Money

I’ve been thinking about writing this for a while now. A lot of people hesitate to talk openly about their finances and I can totally understand why. There’s a lot of stress associated with money amongst marriages. A cursory search of the internet led me to an official looking survey citing 93% of marriages say money was one of the top two issues in their relationship. I can speak from experience when I say that I can totally understand how and why this is the case. However, that’s not the point of this post. What I’m going to talk about are my thoughts on the topic of finances and my paradigms on some things.

Before I start, let me clarify that I’m no expert on this kind of thing. Most of what I’ve learned has been through trial and error. I’ve never taken a Dave Ramsey course so if I copy any of his stuff I apologize. Please let me know in the comments if you agree or disagree with any of this stuff and if you have any other things you’ve learned that are helpful too. It’s always tough to be humble and still remain credible so let me at least say that other than mortgages, we live our lives debt free and haven’t used a credit card in longer than I can remember. We don’t make a lot of money by most standards, but we don’t live paycheck to paycheck.

Oh, one other thing. This is really long. I’m sorry about that. I went back and forth about whether to break it into a two-parter, but I figured if you’re willing to read it in two parts you’d be just as willing to read it in one. If you don’t make it all the way through in one try I don’t blame you (although if you give up, at least post in the comments and tell me how far you got 🙂 ).

Disclaimer: Not everything in this article will be applicable to you. I’m a big proponent of taking things with a grain of salt and I encourage you to do that with this post. Cherry-pick what works for you and leave what doesn’t.

Know what you make and when you make it – I picked this one to start with because you have to start somewhere and also because “knowing is half the battle”. There’s more to it then that though. I get paid once a month at the beginning of the month and Charity gets paid on the 1st and 15th. We also get our rent from our rental property on the 12th. All that is important because it helps you structure your bills. Since the money for us comes in early we pay most of our bigger bills early in the month. If we had all our bills hitting at the end of the month (which is tempting to do) when all our money has arrived, then we would be feeling artificially rich at the beginning of the month and would be tempted to spend it.

Tithe and save first – I’m not breaking any new ground with this one, but I’d be remiss not to mention it. If you take only one thing from this please do this. I understand that some people are digging themselves out of a hole and aren’t in a place to do this, but it has to be a goal. We do the 80% philosophy where you tithe 10%, save 10% and spend 80%. I won’t go into much detail on tithing, but I’ll say that we just started having our bank send that check automatically (this goes with a later point). We had always done it manually before because I liked the idea of doing it intentionally and having it be something you think about each month (or week or whatever). I’m not sold on which method is better yet, but one thing is for sure, I won’t forget to do it with it being automated. I’m going to hit some savings strategies later so I’ll leave that alone for now.

Automate everything you can – Again this isn’t for everyone. If your money is so tight that your automated payments would have a chance of bouncing when they come through then don’t do this. However, most places will let you move your payment dates around to a more convenient time of the month if you need to. Even if you can’t do everything, you should at least be automating your mortgage/rent. You can lose your cell phone or your cable and even have your lights turned off, but you have to have a place to live. That bill should always be taken care of first. Other than the obvious benefit of not being able to forget an automated payment I see a benefit in the consistency of when that money leaves your account which makes it easier to plan.

Know what you spend – Pop Quiz: how much do you spend on food each month? Gas? Entertainment? If you get within 10% you get an A. If you don’t handle the money in your family that’s fine, give this quiz to whoever does and see how they do. I don’t really have anything profound to say about this, but it surprised me how many people have no idea what money they spend and where they spend it. Maybe your surplus each month is such that it doesn’t really matter what you spend (why are you reading this you’ve already arrived? 🙂 ). Even if you are this person, it is still something you should at least have a passing awareness of just out of principle.

Have one checking account – I have to qualify this a little bit. What I mean here is one checking account in use with your budget (budget point coming later). What I don’t mean is that you shouldn’t have other accounts for special circumstances like side-work or a “fun” account or things of that nature. Charity and I do a fair amount of side-work that is outside of our monthly budget and that money goes into different accounts and I think that’s a good thing. When it comes to your budget though, I think all the money should flow through a central location. The more you split things up the more cracks there are for something to slip through and the more variables you introduce. A special case for this philosophy are the people who do things with rewards cards or high interest accounts and things like that. If you’re doing something like that and it’s working for you then keep doing what you’re doing and more power to you.

Have a budget – I waited surprisingly long to mention this topic considering it is so important. Fortunately, you are a dedicated reader and I trusted you would make it this far. You have to have a budget. Have to. Not optional. If you don’t have one you should literally stop reading this (after I tell you how to make one) and go make one. There is no reason not to have one other than laziness. Even if your budget only has your income and your bills and a big miscellaneous category for everything else you should still do it. Ok, I assume I hammered that home hard enough (HAVE TO), so let’s get practical… How to make a basic budget:

1. Write down your income
2. Write down your expenses

You’re done. You just made a budget. It’s really that easy. People get intimidated because they think they have to be an accountant or consult with a financial planner. That’s just plain not true. Literally all you have to do is be able to add and subtract. Now since I know you won’t let me off the hook that easily (nor should you), I’ll go into a little more detail about how I do it.

