Monday, January 5, 2015

Budgeting For Life

B-U-D-G-E-T... kind of like the word D-I-E-T isn't it?

Don't get me wrong, both are amazing during that initial stage when you're out of control. Tame the beast before you fix your actual relationship with food, money or things.

For this first stage of stemming the financial hemorrhage, I love Dave Ramsey's books! They are amazingly readable, inspirational and really get you off on a great start! 

The Mirror

The first thing you have to do is look at what your financial reality is. 

How bad is it? Kind of like with a diet, you need to take a look in the financial mirror. But what can you use as a mirror for your finances? 

Budgeting, specifically budgeting software. We've used Quicken for 8 years and love it! We have tried a lot of free systems but honestly, like most things, you get what you pay for! For us, we would try them and spend a ton of effort switching everything over but they really didn't compare to Quicken and we ended up switching back.

Budgeting software should give you an accurate look at your finances. A good one will let you categorize expenses into general categories. This feature is awesome! Everyone will need different categories but we use the following. Over the next few weeks of blog posts I'll be breaking down each category. 

  • Clothing
  • Debt
  • Groceries
  • Homeschool
  • Household
  • Housing
  • Kids
  • Medical
  • Personal
  • Transportation
  • Utilities

When setting up these categories make sure to keep you goal in mind. Don't let yourself get down in the weeds. The power of financial software is you can make lots of categories and that can also be your downfall. You want to see an at a glance picture that gives you the ability to see the forest not each tree.

So ask yourself, will the category help you to actually evaluate and control your financial health? Just like stepping on the scale, you could weigh 200 pounds and look amazing or terrible. You want to be able to evaluate your spending on a weekly basis and see how you are really doing.

Make a Plan

After you've stopped the hemorrhage by using a budget system like Dave Ramsey's The Total Money Makeover.  You can take a breath and say, "OK, phew! At least we aren't in the ICU of finances anymore! Give yourself a pat on the back and keep your momentum going!

There will be things you really can't do. For example, while it would be great if my husband or I could get a second job somewhere, it's not possible because his primary job actually makes you inform them prior to taking on another job and also calls at all hours expecting him to be available. This is fine, but it does limit our possibilities for earning more money.

When you are examining your categories, really notice how much of your money you are spending on each item. And look for ways to economize on each item. While in later posts I'll be addressing each of the categories and ways we saved money, the overarching theme is to look at how much each category is costing you and think... how can I cut this down?

Fixed Costs

Fixed costs are things like your housing, insurance, car, phone, utilities, debt, etc. The most impactful thing we've done in limiting our spending is to really evaluate our fixed costs. Write down where you
can see making cuts. Have levels of priority. The things that should be at the top in your priorities are items that you can limit without really having much impact on your quality of life. When we decided I would stay home, we had to look for ways to limit those fixed costs. 

Steps we took included: 1. We sold the car I drove which was old and needed a lot of repair, cost a lot annually in insurance, and also about $1,000 a year to have registered; 2. When the contract was up for our cell phones we canceled ours and switched to having a land line. 3 We got rid of the cable tv. 4 We moved to a house that was half the size of our former house, had a longer commute, and was a foreclosure. 

Hidden Costs

Look for hidden costs.

When we were first looking at the idea of me staying home with our kids we were six months pregnant. We actually went through and calculated all of the costs of me working. At first, we analyzed this from a strictly financial standpoint and in a rather idealized world where our kids were healthy, went to public school, I was able to breastfeed, and work full time without taking unpaid maternity leave. What we found out was that before taxes my annual salary, which on paper would have been $45,000, would actually have been $10,000. So I would have been working as a nurse with a BSN for $4 an hour. Was that $4 an hour actually worth not being able to be with my kids? Or were there ways that we could economize and make up that $10,000 a year?

Why Budgeting Didn't Work Long Term

With budgeting, the idea is to limit your spending by categorizing your expenses and staying under your budget. When you are out of money you stop spending. The problem with this idea is that, long-term, you aren't necessarily making good decisions. You are following a good method to really stop over spending but, when that envelope for the food budget still has $100 in it at the end of the month, you'll probably spend it! After all, it's there so why not spend it, right? Again another issue we've found is that a lot of times, by limiting spending, you will make poor choices. For example, say you have nothing left in your clothing budget. It's the fall but everything in your favorite clothing store is for springtime and on sale for $1 each instead of $20 each. Do you pass up this sale? With a strict budget, you do. Then, come springtime, you pay full price for clothes.

This is why you have to be able to carefully and cautiously evaluate your decisions rather than just blindly stick to a budget. Now if you run into that sale and have $60 in your checking account. What do you do? I'd say you pass up that sale. But if you have $10,000 in your savings and $500 in your checking account, don't pass up the sale!

