GAIL’S TIPS
I get letters from people all the time objecting to the fact that “child care” is a Life expense. Because child care can be very expensive, people find that it drives their Life category out of the acceptable percentage, so they want to put it somewhere else. Having a big child care commitment seriously cramps their ability to spend money on food, entertainment, and clothes (along with all the other Stuff they want to buy), which are also in the Life category. Hello! When you have a baby and must pay for child care, you should expect to have less to spend in the other Life areas. If you don’t want to have to spend less eating out, going to the theatre, buying snappy shoes, or acquiring the latest toys, make more money or don’t have children.
The percentages I give are guidelines. If you’re spending nothing on debt repayment—yeah!—that means you have 15% to stick in any of the other four categories. But if you’re over the top in one category, it means you’ll have to cut back on the others. So what if Life is 50% of your spending? As long as your budget balances, you’re saving at least 10%, you’ve got no debt, and you’re happy, you’re fine.
Let me take a minute to clarify a huge misconception that seems to have sprung up around the Debt Repayment category. The Life Pie guideline is 15% of your income. But what that actually means is if you are spending more than 15% of your income paying off your consumer debt, you have far too much debt. It does not mean you should only put 15% of your income to debt repayment. You need to put as much of your income into debt repayment as necessary to get all your consumer debt paid off in three years or less. And if that means your debt category is up to 25%, 30%, or even 40% of your income, so be it. You’ll just have to cut back elsewhere or make more money to have enough for the other categories. If you’ve dug yourself a deep hole by spending money you haven’t yet earned, it’s time to grow up, suck it up, and pay it off! More on this when you get to Chapter 5.
BALANCE YOUR BUDGET
As you work to create your first budget, don’t think that everything is going to fall into place tickety-boo. There’ll be a lot of tweaking required to get it right. And it may mean you have to put the budget down, go away and do something else for a while, and then come back to it to refine it further. When I am creating budgets for families, it takes me several tries to come up with something that I think will work. (It only looks easy.)
Having completed your Spending Analysis Worksheet (page6621–23), you know what you’ve been spending on average in each category, so start by plugging in those numbers into your budget. For any expenses that didn’t get caught in your spending analysis—things like house and car insurance that are paid annually, or perhaps property taxes—figure out what you pay in a year and divide by 12. That’ll give you the monthly amount for your budget. (Yes, even if you pay it annually, you have to put it in your budget!)
If you’ve been spending a ton of money in cash, you won’t be able to remember where it all went. To get a handle on how you spend your cash, get a notebook and write down every penny you spend in cash over the next month. At the end of the month, add the amounts to your budget averages that you took from the spending analysis you did in Chapter 1. So, if you ended up having coffee 37 times that month, you’d add the $90.65 to the Restaurant category on your budget sheet. And if you bought two new pairs of jeans and a couple of packs of skivvies, you’d add the $212.37 you spent to your Clothing category.
The previous exercise is a good one if you spend more than 15% of your income in cash, since it will give you a clearer picture of where you like to spend your money. If you’re currently dropping $700 a month in cash without a clue as to where it’s going, it’ll be pretty hard to see where you need to cut back to make your budget work. Track your cash and face up to the truth about how you’re blowing your dough.
As far as the Debt Repayment category goes, right now you need to stick a number in that gives a nod to your debt repayment plans. The number will very likely change as you go through the process. Since you’ve already added up what your minimum payments must be to keep your credit history from getting bruised, drop that number into the budget.
Next put in your income. Enter the amount you’ve been putting into the bank every month. (You figured this out when you did your spending analysis in Chapter 1. If you skipped this step before, you have to do it now!) This number has to be what’s actually been going into your account, not what you imagine has been going in. If you’ve fallen into the trap of thinking of your income in gross dollars (before taxes), it’s time to stop that nonsense. Your gross income is yours and the government’s income. If you want a budget that works, you have to work with your net income: your income after deductions.
You only have so much money to spend. Up until now, you may have been unwilling to accept that you only have so much money to spend, so you used credit cards, lines of credit, and whatever other forms of financing you could get your hands on to keep shopping. But the reality is … say it with me … you only have so much money to spend.
Once you enter all the averages you came up with the Spending Analysis Worksheet into your budget, if you can’t make it balance—if the number at the bottom isn’t a positive or a zero—you have a problem. You’ve been spending more money than you make for one of two reasons:
1. Your expenses are too high.
2. Your income is too low.
Or maybe it’s a combination of both. You need to assess what the problem is so you can fix it.
People think there’s some mystery involved in balancing a budget. There isn’t. It’s simply a matter of taking what you have and divvying it up in a way that works for you. And if you can’t afford cable, you can’t afford cable.
