Gather Little by Little - Personal Finance with a Christian Perspective » Christian Budgeting http://www.gatherlittlebylittle.com Proverbs 13:11 - "...he who gathers money little by little makes it grow." Fri, 20 Nov 2009 11:00:36 +0000 en hourly 1 Talking Money with your (future) wife http://www.gatherlittlebylittle.com/2009/11/talking-money-with-your-future-wife/ http://www.gatherlittlebylittle.com/2009/11/talking-money-with-your-future-wife/#comments Thu, 19 Nov 2009 11:33:06 +0000 Mike http://www.gatherlittlebylittle.com/?p=2436 couple

As I had written a few weeks ago, a good friend of mine is getting married in early 2010. Being a financial planner, I always find it interesting to see how couples deal with money. It is often overlooked but it shouldn’t be. Studies have shown that financial corners and disputes rank at the top of the reasons for separation/divorce. It’s a lot more complex than most people think and it’s so easy to overlook when you are in love and visualizing the wedding, your honeymoon and all the other good stuff that is to come.

There are an infinite number of ways that family finances can be managed but the two keys are like every other aspect of a marriage; communication and being willing to compromise. This subject will be discussed over time but I consider it even more important to discuss before getting married.

Here are the main questions I think should be discussed. Let me know if you think of any others?

-Should we combine our financial assets/debts?

This is not an easy question. I think it’s a question that should be asked and reflected on. Obviously, as we grow in a relationship, finances tend to merge because future expenses are often for the family. As well, it becomes very time consuming to split every expense and of course you can be much more efficient by combining finances together. I think that as long as both agree on how money should be spent and saved, this is the easiest way to deal with personal finances. Mathematically, you will always be better off on the same financial team as your spouse.

-What kind of lifestyle do you aspire to?

This is a major question. If a husband is hoping to have a boat, a second house and lots of travelling, chances are that the lifestyle he is looking for could be different from that of his wife, especially if her desires are for family, leisure and fitness activities. Chances are that if they simply avoid discussing this, the discussion will come up over and over. My example is perhaps a bit extreme but the reality is that no one expects or hopes for the same life. Ok, perhaps everyone wishes they did not have to work much without having any financial worries. But the reality for almost everyone is different. What kind of house, retirement, etc. There is usually a compromise to be reached that will make it a lot easier to deal with everyday budget and spending decisions.

-Who will be responsible for financial “chores” (paying bills, checking statements, etc?

I don’t think it’s ever a good idea for one person to do everything and be the sole person looking after these matters. However, this is what happens in my case since I am a financial planner and my wife just hates finance as much as I enjoy it!

Personal finance is a subject where both parties need to get involved. That being said, there is usually one person who has more interest in taking care of everything and a compromise can generally be reached for that person to follow a budget, investments, reports, etc. But at the same time, I think it’s important for both parties to get information so this information be discussed. One of the reasons of course is that if one of the members gets very sick or has an accident, the other should be able to still function.

Even though I take care of all financial aspects at home, we still discuss how we manage our money in terms of expenses (I give full disclosure on debt management and investment ;-) ).
-What are your thoughts on charity?

As you are now a couple and have partially or fully merged assets, charity becomes something that you should agree on since it is no longer one member giving but rather both. There are many ways to do this and one of them is to have each person decide to which charity they want to donate (splitting the money in two), or deciding on causes that are important to both parties. But when such subjects are discussed, it makes it a lot easier for both parties to know where they stand.
-What is your opinion about debt?

The reality is that almost everyone must use debt at some point, either to buy a house, a car, household repairs, help a parent, etc. It is important to clarify how debt should be used, to what extent and for what reasons. Using debt in itself is not a bad thing but there is obviously some level of risk involved and for that reason, it is critical for the couple to both be comfortable with their level of debt.

These are some of the questions and I’m certain there are many more that you have discussed with your spouse. I think the main point is that family finances need to be discussed in order to avoid frustration, conflict and misunderstanding.

How do you deal with finances with your spouse?

Author: Mike

Image source: pedrosimoes 7

Blog Traffic Exchange Related Posts ]]> http://www.gatherlittlebylittle.com/2009/11/talking-money-with-your-future-wife/feed/ 13 A fragrant aroma http://www.gatherlittlebylittle.com/2009/10/philippians-410-20/ http://www.gatherlittlebylittle.com/2009/10/philippians-410-20/#comments Wed, 28 Oct 2009 11:00:03 +0000 Stew http://www.gatherlittlebylittle.com/?p=2336 incense

This passage is one of the most instructive passages regarding money in the New Testament. The end of this letter is more or less a simple thank you note to the Philippian church, but it throws back the curtains to show the secret of Paul’s contentment in Christ. The passage does not need a great deal of commentary, but let us just look at a few things that have been a challenge and encouragement to me. I hope your financial insight is deepened as well:

But I rejoiced in the Lord greatly, that now at last you have revived your concern for me; indeed, you were concerned before, but you lacked opportunity.

The Philippian believers were paying attention. They walked a little in Paul’s shoes and recognized that he needed help. Then they started to look for an opportunity to help.

Not that I speak from want, for I have learned to be content in whatever circumstances I am. I know how to get along with humble means, and I also know how to live in prosperity;

Think about the times in your life when you have been the most happy. Chances are, many of those happy memories happened when you did not have a great deal of cash. Paul has learned how to be content in every situation – and if you know anything about the life of Paul, you know that physical comfort was rarely a part of the equation. This was a guy who was stoned, beaten, imprisoned and shipwrecked on a regular basis. He did not own his own home, he walked everywhere he went, had no health insurance and did not have a regular paycheck. He fully depended on God for every necessity of life.

I think the most important lesson to be learned is that we can survive on a whole lot less than we think we can.

In any and every circumstance I have learned the secret of being filled and going hungry, both of having abundance and suffering need. I can do all things through Him who strengthens me.

Now we move to one of the most abused quotations in all of Scripture: “I can do all things through Him who strengthens me”. We have all heard this promised used for everything from athletic events to tasks at work to musical performances to cooking a meal. However, when we stop to consider the context, we realize that Paul was talking specifically about money!

