Free Money Finance

How Much Did You Spend on Christmas?

Here's a piece talking about Christmas spending Some interesting info from it:

The average shopper is planning to spend $929 on gifts this holiday season according to the American Research Group. With the average U.S. family income of $55,775, according to the Census ACS survey, this means, on average, that families spend 1.66% of their total income on presents for Christmas.

We spend about $800 a year on Christmas and have for a decade or more. Since we've made substantially more than $56k per year, we are well below the national average.

Even in early retirement, our income is almost twice the national average, so we're still well below the average spent on the holiday.

How about you? What did you spend on Christmas this past season? And did you get any really cool gifts? ;)

The 50/20/30 Budget

MSN Money details what they call the "50/20/30 rule" for budgeting as follows:

According to the 50/20/30 rule, your monthly budget should be divided into three distinct categories of expenses: 50 percent should be reserved for essentials (think housing and food), 30 percent should be allocated for lifestyle choices (things like nights out and 121 channels of cable) … and at least 20 percent should go toward what we call “financial priorities,” which include debt payments, retirement contributions and, of course, savings.

This is the first time I've heard of this "rule" and wondered what you all think of it?

Personally, here's the progress I suggest for people:

• Start with a 10/10/80 budget - 10% giving, 10% saving, and 80% spending. If you're in a tough financial spot, you could begin 5-5-90, but I wouldn't go lower myself.
• As you grow your career, begin to increase the lower numbers so you start to give and save more.
• Use extra income (like from a side business) to give/save even more.
• Do this for long enough, and you'll become wealthy. :)

Thoughts from others?

How to Find a Financial Mentor

In my post titled How to Create a Budget, here's what I suggested for step #5:

Have a Trusted, Financially Successful Friend Review Your Cash Flow Plan and Make Suggestions

Find someone you know, trust, and respect who is doing well financially and ask them to look over your cash flow plan. Specifically ask for them to help you identify places where you may be spending more money than you need to.

A reader responded with the following comment:

Finding a mentor I trust enough to share money matters with is the hardest part for me. I feel like my family is doing much better than most of our contemporaries or it's just not a subject that is easily broached in conversation to be able to tell if that person would be a good person to discuss this topic with.

So this got me to thinking: where would I go to find a mentor if I was in need of one?

After considering it a bit, here are some places I personally would look:

• Church - Many churches (especially larger ones) offer courses by Dave Ramsey or Crown. While some may say that these aren't generally that financially advanced (to which I would agree, though you don't need to be a scholar to do well financially), they are usually pretty good at identifying places where a person could save some money.
• Friends - If you have no friends doing better than you are, you need some new friends. I can think of a few that I have asked for financial thoughts recently on one issue or another.
• Online - I would seek out some advice from bloggers I trusted if I felt they could help me. Let's face it, these are real people dealing with real issues, and they often have experience we could all learn from. And by the way, if any FMF readers want some budget review help, send me your information and questions and I'll post it as a "Help a Reader" piece. You'll get plenty of advice from FMF readers.
• Research - If I was looking to cut costs, I'd Google a bit for online articles, check out appropriate library books, and look for free e-books on the subject on Amazon.

Well, that's my list. What do you have to add? Where would you turn if you needed someone to review your budget?

Money 101: How to Create a Budget

This piece is part of a series I'm calling Money 101 and is designed for those who might not be as advanced in their personal finance knowledge and experience.

In my last post we discussed why you should track cash flow and how establishing a budget facilitates this. Today we'll cover the steps to creating a budget.

Step 1: Track Your Spending for 30 Days

The only way to get an accurate budget is to start with what you're actually spending. And if you haven't been tracking your expenses up to this point, you're going to need to record your actual expenses over a month to see what they actually are.

For the next 30 days you are going to write down what you spent, where you spent it, and what you purchased (i.e. "$30 at Target for a pair of pants") EVERY SINGLE TIME you spend money. When you pay your car payment with a check, write it down. When you transfer money to your credit card company via your bank, write it down. When you pay for a Big Mac with your debit card, write it down. When you put $1 into the machine at the car wash, write it down. When you give your daughter a dollar to buy a brush, write it down. Write down EVERY SINGLE PENNY you spend -- whether it's cash, credit, check, or anything else -- for 30 days.

If you've never done this, believe me, it will be very enlightening. It will show you where your money is really going (versus where you think it is going.) I've had a few hundred people do this exercise over the course of the past 20 years and there are ALWAYS surprises -- even for those who think they know where every penny is going.

So write down your spending (and if you're in a family, this includes everyone in the family who spends money) for the next 30 days. Don't question it. Don't dismiss it. Just do it.

Your financial well-being is worth the effort, right? I thought so.

Step 2: Collect the Rest You'll Need

During the 30 days you're tracking your expenses, begin to collect the other information you'll need including the following:

• Income -- Gather all your pay stubs, deposits from side businesses, and documents detailing any other regular source of income you have.
• Expenses -- Review your accounts (checking, credit cards, etc.) and look for irregular expenses that your 30-day tracking won't identify. Some examples: annual insurance premiums, real estate taxes, water bills (we get/pay ours quarterly), and vacations. You're looking for expenses that may not happen every 30-day period but that will sometime in the year.

