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Diagramming The Flow Of Money

February 27th, 2009

NCN

For the visual-learners in the audience, I have diagrammed the flow of my money.

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Regular income is deposited into my primary checking account. Scheduled monthly payments are made, and allocations for non-monthly scheduled payments are then deposited in my online savings account.

Irregular income, such as it is, is deposited into my primary checking account, and used, if needed, for scheduled monthly payments. If not needed for scheduled monthly payments, money will be transferred from my primary checking account to my online savings account.

Business income is deposited in my business checking account. All business income is then transferred to my online savings account, set aside for non-monthly payments and long-term savings.

Any non-monthly scheduled payments are made from my interest-bearing checking account. Money necessary for non-monthly scheduled payments is transferred from my online savings account to my interest-bearing checking account, as needed.

Contributions to Roth IRAs and Education Savings Accounts are made from my interest-bearing checking account. Again, these contributions are first transferred from my online savings account, to my interest-bearing checking account, and then a check is written for each contribution.

I have it set so that I make all of my scheduled monthly payments on the first day of each month. As soon as payments clear, I can then transfer remaining money to my online savings account, leaving a cushion in my checking account for unforeseen-expenses. Not included in this diagram, but very important, is my envelope system, which I use for managing my cash, to pay for budgeted items like groceries and gasoline.

I am a big fan of the The ING Direct Orange Savings Account and I use it as my online savings account. I also use ING’s Electric Orange as my interest-bearing checking account. Having both accounts with the same company, it’s very easy for me to make instant transfers.

For more about scheduled monthly payments and scheduled non-monthly payments, please see this recent article about how to create a zero-based budget.

Posted in Budget, Money Management

8 Comments »

How To Create A Zero-Based Budget

February 13th, 2009

NCN

My wife and I use a zero-based budget to manage our finances. Each month, we sit down, discuss the next month’s expenses, and create our spending plan. Here’s how you can create your own zero-based budget.

1. Create a List of all Sources of Monthly Income

Paycheck A
Paycheck B
Other Income A
Other Income B
Other Income C

I use after-tax income (net pay) when creating my budget. For those who work as employees, creating a list of income sources should be relatively simple. For those who are self-employed and / or have irregular income, things can get a little more difficult. Personally, a portion of my income is regular (I receive a paycheck) and a portion is irregular (I receive income from my web business). I use the zero-based budget to manage my regular income and another method for managing my irregular income.

2. Create a List of This Months’ Expenses

Rent / Mortgage
Electricity
Groceries
Telephone
Cellular Phone
Automobile Payment
Credit Card Payment
Donations / Tithes / Giving
Child Care

At this step, we are not concerned about annual, semi-annual, or other non-monthly expenses, unless those expenses are due this month. We’ll get to those types of expenses in a minute. For now, list your actual expenses for this month. For categories that fluctuate, you will have to use estimations. Be realistic. We will also cover savings contributions and accelerated debt reduction payments in just a bit.

3. Create a List of Non-Monthly Expenses

Automobile Taxes
Insurance Premiums
Magazine Subscriptions
Annual Memberships

These are expenses that might not be due this month, but you still need to plan for them. Divide the amount of each bill by the number of months between the creation of your budget and the time your bill is due. For instance, if you create your budget in March, and your life insurance premium of $200 is due in June, you will need to budget $50 per month, each month, so that you will have funds available to pay that particular bill when it is due. After paying that bill, you will have another full year before you have to pay it again, so your monthly allocation for that particular category, in this case life insurance premiums, will decrease, because you will divide by 12 instead of by 4.

4. Create a List of Savings Contributions and Accelerated Debt Reduction Goals

Extra Payment To Credit Card
Emergency Fund Contribution
Roth IRA Contribution
Education Savings Account Contribution

These are non-mandatory contributions to savings, after-tax retirement, and education savings accounts, as well as accelerated debt reduction payments. For those who are getting out of debt, this is where you would list the extra payment at the top of your debt snowball, debt avalanche, or debt deluge.

5. Subtract Total Expenses From Total Income

Your goal is to create a scenario where total income minus total expenses will equal zero.

If you subtract expenses from income, and you get a negative number, you need to decrease the amount you have allocated for expenses. Consider decreasing non-essential categories, like eating out or entertainment.

If you subtract expenses from income and you get a positive, you need to increase the amount you have allocated for expenses, savings contributions, or debt reduction. Consider allocating more for debt reduction or college savings.

