Monday, August 27, 2007

Solving Our Savings and Budget Issues - The No-Budget Budget Way

Our budget and savings goals always seem to be at odds with each other. The more we want to save, the more our budget's suffer and the more we budget, the less we always have left for savings. The struggles are not easy nor are the solutions. While it seems like more money is the only solution, we shrink at the task of balancing our budget and explaining why our savings accounts just aren't adding up. I'd like to propose a way of looking at handling your savings and budgeting that has worked for me for the last 10 years, I call it the no-budget budget.

Budgets and money issues are tough to deal with and incredibly stressful. The issues we have with our budget and savings can actually be symptoms of common mental disorders, like described in this article by Liz Pulliam Weston:

The manic or "high" phase of bipolar disorder, for example, is characterized by impulsive and often self-destructive behavior, which can include big shopping sprees, said Los Angeles psychiatrist Deborah Nadel.

Overspending likewise can be an issue with depression, Nadel said, as those afflicted try to distract themselves and alleviate their distress with purchases. Feelings of hopelessness can make it difficult to plan for the future or to care whether the bills get paid.

The symptoms that define ADHD -- impulsivity, inattentiveness and/or hyperactivity -- make finances a trial for many who have the disorder. Problems with planning and organizing stymie their attempts to deal with even simple money tasks, like bill paying, while lack of impulse control can result in big credit card debts, over-limit fees and bounced cheques.

We've heard at one time or another that financial problems are the most common cause of relationship problems. According to this article: money is the number one reason for divorce. We all have enough stresses in our lives that challenge us. Let's try to look at solutions to lessen those stresses involved with building our savings and creating or balancing our budgets. You may already be incorporating some aspects of this. If not or if only in part, I encourage you to take some time to digest these thoughts when you next sit down to work on your financial matters. I think these methods can be a step or two towards relieving the stresses on our minds and relationships.

I always enjoy an opportunity to refer back to the book that started me on the right track regarding personal finance: The Richest Man In Babylon. There are many great concepts in the book, that we can always find new ways of interpreting. The two that resonated most with me for budgeting and savings and make up the no-budget budget are:

"For every ten coins that thou placest within thy purse take out for use but nine. They purse will start to fatten at once adn its increasing weight will feel good in thy hand and bring satisfaction to thy soul"

"Budget they expenses that thou mayest have coins to pay for thy necessities, to pay for thy enjoyments and to gratify thy worthwile desires without spending more than nine-tenths of they earnings"

When you think about these principles, they are the key to what I've called my no-budget budget. I started using this method about 10 years ago, because I just couldn't keep a budget. The more I tried to concentrate on a budget the more I seemed to mess something up. Whether it was a missed payment, a ding on credit score, a late fee on a credit card, final notice on a bill, someone not getting paid, etc. I'm sure you have many more examples from your own experiences. I'll cover the basics of the no-budget budget and then touch on some ideas of how you can add more sophisticated touches over time (I'm sure you'll come up with many many more of your own).

The Basics
In it's most basic form the no-budget budget is comprised of:

1) Automatically Saving 10% of your take home pay:
If you have 401K, ESPP, or any other kind of employment plan that allows you to automatically withdraw from your paycheck, then do this with a minimum 10% withdraw of every paycheck. At a minimum, write yourself a check or withdraw 10% to your savings account each paycheck. THIS IS THE FIRST CHECK OR WITHDRAWL, WITH EACH PAYCHECK!

2) Pay all Necessary Bills Next and Prioritize Remaining Bills:
Bankrate has a great article that discusses in more detail a prioritization plan. Basically pay in order of necessity to living month to month. First the bare essentials for food and medical expenses, then the mortgage, or rent and insurance. Then pay car loans (if they are necessary to work transport), then make all minimum payments to any revolving lines of credit, so that credit history won't be harmed. Finally, utilities.

3) Remaining Funds:
This is what you have left till the next paycheck. In essence, you've forced a budget for expenses beyond bills to this amount. Here's where sophistication comes in to increase the remaining funds each paycheck and to increase the effectiveness.

4) Maximize Your Payments to High Interest Debt:
Out of the Remaining Funds try to have an ever increasing percentage going to reducing revolving credit accounts.