Step 3: Put It All Together

At this point you're ready to develop your first budget. I suggest one of two methods for doing so: spreadsheet or paper. They both have their pros and cons and which one you use is simply personal preference.

The process is simple now that you have all the information. In one vertical column write down the names for the various sources of income (first) and expenses (second). For income you might write "work", "second job", and/or "side business". For expenses you'll include "mortgage", "taxes", "food", and the like.

Label the next 12 columns to the right of this one with the names of the months -- January through December.

Now that you have the basic format, fill in the information from the data you've collected. Add in the income you'll get from each source in each month as well as the expenses you'll have each month. Once that's completed, add up the income monthly and the expenses monthly. Subtract the expenses from income and list a number at the bottom of each month as "surplus". This number then gets set aside for savings/investment.

Step 4: Evaluate the Budget

Once you get all the information in the right place, you're now ready to evaluate the data.

The first place to start is whether or not you have a surplus over the course of the year. While you may run a deficit in a month or two, over 12 months you should have a net gain. In addition, you want to make sure that number is where you want it to be (are you saving enough to meet your goals?). If the surplus is negative or if you're not saving enough, you're going to need adjustments. And even if you are doing ok in your mind, you need to give the information a closer look.

Look at your income first. Are there things you could do to increase it? Work more hours, get a second job, start a side business, something else? Take some time to think about how you could grow your income.

Next look at which expenses can be cut or decreased. For some general guidelines, you should be spending no more than the following on these major categories (except for savings, of course):

• Housing (35%) -- Mortgage or rent payment, taxes, insurance, utilities, repairs, and any other cost of living there.
• Transportation (15%) -- Car, gas, maintenance, and insurance.
• Debt Repayment (15%) -- Not including your house and car payments.
• Saving (10%) -- Self-explanatory.
• Living (25%) -- Everything else -- clothing, food, charitable donations, entertainment, gifts, travel, etc.

Step 5: Have a Trusted, Financially Successful Friend Review Your Cash Flow Plan and Make Suggestions

Find someone you know, trust, and respect who is doing well financially and ask them to look over your cash flow plan. Specifically ask for them to help you identify places where you may be spending more money than you need to.

When my wife and I used to do financial counseling, we would have couples bring us their budgets (we provided the forms in advance to make sure they covered everything.) Almost every time we ended the session with a laundry list of how they could save money -- based on our own personal experiences. For instance, one couple had two vehicles that were much older than ours and yet they paid twice what we did for car insurance. When we asked where they got their insurance, they said it was from a family friend, someone the wife's dad had always used, so that's who they used. We told them to quote it out. They came back the next time with a cost that saved them several hundred dollars a year for the same coverage! This is what an experienced mentor can do for you and your budget. 

So find a mentor to help you identify cost savings. He or she will likely come up with a lot of suggestions you have never considered. 

Step 6: Update the Budget

Take the ideas you've identified yourself as well as those your mentor has suggested (and you want to accept) and update your budget. Assuming you have a positive annual surplus and are saving what you want, your budget is now set for the time being. If you are falling short on either of these measures, repeat steps #4 and #5 until the budget is where you want it to be.

If your surplus is negative, low, or simply in need of being increased to super-charge your savings, the only two ways to improve it are to increase income and/or cut spending. We will be discussing ideas for how to do both of these in days to come, so stay tuned.

Step 7: Establish a Way to Consistently Track Your Spending

Now that you have your budget, you'll need to use it to manage your money on a daily basis. In addition, you'll want to record how you're doing so you can adjust as needed. There are three easy ways to track your spending to control and manage your finances as follows:

• Envelope System – This basic system is great for those with a tendency to overspend.  Simply cash your paycheck and place the dollar bills in envelopes corresponding to your budget categories (such as housing, food, clothing, entertainment, etc.).  Cash is removed as expenses occur.

For instance, if you budget $50 for entertainment, put $50 cash in your monthly “entertainment” envelope.  As you entertain (attend movies, concerts, play sports), pay with money from this envelope.  When the envelope is empty, no more spending!  If you find yourself tempted to “rob” another envelope, re-evaluate your budget.  Put receipts from your spending in each envelope to later analyze your spending patterns.

• Ledger System – This system requires more accountability and time, but will give you better spending information.  Similar to a checking account, deposit your paycheck and use a ledger or a notebook (less than $5 at an office store) to record your spending.  On separate pages, write the monthly budgeted amount for each category.  Expenses are subtracted and deposits are added to this figure in a continual increase and decrease to the account.

Using the above example, “$50” is written on your entertainment page.  If you spend $10 at the movies, write “movies -$10”, leaving a balance of $40.  Do this with each expense.  Next month, write “deposit +$50” and add it to the current balance.  If you have a negative number, you need to re-assess your budget – are you spending too much in this area?  Can you spend less in another area to compensate?  If you can’t find a solution and you’re consistently in the red on several of your accounts, consider using the envelope system.

