Monday, October 11, 2010

How Some Friends Helped Bring Financial Stability to Our Family

My wife and I started out our marriage with a car payment and a house payment. We were flush with cash from wedding gifts. I was trained in accounting and had a decent job working with taxes. My wife was in the final term of earning a bachelor degree. She had a promising temporary position that looked like it could turn into something permanent.

We seemed to have a lot going for us financially. I had managed a checkbook since age 12. I figured that I knew how to successfully run our fledgling family’s finances. Our earnings were acceptable. We had some cash. We should have no problems.

Then we bumped into reality. My wife’s temporary position turned out to actually be temporary. She finished her degree, but finding a new job was more difficult and took longer than we had anticipated. We had spent a lot of our cash surplus on things we figured we needed and/or would improve life quality. In retrospect, it would have been much better to put a lot of that money in savings instead of spending it so quickly (and frivolously).

Only a few months into our marriage, I was chagrined that I had mismanaged our family finances despite my training. With bitterness for my own folly, I swallowed my pride and asked my parents for a few hundred dollars to help us make ends meet. They graciously provided the subsidy along with some mild but firm advice.

About this same time, friends of ours that lived nearby asked if they could come to our home and spend an hour or so sharing something with us. I figured that they were going to pitch some multilevel marketing scheme at us, but out of friendship we scheduled the appointment anyway.

Instead of a marketing scheme, our friends shared with us a thin book titled Rich on Any Income. (See review.) They had been married for a few years and had two beautiful daughters. They explained how they had gotten into financial difficulties early in their marriage and how following the principles in the book had pulled them out of those problems.

The book is so small that it can easily be read in one session. The principles in the book are really quite simple and flexible. They’re common sense, really. Oddly enough, many families — including families where principles are reasonably financially literate — fail to implement these very basic rules for successfully managing family finances.

I could sum up the rules this way:

  1. Spend less than you make.
  2. Develop and stick to a plan that your family can live with that helps you achieve rule #1. That means budgeting.
While it seems like nothing could be simpler, the book goes on to show you how to set up and maintain a simple family budget. The book is outlined around a monthly budget system, but I suppose you could use any period that works best for your family. Still, I’d caution against too long of a period because it might be difficult to maintain focus.

The basic steps to budgeting are:
  • Set up budget categories. This is where the money goes. Your categories can be as broad or as granular as works for you. Too few categories can make the system meaningless, but too many categories makes the system cumbersome.
  • Determine your anticipated income for the month.
  • Determine fixed and unavoidable monthly expenses. Don’t forget to split out a monthly portion of costs that come up annually (e.g. property tax, car tax & license), semi-annually (e.g. auto insurance), quarterly, or seasonally.
  • Split out the remaining income across more flexible categories. Include a category for savings, even if you’re only saving a small amount.
  • Anytime you spend anything for any purpose, subtract it from the appropriate category. When you run out of money in a category, you are done spending from that category for the month. Or you have to steal from another category.
  • At the end of the month, create a budget for the next month. Carry over amounts left in any category.
The book was written in 1986, before home computers and debit cards were common. It includes a small budget matrix that can be kept in a checkbook so that it can be updated in live time and can provide you with current budget status at a glance.

Discipline is key to making a monthly budget work because it can be tedious and tends to temper ‘fun’ spending. But the tedium pays off in financial peace of mind.

I had some friends that simply could not deal with the tedium of monthly budgeting. Columns of figures weren’t real enough for them. Despite being hard working, intelligent people, their family finances were a shambles. They finally resorted to the cash envelope method. (See Dave Ramsey’s explanation.)

My friends would immediately convert each paycheck to cash. They split the cash among labeled envelopes in a drawer. The envelopes were their budget categories. Anytime they spent anything — even to make a house payment — they physically pulled cash from the appropriate envelope and made the payment. If they ran short in a category, they literally had to take cash from another envelope. This methodology instilled discipline that helped them stabilize their finances once and for all.

For a number of years, we calculated our monthly budget on old time accounting ledgers. We kept a monthly budget matrix in our checkbook. This worked fairly well. We rarely used debit or credit cards back in those days. We mostly wrote checks and tried to rarely spend cash.

For years we avoided using credit cards. I had worked in the collection department of a bank and had seen many sad situations that resulted from credit card misuse. In time we discovered that credit cards used wisely could pay a small return instead of causing pain. From the outset, we decided to never make a charge on a card for which we did not already have money in the bank (and in our budget). That way, there’s always money to pay the full balance when the credit card bill comes due. We never pay interest.

Technology eventually caught up with us. We started tracking everything in Quicken, a popular financial management software package. That has worked fairly well for us. We track every bit of income and every expenditure, no matter whether it’s cash, check, or credit. It’s easy to quickly show where we’ve spent every penny for many years past. We know our financial status at any given moment.

While you can’t tote your PC with you everywhere you go, remotely accessible data and mobile solutions are making it easier to know and track your budget anytime and anywhere. Modern financial tools are helpful, but they do not change the fact that running a monthly budget requires discipline.

Our monthly budget is now an ingrained part of our family culture. For years, I was the family’s primary budget manager. In recent years my wife has taken over that role. Our finances are not perfect. We still run into situations for which we feel insufficiently prepared. We sometimes end up overspending in budget categories. This results in occasionally employing uncomfortable strategies to get things back in balance. Nobody enjoys spending cutbacks. But we are fortunately in pretty good shape.

I could not have known those years ago when I suspected that my friends were trying to hawk a multilevel marketing plan that the evening they spent with us would permanently improve our family’s finances. I’m grateful that my friends went out of their comfort zone to share that little book with us. How is it possible to adequately thank someone for that kind of service?

1 comment:

BDH said...

Thanks for sharing your good experience. This is still as timely today as it was those several years ago when you received the counsel. Today a brief internet search for budget returns a boatload or two of techniques and options, but they all boil down to living on less than you make and sticking to your budget.