This is not a promise that I can ask out a pretty girl or figure out a complicated computer program or dunk a basketball. Paul is saying that the key to contentment does not lie in having financial security, but rather in realizing that God can meet our every need – whether we have money or not. He is not bound by impossible financial straits. He can clothe, feed, and shelter you even if you have no money – and if you don’t have those things, He is still enough.

Nevertheless, you have done well to share with me in my affliction. You yourselves also know, Philippians, that at the first preaching of the gospel, after I left Macedonia, no church shared with me in the matter of giving and receiving but you alone; for even in Thessalonica you sent a gift more than once for my needs. Not that I seek the gift itself, but I seek for the profit which increases to your account.

Paul is commending the Philippians for their generosity – a generosity that was not shared by any of the other churches in which Paul ministered. It is important to see that Paul was not a televangelist who “needs” your money – shyster who is getting rich off the goodwill of well-meaning people. No, Paul knew that God did not need money to care for his needs, but he was happy that the Philippian church was investing in his ministry and sharing in the blessing that comes from giving.

But I have received everything in full and have an abundance; I am amply supplied, having received from Epaphroditus what you have sent, a fragrant aroma, an acceptable sacrifice, well-pleasing to God.

Have you ever given someone the perfect gift? The gift that hits exactly the right balance between utility and luxury, the gift that the person uses for years to follow? Remember that feeling? That is how Paul wants the Philippian church to feel. He called their gift a “fragrant aroma”. It is a great compliment when someone tells you that you smell good.

How do you think the church responded after Paul’s words? I like to think that they were challenged to find more ways to give to others.

And my God will supply all your needs according to His riches in glory in Christ Jesus. Now to our God and Father be the glory forever and ever. Amen.

Once again, the believer in Christ can have absolute confidence that God will meet his needs. There is no problem, financial or otherwise that God cannot handle. He will always give us what we need – and what we need is fodder for another post!

Article by Stew

Photo by Vanessa Pike-Russell

Blog Traffic Exchange Related Posts ]]> http://www.gatherlittlebylittle.com/2009/10/philippians-410-20/feed/ 4 Stuck in the Midst of Debt http://www.gatherlittlebylittle.com/2009/09/stuck-in-the-midst-of-debt/ http://www.gatherlittlebylittle.com/2009/09/stuck-in-the-midst-of-debt/#comments Tue, 29 Sep 2009 09:00:07 +0000 Mike http://www.gatherlittlebylittle.com/?p=2183

mist of debtDebt is perhaps one of the most pernicious things known to modern mankind. As nobody likes to own someone something (not even a kind remark), we soon become obsessed to pay back our due. Some do it by spending less, cutting back on their lifestyles through frugal habits, others will get a second job or study in the hopes of earning a promotion and generating a bigger income. We all do this because we desire much, hate debt and want to sleep in peace.

Debt is stressful

Often, the most common reason for dispute among couples is money. We challenge our spouse on “unnecessary expenses” and she replies back about the promotion you didn’t get, haunting isn’t it. This is a story we have all heard time and again. When one loses his job and the couple starts to accumulate debt, the note of discord starts to infiltrate the home. Stress increases as are payments accumulate, while interest rates rise due to one or two “forgotten” bills on the kitchen table. The same stress reaches a crescendo when the money is spent (read gone) before it has been deposited into your bank account. You are one step away from payday loans… you are one step away from giving back the keys to your once loved and cherished beautiful home…

At this point, you can’t see straight anymore. You don’t sleep well, are less productive at work and constantly run into disputes about money. Debt is literally consuming your entire existence from within. As you can’t walk straight because you are stuck in the fog of debt, saving money becomes an issue. Each time you save a dollar, you think about the 10 dollars of interest you have to pay at the end of the day. Your efforts seems pointless… you are crumbling under the weight of your debt.

There are people to help you see your way through the fog

If you feel as if there is no hope anymore, you are wrong. Debt is like extra pounds, it is quite easy to gain them but much harder to shed! When you are stuck in the midst of your problems, you have difficulty imagining solutions anymore. It is normal, our brain has a tendency to creating a barrier around what we know and rarely accepts an idea from outside of the box. And these walls get thicker as the problem grows.

This is why it is time to reach out for help. The very first step to helping yourself out of debt is to talk about it with other people. I know, money and debt are more taboo than sex these days. But you need to reach out and ask for help. Friends and family can give you tips, point out new solutions because they see the problems from an external, preferably objective, point of view as they are not directly linked to it. Why do you think psychologists are able to help anxious people? Because they see problems from a different angle and help people to see their issues objectively.

If you know a good financial advisor, they would be your best bet to help you get your finances in order. Unfortunately, there are a lot of peddlers in the industry and you are definitely not looking for another salesperson! You need constructive advice regarding your situation.

When you think about debt in a detached manner, you will conclude it is only a math problem. There are 3 variables:

- Your income and possible sources of income

- Your expenses

- The payments attached to the debt built over time

Technically, you need to find the perfect equation:

Your income – Your expenses – Your debt payments = 0 or higher.

You can increase your income in many ways:

- get a second job

- get a promotion

- work more hours

- make money online

- sell things (temporary)

- have a sideline according to your skills

You can also reduce your expenses:

- by being frugal

- by sharing expenses, i.e. rent with another person (when possible)

- by looking for deals (read this article about how to cut down your grocery expenses by 20% while being lazy)

And you can improve your debt payments:

- by finding a better rate (zero balance transfer credit card) (temporary)

- by consolidating your debt using a personal loan with a longer amortization (it costs more in interest over the term but frees up some cash flow)

- by including your debt in your mortgage (not really the right timing to do so…).

As you can see, there are no magic ways to get out of debt. However, by talking with people around you about your problems, they may help you find alternatives to increase your income, decrease your expenses and improve your debt payments in order to help you sleep better at night.

Once you have a plan, the hard part is yet to come; you must follow it. Many people remortgage their house a few times thinking the property was a cash machine (a sort of ATM). Unfortunately, this only works for so long. Sooner or later, you have to look at your budget and make some changes to get out of debt definitively.