Modifications to The Basics
Here are some suggested modifications you can make over time. You will, yourself, come up with many modifications each month as you try to increase efficiencies and savings.

1) Automatically Saving 10% of your take home pay:
The most advantageous savings you can do with your 10% is to apply it all to your 401k until you max out your 401k. What does this do for you? It increases the amount of your take home pay, because 401k deductions are taken out of your check as pre-tax income. Also, this 10% savings can be so much more, due to matching that companies usually do, as well as the tax savings due to tax deductibility. If you don't have a 401K available, then try to fund your IRA, this allows you to increase your tax deductions. If you already normally receive a tax refund, then by making tax deductible contributions will increase your refund, so you can make another sophisticated tweak to your w-4 tax deductions at work to increase take home pay and reduce the likelihood that you'll receive a tax refund. Use this calculator at the IRS site to help you with that. Another modification that you can add to this step is that you can ratchet up the automatic savings percentage each paycheck. At first, you should notice (especially with pretax deductions) that you won't miss the 10% that much. So, start tweaking the savings until you do notice or it get's too difficult.

2) Pay all Necessary Bills Next and Prioritize Remaining Bills:
You should definitely look at the prioritization suggestions at bankrate above for ideas. I usually like to focus on mortgage, car payment, insurance, minimums on credit cards, and then utilities last, other bills. Utilities are one of those negotiable's that you can usually make arrangements if you really need the cashflow for a period of time (i.e. negotiate payment plans, etc. and all of this doesn't hurt your credit scores). The main focus is to never allow any payments that are necessities to live be missed as well as any payments missed that could have a negative effect on your credit scores.

3) Remaining Funds:
You can always tweak things here, like finding bills to save on or cut out entirely. Do you have a netflix or other type of auto-pay account that you just haven't used in the last couple of months? Review your statements for those pesky autopays that just aren't being used and can be canceled. Take a critical look at any other bills and expenses you can reduce or cancel if not really needed or used (cable, phone, Internet, club membership, etc.).

4) Maximize Your Payments to High Interest Debt:
Focusing on eliminating high interest debt is like closing a leak in a dam. The more high interest debt you have, the more you're losing opportunities to save or pay bills with that money. Ways to help here and tweak and expand your monthly budget are many. Some of my favorites are: Taking advantage of 0% credit card offers, Consolidating debt with a HELOC Loan, using emergency fund cash to paydown high interest credit cards. First, I want to say about emergency fund cash to paydown, should only be used if you have your credit issues in control and won't just build up your credit cards again. In this case check out my post on now supplementing your emergency fund cash with a credit emergency fund. If you plan on using 0% or low interest balance transfers, again be sure you have your credit issues in control to avoid getting deeper into credit problems. The suggestion is that you use balance transfers to get yourself out of the high interest and it means that more money goes to paying down the debt. Accelerate and knock out that high interest debt as aggressively as possible and you'll be rewarded with a greater cash flow for your future no-budget budget!

5 comments:

SAHMmy Says said...

Found you through Carnival of Debt Management. We withdraw the remaining cash each payday after all bills are paid; it covers gas, groceries, household expenses, and fun. When it's gone, it's gone, and no need to nitpick the details or pore over credit card statements to analyze spending. That's our "no-budget budget."

Teaspoon said...

Yes, very nice simplicity. It certainly takes a great deal of stress out of financial planning!

It's a lot like investing in mutual funds vs. stocks. The basics, will take you very far without many headaches. The added sophistication of a complicated budget can do well, but can take lots of work and i don't think leaves as much room for sophisticated touches that really end up hitting the bottom line.

Lulu said...

This article has been included in the carnival over at How I Save Money so please remember to link back to it so the other articles can get some exposure.

Anonymous said...

Yes, use the 401K, my company doubles the first percent and goes to 4% but it actually is 5%.

I do not agree with the raising of the amount that the government takes out because that is giving a loan to the USA when you can use the money better yourself.

Anonymous said...

Ever hear this guy?

http://www.johnburley.com/TheSevenLevels_WebVersion.PDF

See page 22.