For us, the problem with staying on a budget is that it's like a diet, way too restrictive and in the long run we ended up spending up to our budget. Kind of like going on a diet is going to make you lose weight, if you follow it, but in the long run you have to change your relationship with food. Most people who go on a diet are going to rebound and actually be heavier after the diet than before it started.

Recognizing that you have a problem is step 1 and a budget is an awesome way to initially fix that issue. But in the long run you have to fix your relationship with money and things.

We live in a totally consumer driven economy. The health of our economy is evaluated based on GDP. This doesn't measure how happy you are, how healthy you are, if you have a job, if you are under employed, if you can feed your kids, if you can buy the latest gadget you want. It measures how much money you produce which is motivated by your spending which brings up everyone else's bottom line.

Break the Habit

What tends to be a problem for women is we are programmed to be gatherers. We look for things to bring back to our home to take care of our family. Not too long ago this was an excellent trait. We brought back important nutrient rich foods for our families and spent most of our day doing this. Now we can spend 1 hour every two weeks grocery shopping. And what do we do with that impulse that God gave us to be able to really provide for our families? It is still there but has nowhere to go!

The first step is to get out of the spending habit. Limit what you are allowing yourself to look at and take your thoughts captive. This is going to be hard! But it is also transformative and will make everything else easier. This step is so important! There are several things I recommend to enable this.

  • Rules: Write down a list of rules for yourself. Put it somewhere you can see it everyday!
  • Lists: Make lists of things to buy. If you see something pretty or interesting that isn't a need but is a want. Put it on the list! Do not buy them, but wait until your shopping day. Have only one day a week you can shop for things. After this becomes comfortable try to push your shopping day to once every two weeks. 
  • Commercials: Don't watch commercial television! This is one of the biggest steps in changing your relationship with money. Have you ever seen your kids after they watch commercial television? Suddenly they want everything. Well, we do the same exact thing! Advertisers spent 64.54 billion dollars on television ads in 2012. And the number increases every year. They are spending that money to get your money! Don't let them get to you or your kids
  • Window shopping: If you window shop its going to trigger your desire to actually buy something. Its just putting yourself in front of temptation. There's no reason to tempt yourself with products that you may want but don't need
  • Simplify: Really become an expert at discerning needs vs. wants.
  • Re-evaluate: Before you allow yourself to shop re-evaluate your list. Do you still think you need everything on the list?
  • Use Your List: Before you go shopping have your list with you. Do this for everything and do not let yourself buy anything that is not on that list. 
  • Rewards: If you make it under budget and are doing a good job with following your rules treat yourself! I actually think a great way to motivate yourself is to have a reward at the end of the month or week. If you reach your goals you get something you want not need. If you don't, you don't.

Spend as Little as Possible

After you have transitioned and been able to really stick to making lists and following your rules then move into a new phase. Keep using the lists but instead of even thinking of the budget evaluate every single purchase. And really think do I actually need this? How much is the real cost of this rather than perceived cost? Your goal is no longer to be just under budget but focus on spending as little as you possibly can in each category. 

Say you've done amazing for the first three weeks of the month. You think to yourself wow I did such a great job maybe I can splurge. No you can't! Reward yourself after you've gotten through the month. Don't relax your focus until you've reached your goal!

Don't generalize your reward. Set a specific reward or category of reward prior to the beginning of the month. Post a picture of that item, every time you think of spending, remember if you spend money and its not a need you don't get the reward. Another way to do this is to build it into your budget. So for example, if I stay under budget on every category I get my reward. Don't give yourself a reward before the end of the month! 

Wives: Our responsibility, especially when staying home, is to find ways to spend less than our husband makes. Don't punish your husband by spending money. This is a place where I have personally struggled. My husband would do something. I would think well he lost his wedding ring so I can spend money on whatever I like now. And so I'd buy a bunch of books I had wanted to read. Which didn't make me feel any better. 

Husbands: Your responsibility is to make enough money so that your wife can have the life you want her to have. If your wife is struggling to get spending down don't tell her that "I never spend any money, you are the one who spends money." It's not helpful. It doesn't fix the problem. 

If you had to walk into a Best Buy, Dick's, or Harley dealership everyday and spend one hour there would you still not spend anything?

The fact of the matter is most women do most of the spending. That isn't because they are crazy spenders its because they are doing the grocery shopping, clothing shopping, etc. This puts women directly in the path of temptation. If you criticize her spending habits it damages your relationship which is going to make her spend more. First come to a consensus about your budget and set up rewards for her if she can stay under budget.

What do you think? 

Have you ever struggled to make ends meet? What strategies do you use to stay on budget? 

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