Feb
16
Creating a Cash Flow Budget
Filed Under Budget, Expenses, Marriage and Money, Money Management, Personal Finance | 1 Comment
This month, the Money Blog Network’s group project is budgets. I’m not in the MBN, but I’ve decided to post a blog about my method for creating a cash flow budget. It’s far more effective for my husband and me than a traditional category-based budget. MBN lists several other budget posts on their site, if you want to test a few different budgeting, and anti-budgeting, methods.
The Monthly Budget by Category
My husband and I use Quicken to track our daily spending. About once a year, my husband and I run out a Quicken budget, just to see how our actually monthly category spending has changed. Then we copy it into Excel so we can play with the numbers: how much more we would have if we paid off this loan or reduced that expense.
This is an example of what that would look like. If I were studying this, I would see that I could cut the dining budget and might consider reducing utilities expenses if possible.
The monthly budget is a helpful way to get an idea of how and where we spend money on average, but it isn’t necessarily useful for planning our monthly cash flow. The budget averages out our expenses rather than showing the blips as they actually occur. For example, auto-insurance isn’t paid monthly, but it appears that way in a budget. We have to plan for the blips, not the even keel budget. Instead of a line-item budget, we use a cash flow statement to plan our monthly bills and spending.
The Cash Flow Budget
The cash flow budget is a much better picture of our expected income and expenses for the month. These are actual bills we must pay, rather than categories that may vary every month. For example, if it’s an auto insurance month, then we know to reduce our spending in other areas to make up the difference. It also helps us plan our debt repayment because we know how much we’ll have leftover at the end of the month.
This is a sample of a cash flow budget for February. You’ll note that the numbers above don’t match the numbers here. There are two reasons: 1. I made many of the numbers up, and 2. Most of our recurring charges (utilities, cell phone, gym, etc.) are on one of the credit cards, so we don’t pay them as a separate monthly bill through our checking account.
Expected bills with variable due dates (like a bi-monthly utility) go at the bottom because we know they’re coming at some point, but not when.
At the beginning of the month, we look at our Quicken account balances for variable bills like credit cards and ballpark the payment amounts in our cash flow chart. We adjust with exact figures as the month proceeds and the bills come in. At the end of the month, we take the end number and add it to our debt payments for the next month. Once our debts are gone (except some student loans), that end number will go towards other goals like savings or investments.
In addition, it helps us see where the bills fall in relation to our income. For example, if we plan to make a big credit card payment, but know that the deposit that covers it doesn’t occur until two days later, we can reduce the payment. Then we can schedule another payment after the deposit.
Creating a Cash Flow Budget
If you want to create a cash flow budget, follow these simple steps:
- Get out your checkbook register.
- Create an excel chart with payment dates and amounts for all expenses for the last six months. Rather than the generic terms I use above, use the names of the payments, like Amex, Discover, and Sallie Mae.
- Use three columns for each month like in the above chart. We go across the sheet for each new month rather than down so several months fit on the screen at once. Although you’ll have to tweak it as time progresses, this gives you a good overview of when your various bills are due.
- Just before each month, review the expected expenses for that month and make adjustments for changes in your finances. Also review the previous month and carryover any remaining balance to the next month.
- At the end of the sixth month, copy the last month over to new columns and update the dates and amounts for month seven.
Once you get used to this system, you’ll probably find that you feel more comfortable with your finances because you always have a snapshot view of them. It doesn’t require special software and no one else has access to your data. If you don’t have Excel, you can use an OpenOffice or GoogleDocs spreadsheet, instead. This is very different from the system I used when I was single, but I much prefer it. Give it a try, you might like it!
Jan
23
Lessons from Celebrities: The Importance of Life Insurance
Filed Under Insurance, Marriage and Money, Personal Finance | 1 Comment
Whenever I hear about the deaths of celebrities like Heath Ledger and Brad Renfro, my first thought goes to the children they left behind. I pray that the surviving parents have the strength to help their children through this. I also hope that the celebrities listened to their financial advisors and arranged for trusts and life insurance.
Most of us can only dream of earning the kind of money these celebrities make, but events like these are an important reminder of why every parent, spouse, or adult child with dependent parents needs a solid life insurance plan to cover expenses after their death. Unfortunately, deaths like these are also a reminder that tragedy can strike anyone at any time, famous or not.
Types of Life Insurance
Life insurance is generally available in two types: whole life and term. Your insurance agent is more likely to push whole life insurance because they earn a higher commission, but that doesn’t make it the best deal for you.
Term Life Insurance
For most people, term life insurance is the best bet. When you’re young, term life insurance is very cheap and rates rise as you age. You’re buying a fixed amount of coverage for that term, as long as you continue to pay the monthly premium. At the end of the term, you usually have the option to buy a new term policy. Terms generally range from 5 to 30 years.
Whole Life Insurance
Whole life insurance is usually more expensive, but it contains an investment component. Your premium buys a fixed payout amount, but your payments also build cash-value. Most policies allow you to cash-out or borrow against the policy tax-free, although you usually receive less than you paid in. However, it usually takes fifteen years to build significant cash value. If you’re young and healthy, term is the better option. If you’re over 65, whole life may be your only option, but the cost will be dear.