1. Make a line for each individual income source you get in
2. Add them up. This is your total income
3. In another column compile your expenses in categories such as:
   1. Tithe
   2. Savings
   3. Mortgage
   4. Gas
   5. Utilities
   6. Food
   7. Entertainment
   8. Miscellaneous
4. Add these up. This is your total expenses
5. Subtract your total expenses from your total income. This is your surplus (it could be negative, more on that later)

Now that’s more like it. Now that you have a budget, you can actually use your budget. The way to use a budget is by plugging every dollar you spend (if you have one checking account just look at it side by side with your budget) into your expense categories. If you go over on a category then you know something is wrong. If you’re consistently under then maybe you should adjust the category to give yourself room somewhere else.

If you have a negative surplus, that means that you are spending more than you make and something has to change. You will almost certainly be using credit to make up the difference which segways nicely into the next topic.

Don’t use credit – The people with rewards cards are already mad at me so allow me to head them off at the pass. I understand that using rewards cards is a nice way to get some free perks and such. If you are using them strategically and you pay them off before they charge you interest then I am in favor of this strategy. I’ll say that this isn’t something we use. On to the real point. If your budget requires you to use credit to be sustainable it is broken. If that is happening to you then you basically have two choices. 1. increase your income and/or 2. lower your expenses. Obviously, there are a myriad of different ways to accomplish these things which will be different for everyone, but most people will find it easier to reduce their expenses then increase their income. You may have to make some very difficult choices. You may have to cut out things that you enjoy or lower your standards on certain things (if you’ve had to do this please mention it in the comments). It takes real courage to be able to make these decisions and I applaud everyone who has been stuck in the grips of credit card debt and managed pull themselves out of it.

So how do you not use credit? The main thing is having a budget that works. If you have a positive surplus each month then the only reason you could “need” to use credit is if the timing of your bills doesn’t line up with the timing of your income. This goes back to the earlier point about knowing when your money goes in and out. If you know the timing you can make sure that there is enough available when there needs to be. Another key thing is having what I call a “variable” savings account (not a good term for it, but I’ll talk more about what it is later) which is able to cover unexpected expenses like a car repair.

Spend your money on expensive things – Wait, what did he say? Ok, I’ll admit that I was hoping to shock you a little bit with that title. I figured we were so far in you were starting to get sleepy and I wanted to shock you back into the game. Here’s what I mean. I think you should have savings goals beyond your regular 10% monthly savings that you pour your positive surplus into. The idea is that if you want/need something expensive it will take you time to create enough surplus and savings to afford it, and that delayed gratification is a valuable skill to learn. Now a practical benefit… Let’s say you have no particular plans for what to use your surplus on. The end of the month comes and you have $100 left over to spend however you’d like. Chances are the $100 gets spent on something frivolous (like 24.6 Reeses Cup Blizzards). However, if you have an Alaskan cruise you’d like to go on then that $100 gets put away in a savings account in anticipation. Now imagine that out of nowhere you have to replace a car or a roof or whatever. That’s not money that you would readily have in your budget, but since you have been saving your money for the cruise you are able to pay it and not have to use a credit card or borrow the money from a friend.

Saving – I promised I would offer up some savings advice and so I shall. I’ve hinted at several of these techniques already, but allow me to lay them out for you plainly.

Retirement Savings: Most people don’t want to continue working for the rest of their lives, however, if you do then feel free to ignore this section. Most employers will offer some sort of retirement plan. If yours does then take advantage of it as much as you can to the extent that it is tax-free or matched. If your employer does a matching plan then you absolutely should be contributing the max that they will match. If you don’t then you are basically saying that you don’t want free money and turning down a 100% return on investment. I don’t know anyone other than Nigerian princes who are getting rates of return like that. Similarly, if you are able to take tax-free pay role deductions then you are getting whatever your tax rate is in free money when you take advantage of it.

Beyond your employer, I feel as though everyone should be contributing to their own personal IRA. There are various flavors of IRA, but in nutshell you get a tax advantage on whatever you gain from your money provided you only withdraw it after the age threshold. The convenient thing about an IRA is that an individual can contribute up to $5,000 a year into it which works out neatly to $416.66 a month and that’s a nice number for people who are looking to start a savings plan.

Protection Savings: For me, this is a separate savings vehicle (a CD Ladder for me personally) that is used as a fail-safe in the event of a catastrophic and ongoing life event such as a lost job. There is enough money in that account to cover approximately 4 months of our mandatory bills. I never touch this account and I don’t contribute any additional money into it regularly. It is as if this money is in one of those “in case of emergency break glass” boxes.

Variable Savings: This is what I mentioned before. This is where my surplus goes at the end of each month. Basically what I do is when a new month starts I add up the paychecks I just got and subtract them from whatever was in my checking account and transfer all the extra into this account. This does two things: First, it lets me save for my “expensive” spending I mentioned before, but second (and more importantly) it resets my bank account to what my budget says it should be. If I just left that extra money in my checking account then I wouldn’t get a red-flag that something was broken in my budget until it had really gotten out of control. By resetting my checking account at the beginning of each month I ensure that I am constantly aware of how my budget is working.

You made it! – Well done, you made it to the end. Now you’re conveniently right next to the comments section which you should now use to respond to what you read. I’d love to hear what you think about everything or if you have any questions about anything I was unclear about.