Author: Mike.

Image source: Okinawa Saba

Blog Traffic Exchange Related Posts ]]> http://www.gatherlittlebylittle.com/2009/09/stuck-in-the-midst-of-debt/feed/ 12 What are your budget habits? http://www.gatherlittlebylittle.com/2009/08/what-are-your-budget-habits/ http://www.gatherlittlebylittle.com/2009/08/what-are-your-budget-habits/#comments Mon, 24 Aug 2009 11:00:11 +0000 Stew http://www.gatherlittlebylittle.com/?p=1966 dollar

Do you save all your credit card reciepts and then enter them in a spreadsheet at the end of the month?

Do you enter the spending from a particular day every day?

Do you use You Need a Budget?

Are you a cash and envelope user? Once the envelope is empty, your spending stops.

Do you have a particular time set aside to update your budget?

Do you use an Excel spreadsheet to record your spending?

Are you careful to write down every penny?

Are you a Quicken user?

Do you round to the nearest dollar?

Do you just purchase what you need and hope it all comes out okay?

Do you record both income and spending or just spending?

Is your budget a rule that was made to be broken or the “law of the Medes and Persians”?

Is your budget set up to balance weekly, monthly, yearly or not at all?

Are you a member at Mint.com?

If your spouse breaks the budget, do you cover their mistake and hope they don’t do it again?

Is there any portion of your spending that you do not record?

Does your spouse ever see your budget?

How do you handle a surplus in any one area?

Do you record withholding taxes on your budget or do you just keep track of take-home pay?

Are investments and retirement savings a part of your monthly budget or do you just ignore that part of your financial life?

Do you check your budget every day?

How often do you check your  bank balance online?

Do you lie awake at night wondering if your budget will balance that month?

Do you just hope your spending is “in the ballpark” of your projected budget?

How long do you keep the previous year’s budget?

Do you discuss your budget with your spouse?

Do you use your credit card statement to balance your budget?

Do you budget for gifts or do those come out of emergency spending?

Do you have good budget habits or bad budget habits?

Do you even keep a budget?

Photo by iChaz

Blog Traffic Exchange Related Posts ]]> http://www.gatherlittlebylittle.com/2009/08/what-are-your-budget-habits/feed/ 9 Live 30 days on a budget – I dare you! http://www.gatherlittlebylittle.com/2009/04/live-30-days-on-a-budget-i-dare-you/ http://www.gatherlittlebylittle.com/2009/04/live-30-days-on-a-budget-i-dare-you/#comments Wed, 22 Apr 2009 11:17:06 +0000 glblguy http://www.gatherlittlebylittle.com/?p=1533 i-dare-you

If I had to name just two personal finance techniques that have literally changed by financial life around they would be: Budgeting and the Debt Snowball.  Budgeting because it’s allowed me to control my money rather than my money controlling me.  The debt snowball because for years I struggled to try and get caught up my credit card debt but with little to no progress.  Using the debt snowball I’ve paid off half of my debt in just 2 years and am on track to have it all paid off in another 1 -2 years (excluding our mortgage).

The concept of budgeting wasn’t new to me when I had my financial epiphany, but knowing how to budget was a concept I just couldn’t seem to grasp.  I cannot even begin to tell you how many sheets of paper I wasted trying to create and live on a budget.  I even tried using the limited budgeting capabilities of Quicken, no luck.

We would start out great, with budget categories for our spending.  We would enter each transaction and associate it with a budget category.  At first I would do this daily, then every couple of days, then weekly, and then as the transaction volume piled up, not at all.  I would also get frustrated by the fact that I could never get the category amounts correct.  I always seemed to miss something and always under allocated the category amount.  Not to mention all of the unplanned expenses that kept coming up that would completely blow the budget.

After a month or two of not being able to follow the budget 100%, I’d give up.  To be very honest, I never really liked the whole budgeting concept either.  I didn’t like feeling like I couldn’t do what I wanted with my money.  After all, I worked hard for that money.  I should be able to spend it how I want.  I deserved it right?  WRONG.

Common budgeting mistakes

Here are just a few of the most common budgeting mistakes I’ve come across since I’ve been writing here on Gather Little by Little:

  • Trying to track your spending before you create a budget
  • Trying to be perfect
  • Not involving your spouse in the budgeting process
  • Not using a zero based budget
  • Trying to be too detailed
  • Expecting the budget to fix your problems – A budget is just a tool, it won’t fix all of the underlying problems that cause you money problems.

Track your spending before budgeting

Most all personal finance experts say that you should track your spending for 30 days before you create a budget.  What they mean is that you should write down each and every expense you make for 30 days.  Doing so will not only open your eyes to where you money goes, but it will serve as a solid foundation for building your budget.

Why wait 30 days?  Spend an hour or so making your initial budget and begin tracking your spending using your budget.  This has the benefit of not only tracking each and every expense, but also gets you started budgeting right away.  “He who hesitates loses” right?

Rather than wait, go ahead and make a first attempt at a budget.  Do so with the understanding that it won’t be perfect.  Heck, chances are it may be completely wrong.  A budget is is never perfect.

The perfect budget

The perfect budget is a myth.  Understand one thing and accept it before you even try to start a budget: Your budget will never be perfect.  Say it out loud with me: “My budget will never be perfect, and that’s okay.” If you’re in a public place and everyone is now looking at you, just smile and tell them you’re reading Gather Little by Little dot com.

This concept seems easy right?  Well, for some of you it will be.  For people like me who struggle to do anything unless it’s 100% correct this was an incredibly hard concept to grasp.  I wasn’t okay with my budget not being 100%.   I didn’t like having to make adjustments to the categories and overspending.  But I soon realized that budgeting is an iterative process.  Each budget you make and the mistakes you make with it, serve as input into your next budget to make it more accurate.  6-12 budgets later, you’re budget should be about as close to perfect as it’s going to get.

When you get frustrated, remind yourself of this: A budget that is only 10% accurate is 10% more accurate than no budget at all.  Always remember, personal finance is all about direction, not perfection.  Personal finance is a journey, not just one hurdle you can jump, receive a trophy and move on.  Trust me; there are many more hurdles after the first one.