There you have it. That’s how we create our zero-based budget. If you have any questions or suggestions, feel free to leave them in the comments section. My wife and I use You Need A Budget software to create our zero-based budget. I strongly recommend it and I’m proud to have them as a site sponsor. For those new to zero-based budgeting, I suggest outlining your budget on paper and then transferring your numbers to the budgeting software of your choice.

If you haven’t done so, consider subscribing to No Credit Needed via RSS or email.

Posted in Budget

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A Plan And Rock Solid Determination

February 10th, 2009

NCN

What does it take to build a solid financial future? Money, a good plan, and rock solid determination.

Consider a recent article written by Jen from Beyond Mom. I love the article’s title: The Budget Might Kill Me This Month. Isn’t that awesome? Trust me, I’ve felt that exact same sentiment several times. I encourage you to read Jen’s article, and I think you’ll be impressed, just as I was, by Jen’s closing words -

It’s not super-fun, and it’s certainly not glamorous, but you know what…it will be worth it.

I think that’s how most of us feel about living on a budget. It is so cool to see someone make a choice – the right choice – and focus on the future. By the way, Beyond Mom is a member of the No Credit Needed Network and you can click here to view her most recent NCN Network Chart – beyondmom.

For our family of five, it’s extremely important that we live on a budget. In fact, just the thought of living without one makes me nervous. I need the structure that a good budget – a good plan – provides. Personally, we use software developed by You Need A Budget to manage our household finances, and we really like it. I’ve been using YNAB for several years, and I’m proud to have them as a site sponsor.

As you develop your budget, remember one thing. Your budget will be useless if you are not determined to use it. I can remember, years ago, before I got serious about getting out of debt, creating an elaborate budget. I broke down categories into sub-categories, and sub-categories into sub-sub-categories. I created short-term, mid-term, and long-term goals. I averaged my payments, created scenarios for paying of my debts, printed out my budget, and placed in a brand new three-ring binder. And there is sat. The budget – my plan for changing my future – just sat there. I spent hours creating it, and then I did nothing with it. It was years later, when I finally decided to actually do something about my future, that my budget started to matter. I had to find the drive, the purpose, the determination to put the numbers on the page into real life action. Then, and only then, did I begin to turn my financial life around.

Posted in Budget, Motivation

1 Comment »

How I Live Without Borrowing Money

October 1st, 2008

NCN

As the credit crunch continues, more and more people are learning to adjust to life without credit. It’s been four years since I borrowed money or used a credit card. Here’s how I live without borrowing money.

Budget -

I live on a budget. My wife and I receive monthly paychecks and I receive irregular income from various sources. I use the You Need A Budget software to create my budget and track my spending. As I create my monthly budget, I’m able to think about the coming month’s expenses, and plan accordingly.

Many people, when dealing with personal finances, feel anxious and frustrated. Budgeting can help with these feelings, because a realistic budget helps to remove some of the what ifs and replaces them with actual realities. When you create your budget, you may not like the numbers that you see, but, at the very least, you’ll know exactly with what you are dealing.

Learning to live on a budget can take time. Be patient. It took me almost six months to get things right. Eventually, creating a budget will become second nature and you’ll actually look forward to sitting down with your bills and hammering out your monthly plan. Seriously. Trust me!

Plan -

Sure, my budget helps me get through the month, but also create short-term and long-term plans. Remember, you’re learning to pay CASH for every thing. That new washing machine? You are going to pay cash. That newer automobile? You are going to pay cash. College for the kids? Yep, you are going to pay cash. So, you need to plan, plan, plan. (Note, when I use the term cash, I mean that you are going to pay for these things, up front, instead of borrowing money and paying for them later. The actual method of payment might be cash, debit card, online bill pay, or check.)

I have several short-term plans (and goals). Currently, we are saving to buy new furniture, a newer automobile, and new appliances. But, I also have long-term plans (and goals), including buying a house for cash and paying for our three kids to go to college. So, even though we are debt free, and could spend our money foolishly, our plans keep us honest and frugal. In fact, we have less spending money, now, than we did when we were in debt, because so much of our savings are allocated to future purchases. (Of course, the cool thing is, even though this money is allocated, on paper, for specific future purchases, we could, in the event of a real emergency or opportunity, use this money for anything we wanted. That’s what’s great about having money in savings. It’s ours, and we can use it as we wish.)

Sacrifice -

There are no shortcuts. If you want to have enough money in the future, you have to sacrifice today. If I bought every gizmo and gadget that I wanted (and could, at this point, afford), I would never achieve my long term goals. Right now, we live in a house that is provided as part of my compensation. We really want to buy our own home. But, our real goal is to pay cash. So, we make a house payment, to ourselves, each month. Even though I could buy name brands, I still buy generic, because getting out of debt was just the first step of a very, very long journey.