GAIL’S TIPS
Some people are more concrete thinkers than others, and working with a budget on paper feels too abstract to be real. They need to actually see the piles of money to see when the piles of money run out. If you’re one of these people, here’s what I suggest you do:
1.Get yourself a stash of play money. You can print these up on the computer yourself or you can simply raid your kids’ games for the “money” you’ll need. Find an amount in a mix of denominations that matches what you earn every month. This is your “income.”
2.As you work through your budget, take the money out of your “income” and set it aside with a note that says what category it’s going into. So if you’re planning to spend $550 a month on Groceries and Personal Care, write $550 on your Budget Worksheet. Then take $550 out of your pile of money and label it “Groceries and Personal Care” and set it aside.
3.Work through every category of your budget like this until the money runs out.
4. If you have categories with no money, you’ll have to decide if you’re going to eliminate those categories from your budget or take money from the other piles to put something into those piles.
CUTTING EXPENSES
Some things are very important, some things are a little important, and some things aren’t important at all. This is when you figure out for yourself which is which.
You have to pay to keep a roof over your head, so rent, mortgage, property taxes, and utilities are all essential expenses. They are “need to have” expenses. Food is an essential expense since you have to eat. But steak is a “nice to have” when it comes to how much you’re going to allocate for food. If you can afford steak, you can eat steak. If you can’t, you’ll be looking for a cheaper way to fill your belly by focusing only on what you “need to have.” While food is an essential expense, how much you spend on food is “variable” (it can change) depending on your resources.
When you’re trimming expenses, the first thing to do is to significantly reduce or completely eliminate anything that isn’t an essential expense: everything that’s a “nice to have.” If after balancing your budget and taking care of all the “need to have” items you find you have some money left, you can always add a “nice to have” back into your budget.
Grab a pen
cil and start chopping. Cut out everything that isn’t an essential expense. Chop your communications costs: cable, landlines, cell phones, Internet. Eliminate money in the Clothing category, the Entertainment category, the Vacation category. Salon trips and massages are gone. The gym is gone. Restaurants and takeout … gone!
If when you add up the numbers your budget still doesn’t balance, you’ll have to look at ways to trim some of those essential expenses, eliminating the “nice to have” and focusing only on the “need to have.” Turn down your thermostat and put on a sweater to save on heating costs. Get rid of the car you simply can’t afford and carpool instead. Find a cheaper place to live. Do whatever it takes to get the budget to balance.
It’s amazing just how little people can live on when they become conscious of what they are spending. My families routinely have to learn to live on less. I’ve cut their variable expenses by 50%, 65%, or 85% and they manage. In fact, I haven’t worked with a single family to date that hasn’t had money left in the Magic Jars at the end of my time with them. You can live on less if you’re determined to change your circumstances.
Of course, determination is a big thing. If you’re at all wishy-washy about what it’ll take to set your money and your life straight, if you just can’t work up the guts to do things differently, it won’t be the budget that failed.
Sometimes no matter how much you cut, there’s still not enough money to get to the end of the month. That means you don’t make enough and you’re going to have to find a way to make more money. (We’ll talk about that in Chapter 9.)
DON’T SKIP SAVING
You can’t sacrifice savings in the name of balancing your budget or paying off your debt. Sorry, that’s cheating. You have to set aside some money each month for your emergency fund and for long-term savings, so that you’re working with a balanced plan.
The rule of thumb for saving is to set aside 10% of your net income. Take your net monthly income and calculate 10%: if your net monthly income is $2,875, the amount you put into Savings will be $287.50 a month. Never mind that you can’t imagine where you’ll find $287.50 right now. That’s your goal and that’s where you’ll start.
If you have a whack of debt and not enough cash, getting to 10% may take some time. It doesn’t matter how little you start with, you must start to save: something must go into your long-term savings and something must go into your emergency savings every single month.
I know there are a lot of people who believe you should pay off all your debt before you start to save, but I don’t agree. If you have nothing set aside in an emergency fund, the first time you run into a problem, you’ll go back to using your credit, which will be emotionally defeating. And if you don’t start the habit of long-term savings TODAY, you won’t ever start. I’ll help you figure out some saving strategies that will work for you later in Chapter 7.
USING THE MAGIC JARS
All over the world, people have rinsed out their jam jars and are now using them to manage their money. Perhaps it’s because putting money in the jars where you can see it coming to an end makes money management really concrete. When the jars are empty, you’re done spending.
The jars aren’t actually the “magic” in making money work; the budget is. The real magic is the fact that people seem to want to use the jars—people hate to budget!—and I think it’s because the jars make the process so tangible. You decide how much to put in the jars, you put the money in, you live on it, you can see when the dough’s running out so you have to stop spending. People seem to get a real kick out of having money left in the jars at the end of a week.