Not involving your spouse

One of my key mistakes early on was not involving my wife in our personal finances.  Early in our marriage, I took on the responsibly of managing our money.  This included bills, retirement, savings and investing.  I just disliked it less than my wife.  Looking back, I have no idea why we felt the need to have just one of us do it.

If you’re married and your spouse is not involved in assisting with managing your personal finances, you’re doomed for failure.  How many times have you heard the story about someone’s spouse going out and spending money, only to come home and get into a fight due to that spending?  Why does this happen?  Generally because the spouse that did the spending didn’t understand your current financial situation.

Make sure your spouse understands your financial situation.  Involve them in the budgeting process.  Do your finances together.

Not using a zero based budget

This was a big problem with my early budgets.  I’d list out our income, then our expenses and subtract the difference.  Generally for us, there was an excess of money.  Whoo-hoo!  Let’s go eat out, or buy something!  Seriously, that is exactly what we would do.  We would spend that excess only to find out a few days or weeks later that our budget categories were way off and we didn’t have the money we thought we had.  I know: stupid.  I agree.   We lived in the land of stupid for a long time.

What I later learned from Dave Ramsey is that a zero based budget is far more effective.  A zero based budget is a budget where each and every incoming dollar gets “a home” meaning a budget category.  Your budget is complete when your incoming minus your expense categories is zero.  Each and every dollar you receive is allocated to an expense category.  Had we allocated that extra “whoo-hoo” money to savings instead of blowing it, we wouldn’t’ be in the credit card debt we’re in now.

Trying to be too detailed

30+ years later in life, I’ve finally accepted that simplicity makes life far less stressful.  My early failed budgets were far too complex.  I had way too budget categories.  To this day, I am still guilty of doing that, and have to perform a budget clean-up every now and then to “re-simplify” our budget.

The more complex your budget is, the longer it will take you to update it.  The longer it takes you to update it, the more likely it becomes that you won’t.  Keep you budget simple and easy to update and manage.  After all, who wants to spend all of their time updating a budget?  Can you say boring!

Expecting a budget to fix your problems

Breaking news: A budget will NOT fix your financial problems.

Far too many people expect a budget to fix all of their financial problems, it won’t.  A budget is just a tool.  The funny thing is, not only will a budget not fix your financial problems, it will most likely make you aware of a few more.

A budget does not: fix your need to buy things you don’t need, resolve your need to use credit cards to pay for things you feel you need to have right now, begin saving money for you, begin paying off your debt, diversify in your investments…Well you get the idea.

A budget will help you meet your goals and allow you to control your money, but only after you’ve fixed you.

High School ROTC

Bear with me and let me share a quick story, I promise this will relate to budgeting…

While at my oldest son’s high school orientation last month, a couple of students from the ROTC program spoke to the audience of students and parents.  This kid impressed me.  He joined ROTC on a dare from some friends during high school orientation thinking “I’ll wear the uniform, make an A, no problem.”  At the time he was only interested in skate boarding and hanging out with friends.

Four years later, he’s the top student in his ROTC program and one of the senior leaders.  He’s received a full scholarship to the United States Air Force academy.  The ROTC leader for the school said “Mark my words, this boy will be flying an Air Force fighter in a few years, I have no doubt in my mind.”

At the end of the kid’s talk about why he liked ROTC so much and how much it changed his life, he looked out at the audience and asked all of the future high school students who weren’t going to sign up for ROTC to raise their hands.  He asked them to reconsider their decision and said “I dare you to join ROTC.”  Awesome speech for a high school student.  Great speech for anyone.

I dare you!

Using the ROTC student’s technique, I dare you!  If you aren’t currently budgeting, I dare you to start a budget and follow it for a month.  Just 30 days.  If you aren’t sure exactly how to get started, read my article Create and Follow a Budget.  You can use paper, the Excel budget spreadsheet I developed, or better yet You Need a Budget.  Use whatever works, but commit to creating a budget, tracking it and following it for 30 days.

My bet is that it will sell you on budgeting and chances are it will have a substantial and positive impact on your personal finances.  Don’t believe me?  Prove me wrong by trying it and pointing out the flaws.

If you’re willing to take my dare, add a comment below saying so.  Also share with everyone when you will be starting and how you’ll manage and track it (paper, excel spreadsheet, software, etc).  I firmly believe in making your commitments in writing and in public to make you accountable.  I’ll check in in a few weeks to see how you’re doing and then again in 30 days or so.

Take my 30-day budget challenge…I dare you!!

Photo by: TheNickster

Blog Traffic Exchange Related Posts ]]> http://www.gatherlittlebylittle.com/2009/04/live-30-days-on-a-budget-i-dare-you/feed/ 23 Budget Categories – Less is more http://www.gatherlittlebylittle.com/2009/03/budget-categories-less-is-more/ http://www.gatherlittlebylittle.com/2009/03/budget-categories-less-is-more/#comments Wed, 04 Mar 2009 10:00:26 +0000 glblguy http://www.gatherlittlebylittle.com/?p=1421 less-is-more

Every so often we spend a weekend and just clean house.  I don’t mean just sweeping, dusting, vacuuming etc.  We literally, clean house.  We look for stuff we are no longer using, things on shelves collecting dust, etc and sell them.   I’m always amazed at how much more relaxed I feel about our home when we have less stuff.  Not to mention the extra cash we receive for debt snowflaking.

Our budget had been stressing me lately and not because we were money on tight, but because our budget just seemed too complex due to the amount of budget categories we had.  Our budget was becoming more and more time consuming to update, which has the unfortunate impact of making me want to update it less often.  This of course leads to more to more stress since the budget wasn’t current.  Yes, so I’ll admit, I’m a little OCD about our finances…just bear with me.

Cleaning out the budget categories

Practicing the same concept we apply to our house once or twice a year, I decided to clean house on our budget categories.  Before the clean-up, we had a little more than 50 different budget categories.  I walked through each of them and asked the question: “Do I really need this level of detail?“  If I answered “Yes“, I asked two follow-on questions: “Why?” and “How does it benefit me?“  If I didn’t get a good answer to both, the category was removed.  Yes, I did ask these out loud a few times, which resulted in a few strange looks from my wife and kids…but I’m used to that.