Focus -

It’s never easy to go against the grain. When everyone else is buying new cars and upgrading to the latest and greatest, it takes a certain inner strength to be content with what you already have. As recent events have shown, however, most Americans (and most politicians) would do well to learn a little fiscal restraint. So, the next time everyone in the office goes out for lunch, proudly produce your brown bag. When the newest cell phone hits the market, be content with the one in your purse that still works just fine. If you can’t afford your lifestyle, make the changes necessary to bring your expenses into line with your income.

Side Note: I’ve been living without borrowing money for four years. I’ve also avoided using credit cards. If you choose to use credit cards, and many do, just remember to pay them off at the end of the month, so as to avoid those pesky interest payments. As credit card companies look for more ways to make money, in tight times, I’m sure that they’ll get more and more aggressive with their fees and charges. If you must use them, be careful!

If this article inspired or informed, please Stumble It and pass the word. Thank you.

I’ve written about this subject before, and you might be interested in some of those articles.

Click to read -

How I Live Without Credit Cards

Life Without Credit Cards And The No Credit Needed Experiment

Edit: I just reread this post, and I think I want to write a little more about combining the budget with short and long-term plans. I’ll write about that in my next post. If you haven’t done so, consider subscribing to No Credit Needed and you’ll receive all updates and new posts.

Posted in Anti-Credit Articles, Budget

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How Free Spirits And Money Nerds Can Help Each Other Out

August 13th, 2008

NCN

Chances are, if you are reading this article, you are the money nerd in your family. You spend hours thinking about how to fund your retirement. You balance your checkbook – to the penny. You create a detailed, down-to-the-last-dollar budget. You work hard to save money and you are focused on the future.

In my family, I’m the money nerd. My wife? She’s the free spirit. She works very hard at her job and she does a great job as a mommy. But, she’s not all that interested in the day-to-day management of our finances. She leaves most of the bill paying and investing to me.

So, how do we coexist and keep things running smoothly?

As the money nerd -

I (try) to remember that it’s our money and not my money. This can be very hard for the money nerd, because the money nerd really likes to be in control.

I don’t make decisions. We make decisions. Sure, I like to run the numbers and create the spreadsheets, but I don’t pull the trigger on any major financial move until we are both comfortable with what we are going to do.

I am not the budget-master. Here’s how we create our monthly budget. I enter the data into my favorite budget software – You Need A Budget – and I print out a copy of our preliminary budget. I hand the budget to my wife and I walk away. She makes whatever changes she wants to make – and that is our budget. (When we first started using a budget, it took some time to get on the same page, because we were both used to just spending money, without any guidelines. But, over time, it gets easier and easier. Now, we pretty much use the same budget, from month to month, with just a few minor changes.) The only reason we don’t sit down together and do our budget is that my wife, quite frankly, just isn’t interested in watching me goof around with the numbers!

As the free spirit -

She realizes how much this means to me (and, ultimately, to us). My wife is the greatest. She knows that I’m doing my best to ensure that we have an awesome future together. So, she puts up with all of my nerdiness and my need for crossed t’s and dotted i’s. Sure, she’s pretty much convinced that I’m insane, but she still puts up with me!

She actually participates in the process. Instead of leaving all of the work – and all of the worry and headache – to me, she contributes to the planning process.

She sticks to the budget. I’ve know many married couples where one spouse hides spending from another spouse. By working, together, to create the budget, we avoid the money squabbles that ruin many marriages. But, the budget doesn’t work unless you actually stick to it.

The money nerd in the family might be the husband or it might be the wife. And, some families might have two money nerds. Or, both husband and wife might be free spirits. But, usually, there’s one money nerd and one free spirit. If the nerd and the free spirit will work together, a family can make great progress. The money nerd needs to learn to involve the free spirit in decision making – and the money nerd most avoid, at all cost, becoming the money-dictator. And, the free spirit can help the money nerd loosen up a bit, and learn to enjoy the present (instead of always worrying about the future!).

Side note: For the purpose of this article, I’m using the terms money nerd and free spirit in the most positive of lights. I was trying to find terms that were easy-to-understand, which would also convey a little humor. And, for those who might be tempted to think that money nerd = boss of the family, then you need to talk to my wife! My wife is MORE than capable of managing our household finances, but, she knows that I enjoy working with this stuff. So, she lets me.