How Much Life Insurance Coverage to Buy
The general rule of thumb is that you need a policy that covers five to seven years of your salary. So, if you earn $50,000 a year, you should buy a $250,000 to $350,000 policy. If you have very young children, you may way to opt for a policy equal to ten years of salary as a precaution. Although insurance is designed to cover the salary of the working spouse, many advisors also recommend buying coverage for a non-working spouse. They reason that the working spouse will have to pay for childcare, household help, and other assistance that the non-working spouse provided.
How Long a Term to Buy
Again, the general rule of thumb is to buy coverage that will last until your youngest child completes college. For young families, assume a 20-year-term. Many people buy coverage until their retirement age to recover lost income their spouse was counting on. Term life insurance for people over 70 isn’t usually available, or is prohibitively expensive.
Whether or not you’re a celebrity, life insurance is vital to anyone with dependents. Unfortunately, it often requires a tragedy to make us realize that and act upon it. If you don’t have life insurance, research plans today.
Jan
17
The Personal Impact of the Consumer Price Index
Filed Under Debt, Financial News, Marriage and Money, Personal Finance | 1 Comment
Yesterday morning NPR reported that the consumer price index had risen 4.1% since December 2006. They also reported that although wages have risen, they’re actually lower than they were in 2000 when adjusted for inflation.
I exhaled a stunned breath when I heard the first part. That’s a hefty jump for one year. According to NPR, it’s the biggest increase since 1990. When I heard the second part, I instantly felt poor and angry. I know my salary is higher than it was in 2000, but thanks to massive student debt and other debt, my husband and I both feel poorer than we did in 2000.
The continued rise of fuel prices is a big part of the problem for us. I drive less than 100 miles a week and have a fairly small tank, but pumping $29 into it when I used to only have to add $15 is frustrating. I have to fill it at least twice a month, so my fuel costs have effectively doubled in the last four years. When gas hit $3 the first time, it started to affect my choices. I now see some of my friends less frequently and attend fewer events because I don’t want to pay for the gas to get there.
Rising food costs also comprised a large part of the increase in the CPI. Those haven’t affected us as much because we don’t buy many wheat or dairy products, but it’s had some impact on our budget. The CPI was only up 2.4% when food and energy are excluded. Many economists choose to exclude those numbers because food and energy are not considered “discretionary spending.”
Now, realistically, when I look at my finances, I know I’m not poor, but I definitely don’t feel well off, or even completely secure. Our income has increased almost 1200% since we got married in 2005 (remember, we were both grad students, and thus actually poor. Not “top ramen for every meal” poor, but “spending all our money on groceries, gas, and books” poor.) We can put food on the table, we can pay our monthly bills, and we can even afford to live comfortably, but rising prices also make us feel more restricted in our choices.
Someday soon I hope that we’ll reduce our debt enough to a level where I will feel more secure even in the face of rising inflation and stagnating wages. Unfortunately, it’s hard to see that day coming when I hear news like this.
Jan
4
Turning Financial Systems into Good Financial Habits
Filed Under Marriage and Money, Money Management | Leave a Comment
All the good financial systems in the world won’t do you any good unless you turn them into good financial habits. Here’s how I made managing my money a habit, and continue to maintain it even though I’m not in charge of paying the bills anymore.
So let’s start by admitting that I can be a bit obsessive when it comes to money. When I first got married and it was decided that my husband would manage the day-to-day money while I took care of investing and taxes, it made me a little crazy. I hate not knowing exactly how much money we have every day. So, first I made sure he adopted all my financial systems, then I made new habits to manage my money neuroses.
Regular Check-Ins
If you pay the bills, then your regular check-ins can occur at your weekly bill paying time, but you should also review your finances overall every month to see where your spending categories have changed and why that might be. Some, like fuel, are unavoidable, but you might also discover just how much you’re spending at the cafeteria now that you have a new job. It will also keep you in touch with your actual financial picture so you’re less tempted to overspend, or not so panicked that you’re afraid to spend any money. I call this “looking at the money” and I probably do it more than necessary, but it makes me feel better about our financial picture.
Schedule Money Talks
If your spouse manages the money, set aside some time once a month to discuss your financial goals and review your budget. That way you’re both motivated to maintain your course. It’s also important in case something happens to one of you. The other one has to be ready to step in and take over the bills at any moment.
Be Obsessive for a Couple Months
Like an exercise program, it takes a while to turn your systems into a habit. With the gym, they usually say that making it going for two weeks is enough to make it into habit. Since you probably don’t deal with your money as often as you go to the gym, I suggest being obsessive about your system for two months. Schedule set times to review the money and mark them on a calendar. After a couple months of practicing your entire system, it will become habit and you’ll be less likely to forget to pay a bill on time.
Be Flexible
Of course, once you’re done obsessing, you also need to be flexible to changes in your financial status. Getting married, having kids, buying new software, and earning more money can all change your financial habits. Give yourself time to adapt and find new ways to manage your money. It took me a while, but I’ve learned not to stress about my husband paying the bills, at least most of the time.
Managing money isn’t a chore once it becomes a habit. It’s just a thing you do because you’re an adult and not independently wealthy. It’s sad, but it’s a fact we all have to accept.