I use You Need a Budget Pro (YNAB) to manage our finances and budget.  YNAB has master categories and categories.  Master categories provide a roll-up of all the categories.  For example the Housing master category, could contain categories for: Mortgage, HOA Fees, Insurance, and Maintenance.  In addition to having too many categories, I also had far too many master categories.  So I consolidated them as well, using the same set of criteria I used for regular categories.

One of example of where I consolidated: Prior to doing the cleaning, I had a master category named Food, with sub-categories under it for Groceries, Eating-out, Lunch, Kids Lunch, Starbucks and Misc.  Since I now work at home, I don’t eat lunch out anymore, I also don’t buy Starbucks out much at all, and never use Misc.  So Lunch, Starbucks, and Misc all got nuked.  I left Groceries and Kid’s Lunch as I wanted to be able to track and manage our children’s hot lunch spending.

The benefits of budget category cleaning

All in all, I trimmed a 50+ category budget down to around 20 categories.  That’s more than half and a pretty extensive cleaning all together.  Since then, I’ve added a few categories back into the budget and deleted a few others,  but still have around 20.  The best part about reducing the number of categories is that it takes me far less time to update our budget and it makes it easy to  review with my wife.  I’ve also found I’m far less stressed about our budget overall because it’s easier to update, takes less time and I can get a better high level perspective on our spending.

I’m a firm believer in less is more and so it seems it concept applies to our personal finance budgets as well.

How about you?  How many categories do you have in your budget?  How often do you clean out your budget?  Do you prefer lots of categories, or just a few?  Why?  Add a comment!

Photo by: theilr

Blog Traffic Exchange Related Posts ]]> http://www.gatherlittlebylittle.com/2009/03/budget-categories-less-is-more/feed/ 17 5 Common budgeting myths http://www.gatherlittlebylittle.com/2008/10/5-common-budgeting-myths/ http://www.gatherlittlebylittle.com/2008/10/5-common-budgeting-myths/#comments Tue, 21 Oct 2008 10:10:18 +0000 glblguy http://www.gatherlittlebylittle.com/?p=1136

My wife and I have been living on a budget for a little over two years now.  The first few months were a little frustrating as we got used to the process and learned a few things but since then we don’t even really think about it that much.  As a result, we don’t overdraft our accounts, we see our debt consistently going down, and our savings going up.

The best part about budgeting is that it significantly reduced our stress.  We frankly don’t stress about our money anymore.  We allocate enough to pay our bills, allocate enough to grow our savings, plan for upcoming expenses, and know where each and every dollar goes.  We used to worry about how we would pay our bills or upcoming expenses.  Living on a budget removed that worry from us.

I’m surprised at the number of people I encounter who don’t budget.  When I’ve asked them why, I’ve received the same types of responses and all of them are myths:

Budgeting is too hard

Budgeting is as simple or hard as you make it.  For some reason, people seems to have this idea that you have to utilize this overly complex spreadsheet and complex mathematical formulas in order to budget.  That’s simple not true.  To budget you need to know how to add, subtract and/or use a calculator.

The most simple and easiest budget is an 8×11 sheet of paper.  List and total your income at the top, just below that list and total your expenses.  Subtract the difference and it should be zero.  If the difference is negative, reduce your expenses or increase your income.  If the difference is positive, congratulations, you spend less than you earn!  Add the difference to your savings or debt snowball until the total difference is zero.

That’s it.  You just created a budget.  Of course there are more automated means as well, like the spreadsheet I use.  There are even a number of software programs specifically targeted at budgeting.  My personal favorite is You Need a Budget.

Budgeting is for poor people – I don’t need a budget

Sure you do, you just don’t know it.  Everyone needs a plan and a way of tracking and managing your expenses regardless of how much you make.  Even major corporations that are highly profitable like Apple, Microsoft, GE, etc have budgets.

Budgeting allows you to see where your money is going and make better choices about what you can do with that money.  It’s about optimizing how you spend it.  Regardless of how much or how little you make, making smart choices about each dollar you earn and spend is smart.  A budget allows you to do this.

Budgeting is too time consuming

I always laugh when I hear this one.  This is just not true and is generally said by someone who hasn’t ever done a person and would therefore no know how long it takes or it’s from someone who is trying to budget but doesn’t understand how.

Using an 8×11 sheet of paper, you can make a budget in less than 15 minutes.  The trick is to have all the info in front of you and to go into the budgeting process knowing the first few budgets you do aren’t going to work out perfectly.  Until you start budgeting, it’s difficult to know exactly how much you spend each month.  Therefore it’s difficult to know how much to allocate to each category.  Once you budget for a few months, you’ll know.

I budget using a combination of my own spreadsheet and You Need a Budget. It takes my wife and I all of 10 minutes to do our budget for the upcoming month, and then about 5-10 minutes every other day or so to quickly update it.  If you don’t have 5-10 minutes a day to dedicate to your finances, you have much bigger problems to worry about.

Budgeting is too controlling

I would argue the exact opposite.  Budgeting gives you freedom.  Freedom from worrying.  Ever go to the grocery store or ATM and say that little prayer in your head: “God, please, please,  please don’t let it reject.  Please let me have enough to cover this.”  I have been there far too many times in the past.  But no more.  With a budget, I know exactly how much money I have and I never worry about it.  I can go shopping, to the ATM, and on vacation without fretting about whether I have enough money or not.

But what if something unexpected happens?  The bank screws up, your account gets over drafted, or someone steals your debit card?  That’s why I have a fully funded emergency fund that I built my allocated money in my budget to fund it each month.

Budgeting is for people with fixed incomes

Sure, but it’s for people with variable incomes as well.  In fact, people that live on variable incomes are the ones that need to budget the most.  Budgeting on a variable income is different though.  Lynnae from Being Frugal has a great article on how to budget with an irregular income.