GAIL’S TIPS
While many people have embraced the Magic Jars eagerly, some people seem to have difficulty figuring out where the money for the jars comes from. It’s as if they think this is “extra” money, not money they would have been spending all along. The Magic Jar money is money you’re already spending on things like groceries, clothing and gifts, gas, car repairs, and pet food. So finding the money to put into the jars isn’t a test. Of course if you’re in overdraft 27 days out of 30, you may think you don’t have the money for the jars. Hey, if you planned to eat this month, and you were going to stay in overdraft to do it, then that’s where you’ll get the money to start the jars. Once you’re on a budget and have a plan, you’ll work on eliminating your overdraft.
FIXED AND VARIABLE EXPENSES
I divide my budgets into two parts: fixed expenses and variable expenses. Fixed expenses are the things that you must pay every month; the amounts tend not to change (much) and the money usually comes directly out of your bank account either through an auto payment or through some other form of bill payment (like online banking or writing a cheque). Categories like rent/mortgage payment, taxes, child care, utilities, auto loan payments, and the like fall under the title of fixed expenses.
Variable expenses are the things that are less rigid, that we pay for in cash, by debit or credit card, and that tend to get away from us if we’re not paying close attention: grocery shopping, gas, clothes, entertainment, the discount department store, gifts, travel, sports … you get my drift. These are the expenses I go after first when I’m cutting back to the bone on a budget. That’s not to say the fixed expenses may not need some trimming. But having trimmed, they usually stay pretty much the same from month to month.
The money that goes into the jars is the money that you will be spending on your variable expenses. So you can’t actually make the jars work for you if you don’t start by making a budget that balances.
GAIL’S TIPS
People sometimes want to debate with me whether an expense category should be fixed or variable. I get long letters from people telling me why a budget category on my interactive budget is in the wrong place. If you want to make the expense a “variable” expense, feel free. Want to add categories, subtract categories, move categories, you should. When I created my Budget Worksheet, these are the choices I made. But you should feel free to make your own. The only way you’ll be able to live with your budget is if you make it exactly what you need it to be. And remember, it’ll take some fine tuning to get your budget working just right, so don’t cast it in concrete. Let it change to meet your changing needs.
FILLING THE JARS
Want to use the Magic Jars? Get yourself five jars (boxes, envelopes, tin cans all work too) and label them:
• Groceries & Personal Care
• Transportation
• Entertainment
• Clothing & Gifts
• Other
If you use the Interactive Budget Worksheet on my website, the amount that goes into the jars is automatically calculated for you. So you can do your own budget and then transfer the numbers to the online budget to see how much goes into the jars. Or you can figure out your own jar amounts.
Add up each of the budget categories that belong in a particular jar.
• Groceries & personal Care : If you eat in a restaurant or order takeout, this is the jar from which the money must come; ditto if you buy diapers.
• Transportation includes gas, repairs, tolls, taxis, and public transportation.
• Entertainment is everything from movies to sports, book buying to newspaper reading … whatever you consider fun; if you buy lottery tickets or gamble, you’re wasting your entertainment money!
• Clothing & Gifts: This category is self-explanatory
• The Other jar holds the money from your budget that’s variable but doesn’t fit in any of the first four jars. It may include your children’s allowance, pet costs, and medical expenses. If you have school trips, they’d go in the Other jar. Ditto anything else that’s unique to your specific situation that doesn’t seem to fit elsewhere.
Let’s take Clothing & Gifts as an example. If you have $50 a month allocated for clothing, and $25 a month allocated for gifts, your total in this category is $75. Now you have to divide this monthly amount by how often you’re going to fill your jars. If you fill yo
ur jars weekly, you’ll put $18.75 a week into the Clothing & Gifts jar. Fill it biweekly and you’ll be putting $37.50 into the jar every two weeks. It’s a good idea to keep a small stash of coins handy to make change for the jar money. Don’t round up or down! That’s a sure way to throw your tracking off.
GAIL’S TIPS
My Interactive Budget Worksheet assumes there are 52 weeks in a year, so it multiplies the monthly amount by 12 and then divides by 52. This is perfect for people who are paid weekly or every two weeks. If you are paid twice a month, you may decide to fill your jars on the same schedule, in which case you would take your monthly amount and divide by two. If you like the idea of filling the jars monthly, the task of figuring out what goes in the jars is very easy.
You may have money left in the jars at the end of the month. Some of those jars are meant to accumulate. Let’s face it, if you have $25 a month for clothes, it may take a few months before you have enough to buy your kid’s new snowsuit. Ditto transportation, in which you accumulate your car repair money. Grocery money, too, should sit there for a while since there are big-cost items (think laundry and cleaning supplies) that have to be replaced on a less frequent basis. If you have money left over in the entertainment jar, either you’ve budgeted too much or you’re not having any fun. Fix that.
GAIL’S TIPS
Debt-Free Forever Page 5