living outside our means now, but we have a pretty big hill to climb and I'd like to pay it off as quickly as possible.

My biggest motivation is to get out of the condo I'm in. Both to get away from my loud bass playing neighbors and so that we can start on a family.

So I started to tackle the job this week. I'm a pretty organized guy and pretty frugal so I have to confess I figured I'd jump on here and write about some minor tweaks I made and give some great advice about tracking these numbers. Unfortunately I have to admit, it's not quite as simple as I thought.

First off using a credit card complicates budgeting quite a bit. I can see why most financial books recommend avoiding them now. It's not just about carrying a balance. The concept of credit is buy now and pay later, so this months bill is for last months purchases. Mix in cash and it gets very confusing.

It probably wouldn't be so bad if I put the cash aside when I made the purchases to pay the bill next month. At this point though I'm essentially a month behind with not a lot of hope of catching up. In hindsight I shouldn't have let that happen, but let's move on...shall we.

I still won't say credit cards are bad, but they do make for some interesting budgeting issues. In fact, I wrote a posting on why I use my credit card for almost everything. I'll post it in the not too distant future.

At some point I'd like to catch up, so I'm not a month behind (tax return perhaps?). In the meantime, I tally up this months surpluses and deficits and use the difference to pay more (or less) on the line of credit in the following month.

My advice to anyone just starting out is to put money aside when you make those credit card purchases.

Part II next week...

Doing Magic with Numbers

Time for a little magic!!

Last posting I talked about my poker strategy. I mentioned at the end of it that I had some problems tracking the funds. Here's the first part of the magic trick...the money disappeared.

That's when I noticed that there is a problem with my budgeting technique. I talked about the benefits of budgeting before, but I realize now that creating a budget is just the first step. It gave me a general idea of my limits and for the most part I kept within those constraints even though I wasn't checking the numbers regularly. And, if it wasn't for unexpected expenses it probably would work just fine.

When it comes time to pay the Visa and we need to decide how much to pay, the waters always seem to get a little muddy. We sort of just eyeball the balance in the chequing account and figure out how much we can comfortably afford to pay and still make the next mortgage payment.

To clarify, we don't leave a balance on the Visa ever. However, in this particular case we had some unexpected car expenses and some frivolous (but glorious) travel expenses that needed to be taken care of. So the question was how much to take from the chequing account and how much from the line of credit.

So using the eyeball method and seeing this inflated chequing account, we included my poker winnings in the amount to pay from chequing. Not intentionally of course, but I hadn't really been watching what was in there too closely. Well...there goes my poker plan...or so I thought.

Now here where the real magic begins. Ignoring my other expenses for the time being, let's look at just the car repairs and the poker savings. The poker winnings in this case were $200 and the car repairs were $3000.

Scenario 1:
I put my poker money into a savings account and draw the full $3000.00 from the line of credit.

The result: +$200.00 in savings -$3000.00 on the line of credit
Net result: -$2800.00

Scenario 2:
I use my poker money to pay down the visa and draw 2800 from the line of credit.

The result: $0.00 in savings -$2800.00 on the line of credit
Net result: -$2800.00

Prest-o change-o! The result is exactly the same. Actually I'm better off in scenario 2 because I save the interest on the $200 for as long as I don't pull it back out. And by changing my thinking the disappearing poker money comes right back into view. It's just a number in a column somewhere. Or, it would be if I had been tracking this better.

Keeping that in mind, I don't think it makes a lot of sense to have separate accounts for all these savings (i.e. poker, vacation, car, haircuts, etc). Especially when you have a large outstanding debt like I do. So instead of earning little to no interest I can put these things into the line of credit and save interest. This only works because I can pull the money back out again when I need it though. Putting these towards the mortgage for example would mean the savings would be lost.

The problem is only how to properly track these amounts. I'll discuss this more next post.

Spending Plans

If I titled this posting as Joys of Budgeting, I wonder how many people would have read on. Most people I've talked to, aren't big fans of budgeting. I think it's because most of us look at budgeting as restricting our spending. However, it's income that restricts our spending, not the budgets. At least we should be restricted by our income. Spending more than we make is a recipe for disaster.

A budget is just a tool to help us to ensure that our money goes where we want it to go. It doesn't mean the end of all fun shopping. You determine what you want to spend the money on. Whether it's movies, clothes, a new car, etc. It's a plan on how to spend the money the way you want and it's only as restrictive as you want it to be, or your income allows. That's why I used the term spending plan, as I think budgets make everyone immediately think of "tightening the belt".

In fact I personally find it quite freeing and not restrictive at all. When money is tight we have a tendency to avoid spending all together and when we do spend we feel guilty. At least I do! With a spending plan in place, I know what I have money set aside for. So if I have a video game budget of $50/month, I don't feel guilty about buying a $40 game with an otherwise tight budget. The savings and the debt repayment were already included when I added the video game budget.

Also, I think it helps to have a little bit of flexibility built into your plan. Wiggle Room, Fudge Factor, Mad Money, or whatever you want to call it. Just some unaccounted extra money, so that if you eat out a little more one month, or spend a little extra on clothes you don't feel guilty. If you start resenting the plan you're not going to want to use it.

Making your plan unrealistic or too restrictive is just going to make you hate it as well. Maybe you'd like to pay off your house in 10 years, but if that means no fun at all, it's not going to last. I've kept a very tight budget for several years while my wife was in school and we both started to go a little bonkers. It just can't last.

If you've tried budgeting before, you probably noticed that the money you planned to put into savings, after all your expenses, never seems to be there. You tell yourself it's just this month and next month will be different, but it never is. I think the reason this happens is because wants often become needs (or feel like needs) and when the money is there you spend it. Therefore, it's important that you pay yourself first.

This doesn't mean that you don't pay your bills, as I think your personal credit is your second most valuable asset beside financial knowledge. What it means is that you put some money aside for your savings automatically. Whether that is off of each pay cheque or at a certain date is up to you. The key is that money is moved so that you don't see it. Out of sight, out of mind. If you're building your RRSPs you're probably already doing this.

So after you pay yourself and you pay your bills, you're free to spend the rest of the money however you want. So if you end up not following the budget exactly, you're still OK. If you eat out more month you don't buy the video game that month for example. As long as you don't exceed your income you're fine.

If you find that your expenses are greater than your income, you are left with two options. You either need to make more money, or you need to reduce the expenses. Either way, the spending plan will be a useful tool in identifying these areas and allowing you to choose what is the most important to you.

If you don't already have a budget in place and you're not sure what things cost, just record your expenses for a month or two with no changes. You might be surprised at how much money is going to different things. Eating out always seems to catch people by surprise. Then decide if that's really the best way for you to spend your money. Keep in mind this is how YOU think you should spend your money, not how anyone else thinks you should. It's your choices and your money!