Photo by: Torley

Blog Traffic Exchange Related Posts ]]> http://www.gatherlittlebylittle.com/2008/10/5-common-budgeting-myths/feed/ 20 You Need a Budget (YNAB) Reader Testimonial http://www.gatherlittlebylittle.com/2008/09/you-need-a-budget-ynab-reader-testimonial/ http://www.gatherlittlebylittle.com/2008/09/you-need-a-budget-ynab-reader-testimonial/#comments Tue, 09 Sep 2008 10:26:42 +0000 glblguy http://www.gatherlittlebylittle.com/?p=1037
I received a comment on one of my guest articles the other day from a frequent commentator here on Gather Little by Little named David.  David is a user of You Need A Budget Pro and had this to say about it:

If you want budget software that really shows you the real truth about budgeting, check out YNAB PRO.  That software has -4- laws of budgeting and also each law is explained via a video, each law is fully explained and via the video, all the operations of each law are explained…Also they have a very very well operating forum too, you can get help, post any questions that you feel you need further help with and yes they will get back in touch with you, they are very good….Jesse is the founder of YNAB PRO and I am so pleased that I found him and his wife and all of his staff, they are a true blessing to me…I strongly recommend YNAB PRO to anyone that wants to get their budget together…

Erin, is one of the coaches at YNAB PRO and she is very good…

YNAB PRO is the best investment that I’ve ever made.

YNAB Pro

I’ve been using YNAB Pro off and on for about 6-months or so now.  I have to say I agree with everything David says.  YNAB Pro really is a great product.  While it doesn’t have every feature I would like, Jesse and his team continue to make improvements to the product to make it easier to use and more powerful.

The latest version is  2.5.6 and includes a number of enhancements primarily focused on improving application performance and usability.  One nice feature is that when you download your file transaction files from your bank, YNAB Pro automatically opens.  No more hunting around for those download files!

Give it a try

If you aren’t currently using YNAB Pro, I’d highly recommend you give it a try.  You can read the full review I did back when I first tried it.  YNAB Pro is backed by a 60 day money back guarantee, so you really have nothing to use.  It really is a great piece of software, backed by an even better process for managing and budgeting your money.  YNAB also has a very active user forum that is very helpful and honestly just fun to be a part of.

If you are a Mac user, sorry but no version of YNAB yet…but one is on the way.

Are you a YNAB user?  If so, have anything to add to David’s comment?  Add a comment!

Blog Traffic Exchange Related Posts ]]> http://www.gatherlittlebylittle.com/2008/09/you-need-a-budget-ynab-reader-testimonial/feed/ 7 Personal budget categories – the key to tracking your money http://www.gatherlittlebylittle.com/2008/09/personal-budget-categories/ http://www.gatherlittlebylittle.com/2008/09/personal-budget-categories/#comments Thu, 04 Sep 2008 11:27:42 +0000 glblguy http://www.gatherlittlebylittle.com/?p=1020

Creating and maintaining a personal budget isn’t hard.  There are many different options including the old tried and true paper and pen method, using a spreadsheet, and even specialized software packages like You Need a Budget (my personal favorite).  Regardless of which option you choose to use, all options require selecting categories.

What are personal budget categories?

Personal budget categories are a way of grouping your expenses so you can track where your money is going each month.  When creating a budget, you’ll allocate a particular amount of money to a category then track your expenses against it.  Once your expenses meet the amount allocated in that category, you have no more money to spend in that particular category.

In the original envelope budget method, a budget category is a a physical envelope.  Using envelope based budgeting software like Mvelopes or Neobudget, they are “virtual” envelopes.

Ready, Fire, Aim

When I created my first “real” zero based, month-to-month budget, I spent a great deal of time thinking through the categories required.  I logged into online banking, analyzed all of my various transactions, looked at other example budgets, looked at books, thought about them some more, etc, etc.  Bottom line: I spent way too much time thinking them through and as a result ended up with way too many categories.  Needless to say, my budget was difficult to manage that month.

Since my first budget, I’ve added sub-categories in some places, and removed them in many others.  Overall, I removed far more sub-categories than I added.  In other words, I’ve significantly simplified my budget.

Don’t get caught up trying to come up with every little category you think you will need.  While I took the more detailed to less detailed path, a better approach is to start off with high level budget categories and add sub-categories where when you want to break things out a bit, manage your money a little tighter, or just plain want to see a little more detail.  Just pick a few high level categories and start budgeting.  You’ll figure out pretty quick which categories you need and which ones you don’t.

For example, one initial category might be food.  For the first month track all of your food expenses, including eating out in the food category.  When making your budget for the next month, you might wonder “How much did we spend eating out?”  Without going through each transaction, it would difficult to know the exact amount.  This amount would become important if you are trying to cut back on your eating out expense or if you are trying to determine what percentage of your overall expenses eating out is.  When you begin asking yourself these types of questions, go ahead and break the food category down into sub-categories such as: Groceries and Eating out.

Good starting points for personal budget categories:

Here are some categories that serve as good starting points:

  • Housing
  • Utilities
  • Food
  • Transportation (Car payments, gas, insurance, subway fare)
  • Clothing
  • Personal (things like life insurance, hair care, medical expenses)
  • Education (tuition, daycare fees, school supplies)
  • Savings
  • Credit Cards

Let your personal budget categories evolve over time

I’ve been following a monthly personal budget now for more than 2 years and I’m still tweaking my categories.  I even have to create new categories when expenses come up that I haven’t categorized before.  The important thing is to just start somewhere, knowing the categories you initially choose won’t be perfect.

Choose the categories that work for you and meet your needs and don’t try to shoe horn your expenses into someone else’s categories.  Remember too, don’t make them too detailed.  If you do, you’ll just become bogged down in the details which makes your budget more difficult and time consuming to manage.  This is a sure way to become discouraged.  Keep your budget simple and easy to manage.  The easier it is, the more likely you are to do it.

Personal budget categories are easy to adjust and can even be added/removed on the fly as you find you do or don’t need them.  If my starting points above aren’t enough to get you kick started, head over to Google and do a quick search on budget categories and you’ll find lots of discussion and examples to choose from.

What categories do you use that I haven’t listed below?  Did I miss anything?  Any helpful tips you have to share?  Add a comment!

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Blog Traffic Exchange Related Posts ]]> http://www.gatherlittlebylittle.com/2008/09/personal-budget-categories/feed/ 19 Getting started with the envelope budget method http://www.gatherlittlebylittle.com/2008/08/envelope-budget/ http://www.gatherlittlebylittle.com/2008/08/envelope-budget/#comments Sat, 30 Aug 2008 09:00:48 +0000 glblguy http://www.gatherlittlebylittle.com/?p=1012

This is a guest post from Luke the guy behind Neobudget.  NeoBudget is an online budget manager that uses the envelope method to help you track your spending habits and stick to a budget. You don’t need to be an accountant, and you don’t need to be good with numbers to use NeoBudget. It is budgeting for normal people.  Head over and check out Neobudget, it’s pretty slick and the best part?  It’s really inexpensive.

Introduction

Prudent financial management requires some kind of plan or budget. My parents taught me budgeting skills early using the envelope method, which my grandfather taught them. My mom has helped several friends out of debt and put them on the right track financially using this very simple method. My goal here is to pass on some of this wisdom that I have found so valuable.

I’m not an accountant, so whenever I try to use programs like Quicken or Microsoft Money, I get confused and a bit overwhelmed by the terminology and the complexity. Those programs are great and have many great features, but just keeping a simple budget doesn’t need to be that complicated. All it takes is a little common sense and some self discipline.

This is not a get-rich-quick scheme. Indeed it’s not even about getting rich.  It’s about getting on top of your financial situation and living within (or below) your means.  I’m kind of self-conscious writing this article because I am certainly not the model of financial responsibility. I have a lot to learn in this area.  I’m writing this for other people like me who are not accountants but find themselves thrown into real life where they have to manage their finances.

The name of envelope budget method comes from its origin. Back in the days before debit cards and instant access to bank accounts, many using this method would store cash in envelopes, and spend from those envelopes throughout the month. Some, like my parents and grandparents, abstracted this by keeping track of the envelopes on paper, rather than physical cash. I have used spreadsheets as well as other computer programs. The principles are the same no matter how one keeps track of the envelopes.

Creating a budget

The envelope method is very simple to understand. You have categories (envelopes) designated for each of your major expense items and each of these categories is allocated funds from each paycheck. An important thing to remember is that the envelope method is front-loaded, meaning that you save up money for expenses, then pay after you have the money.  Say that you have a $40/month Internet bill.  If you get paid every other week, you’d save $20 per paycheck.  At the end of the month, you’ll have enough to pay the bill.

I get paid bi-weekly (every other week), and have found it best to set myself up on a monthly budget, counting on two paychecks per month. For those who are quick with math, you’ll realize that that leaves two unallocated paychecks per year. That’s right! It’s like a scheduled bonus twice a year. Budgeting for 24 paychecks a year, when paid bi-weekly, is a great practical way to help yourself spend less than you make.

Lets look at how to set up an envelope-based budget.

Identify your expenses

The first thing you need to do is identify all of your expenses. The best place to start is with your recurring bills and expenses such as electric, Internet, cell phone, cable, car insurance, tithe, etc. Also make a list of other expenses that I call “fuzzy” expenses such as groceries, spending money, eating out, gas, etc.  Fuzzy expenses are those that are dependent on your discipline. It’s simple to spend less money eating out (don’t eat out), but not as easy with a bill. Be sure to include infrequent bills such as car insurance which may be due only every six months.

Create envelopes

Once you know your expenses, organize them into envelopes. There are a couple ways you can do this. Some people group similar expenses together. For example, someone might create an envelope labeled Utilities rather than having separate envelopes for Electric, Water, and Propane. I find it easier to create a separate envelope for each expense.

Determine monthly goals

Each envelope will have a goal. This is the amount of money that needs to be allocated to this envelope each month. If the expenses in that envelope have a fixed amount, set that as the goal. For instance, if your Internet bill is $40/month, that is the goal for that envelope.

Some bills vary per month, such as electric. Look at past bills, figure out the average, add a little bit, and use that as the goal for that envelope. Some months you’ll have extra. That’s good, keep it in that envelope for the months where it’s a bit more expensive. It will all work out through the course of the year.

For the fuzzy envelopes, set goals based on past spending habits. For now, it’s important to be realistic, not optimistic, about how much you will spend. While I would like to only spend $25 per month on groceries, that just is not realistic. When you first create your budget, allocate funds based on your track record, not your future goals. For a few months just keep with what you’ve been spending then later you can work on adjusting your habits. This will help keep you from getting discouraged if you don’t meet your monthly goals right away. Believe me, being realistic is a lot harder than you’d think.

Create an income allocation plan

Now create a plan for what happens to your paycheck. Figure out how many paychecks you will receive each month.  As I said earlier, I get two paychecks per month so that’s what I’ll use for this example.  With two paychecks per month I need to allocate half of the monthly goal for each envelope with each paycheck.  Allocating funds this way, rather than based on what bills are due this week, frees you from having to worry about whether or not funds will be available when the bill comes. The trick is to pad your budget by one or two paychecks. I talk more about that in the “Practical thoughts” section of this article.

You now have all your major spending categories defined as envelopes, realistic goals set for each category based on your income, and a plan for what happens with each paycheck.

Maintaining an envelope budget

The key to keeping this budget is to practically ignore your bank account balance.  If you want to see how much you can spend on clothes, look in the clothing category, not the available balance on your checking account. You have already done the hard work and planned how your paycheck will be allocated so that you have enough to pay all your bills. Now just stick to that plan.

It does take some work to maintain the budget, and this is where the self discipline part comes into play. The weekend after payday, I usually sit down at my computer and update my budget. This involves getting online and printing out my bank statement, and spreading all my receipts for the past two weeks out across the desk. Starting where I left off last time, I check off lines from my bank statement, find the corresponding receipts, and enter the transactions into my budget. When I enter the transactions, I deduct the amounts from the appropriate categories. This usually takes about an hour. Then I spend some time looking over my spending habits for the past two weeks to see where I can improve.

If you find yourself habitually in the red in a certain envelope, either your projected goal is unrealistic, or you need to work harder at keeping tight reigns on spending in that category. By noticing these trends in my own budget, I have identified areas where consumerism has crept into my life without me realizing it and have been working to reduce my spending in those areas.

Let me add a quick note about checks. With checks, there is a delay between the time you write the check, and the time it is cashed at the bank. Depending on the recipient, this may be a few weeks or months. It’s important to deduct the check from your budget when you write the check, not when it appears in your bank statement. As soon as you write a check, consider it gone. This is important because in two weeks you might forget that you wrote the check, and your budget deceptively shows you doing a lot better than you actually are. When the check is cashed, it can be devastating and the check might even bounce. For this very reason I avoid writing checks whenever possible. Thankfully most bills can be paid online these days.

One thing you’ll notice if you do this is that your budget and your bank statement will not have the same totals for your checking account. Your budget will be less than your checking account because of outstanding checks. Keep this in mind when balancing your budget.

Making improvements

After a couple months, you will have a good idea of what you typically spend in certain areas.  This might be painful.  I had no idea I was spending that much on eating out!  You can slowly tighten the reigns to help yourself take control.  Immediate, dramatic changes work for some people, but for the majority change is most successful when it happens slowly over time.  It is less painful that way.

Lets say I’m currently sticking $50/month into savings, but I want to do more.  One thing I can do is cut my “Eating out” envelope by $10/month.  When I am eating out 4 or 5 times a week for lunch, that $10 would hardly be noticed.  That is only twice a month that I have leftovers for lunch instead of going to Wendy’s.  Adding that $10/month to my savings increases my savings rate by 20%!  Over the course of a year, I will have saved $720 instead of $600.

This may not seem like a whole lot, but you can do this many times in many different of your “Fuzzy” envelopes over the course of a year or two.  You can get creative about ways to tighten the straps too, such as cutting back your cell phone plan, walking instead of driving, etc.

That’s how it worked for me.  I now only eat out one or two times a week.  I didn’t break the habit overnight, but slowly started funneling that money into my “Giving” envelope so that I could increase the amount I contributed to various charities.

Some Practical thoughts

  • Spend less than you make. Without budgeting, this is very difficult to accomplish. Budgeting for 24 paychecks per year is a great way to accomplish this. Spending everything you make is dangerous. There needs to be room for the unexpected. Credit cards are very tempting, but credit card debt can be very dangerous. High interest rates make it hard to repay. For someone with a moderate credit score, interest rates of 15% to 30% are typical. That’s insane. Credit cards are good to keep around for emergencies, but making a habit of buying things solely on credit is dangerous.
  • “When in doubt, do without.” This is a practical little saying, and is applicable to many areas of life, not just finances. Basically it means that if you’re on the fence, debating whether or not you should buy something, chances are you don’t need it, and you just want it. In that case, just do without; don’t buy it.
  • Wait a day before spending over $100. This is something I do simply because I hardly ever obey the “When in doubt, do without” principle. Waiting until the next day helps my judgment and reduces impulse buying.
  • Be realistic, not optimistic. When creating a budget and identifying goals, it is important to be realistic, not optimistic. This is especially important when creating a budget for the first time. Base it in reality, not in where you want to be. After you’ve tracked your spending habits for a while, then start tweaking your budget to bring it in line.
  • Pad by one or two paychecks. One of the hard parts of starting a budget is that all the categories are $0. After the first paycheck, some of the bills will be due, but not enough money will be in the category to pay for it. If at all possible, build up for yourself a buffer of one or two paychecks. To do this, in the first month where you have three paychecks (if paid bi-weekly), treat it just like normal and allocate it into the various categories. This gives you breathing room from there on out. The great thing is that doing this once is all that’s necessary. The budget will balance itself out after that. Once you do that, maintaining a budget is a lot easier, especially for monthly bills that don’t always occur at the end of the month.
  • Get receipts for purchases. I use my debit card for almost everything. I’ve found it useful to save receipts from all my purchases so that I have two sources for each purchase (my bank statement, and the receipt). The receipt is also good for remembering what I bought. If I spend $45 at Walmart, $20 might be for my car, $10 might be groceries, and $15 might be for a shirt. All I would see on my bank statement is “$45 to Walmart.” My memory is not that great, so having a receipt helps me remember what categories to deduct from.
  • Keep paperwork. This doesn’t have to do with a budget per-se, but it’s something I learned the hard way. Keeping paperwork in a filing cabinet is very useful, especially come tax season. Things you should keep include receipts for paid bills, receipts for all your giving (since it might be tax deductible), copies of past filed tax forms (the IRS recommends keeping 7 years of tax history on file), pay stubs, and bank statements. Keeping my budget and doing my taxes has been a lot easier once I started keeping these things on file.
  • Categories that are not obvious. Bills are obvious categories that you’ll want to create. There are some others that are not quite so obvious. Here are some possibilities: Tithe, Giving, Cash ($10 or $20 a week), Eating Out, Home Improvement, Car Maintenance (I put $20 a month in here. It adds up after a year so when I do have a major expense, I’ll have enough). If your car is paid for, maybe create a category called Car Savings so you can have a good down payment when you go to buy a different one. Another good category is Gifts. Putting $5 per paycheck into this category is easier than trying to find money when you realize that tomorrow is mother’s day.
  • Create a Savings category. Unexpected expenses always come up. It’s good to chuck a little bit away into a Savings category from each paycheck. It doesn’t need to be much, even $10 or $20 is good. If you save $20 per paycheck, in a year you’ll have $480 saved (on a bi-weekly paycheck). Make a rule to only spend out of this in an emergency.

Conclusion

Getting ones finances in order has many benefits. Some of those benefits include staying out of debt, overcoming existing debt, saving for unexpected expenses, saving for the future, providing for ones family, developing self discipline, not worrying about paying bills, and discovering where ones heart lies by tracking spending habits.

There are certainly other ways to keep a budget. This is just a method that my family has used and has worked well for us. If you don’t currently have a budget or track your spending, I encourage you to get into this habit.

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