• Electronically – If you’re technologically minded and own a computer, tracking your spending electronically might just be your cup of tea.  Quicken is a good financial program that not only tracks your spending but also helps with extras like recording your household inventory for insurance purposes.  Or if you prefer a web-based option, Mint might be for you. Their versatility allows you to analyze your spending in a variety of ways, even providing a “net worth” graph as an incentive for saving and reducing debt.  And though you still need to record your data regularly, this method can be less time consuming than the ledger system.

Any of these three methods will help you track your finances and manage your money.  Choose one that works best for your temperament and lifestyle, and stick with it.  The payoffs will be a greater understanding of your spending patterns, freedom from worry, and ultimately the realization of your financial goals.

And that's it! You now have a working budget and a system for knowing where your money goes. You're now able to manage your cash flow and have much better control of your money. Congratualtions!

Money 101: Why You Should Track Cash Flow

This piece is part of a series I'm calling Money 101 and is designed for those who might not be as advanced in their personal finance knowledge and experience.

We've discussed the fact that you need to track your net worth, but there's another measure that you should keep an equally close eye on. It's your "cash flow."

Cash Flow Definition

Cash flow is simply income less expenses. It's the amount of surplus you have after you've paid all your bills. The difference is then what you can save and/or invest. If you remember my post on how to become wealthy, you know that it's a vital part of becoming wealthy.
 
This is why I will talk about the two parts of creating a strong cash flow -- maximizing your income and limiting your expenses -- so often. If you can grow the former and keep the latter in check, your cash flow will skyrocket, fueling your net worth to new and glorious heights.

The Budget through the Years
 
The budget is the method most used for tracking/setting/managing cash flow. It's an invaluable asset in my opinion, but the level at which you need to develop and use a budget differs based on your financial position:

In the early years of managing your own money (or when you're "starting over" with little to your name), a budget is invaluable. It will help you see where your finances are going and how they are spent. It will enable you to catch things that otherwise might not be noticeable and assist you in making good financial decisions. I highly recommend having a budget for people just starting out handling their money. I would make it as detailed as possible and review/update it on a regular basis (like monthly.) This is what we did for the first decade or so of our marriage, and it made a HUGE difference in how we manged our maonet and the financial results of those efforts.

After you become a bit more proficient in managing your money (and have developed a larger surplus between income and expenses), I think you can go to a less detailed and less frequently updated budget. If you've proven that you can manage your money (and especially control your spending) a budget isn't needed nearly as much to ensure your cash flow remains strong. I'd ease into this process but updating and reviewing a budget quarterly, then semi-annually, then annually. If you get really good at creating a surplus and watching your spending, you can eventually get to the point where you don't need an official budget at all -- you can simply review spending in real-time as needed. This is what we currently do. We look at spending in Quicken and make adjustments as needed, but we don't have a formal budget.
 
Finally, as you begin to approach retirement (or early semi-retirement), you'll need to go back to the basic budget. You'll want to be 100% sure that your income and expenses are where you want them to be before you make any major moves because once you do, it's hard to go back (for instance, hard to go back to work, hard to cut expenses that are now fixed, and so forth.) For these reasons, I suggest you do a very detailed, multi-year budget well before retirement to see if you can afford to make the changes you want to.

How They All Fit Together

Here's how all the financial pieces we've discussed so far fit together:

• A budget allows you to see where your money comes in (and how much and when) and where it's spent. It's the mechanism for determining and tracking your cash flow.
• Your cash flow reveals the surplus (income less expenses) that you have each year to be saved/invested.
• These savings/investments increase your net worth and, over time, allow you to become wealthy.

By tracking cash flow on a regular basis (with a budget) and using the information generated to make appropriate adjustments, you can take steps to significantly grow your net worth over time and ultimately meet almost any realistic financial objective you set for yourself.

How Much Did You Spend on the Holidays?

Now that the holidays are over and many of us are looking over our 2012 spending while planning for 2013, I thought I'd ask the following:

How much did you spend this year on holiday presents?

Personally, our budget was $700 for the year and we spent about $850. We always go a bit over, so we might as well recognize the fact and increase the budget! :)

That said, $150 over budget isn't going to break the bank for us, so it's all good.

Most of the money was spent on our direct family (me, my wife, and kids) and my parents (my wife's parents are deceased.) There were other amounts for friends, a handful of extended family members, the postman (and similar people), and people I volunteer with at various organizations, but that's about it.

How about you? How much did you spend this year on holiday presents?

6 Reasons You Need a Spending Plan

Note: For the most part, this post is for those who are at the beginning of their personal finance journey. As I've noted previously, once you have control over your spending you can dial back on how much budgetary control is needed.

Whether you call it a spending plan, a budget, or something else, you need to have a way to keep track of your finances. It doesn’t seem like a lot of fun at first, but a spending plan can really help you take your money management up several notches. It's so vital that I put it near the beginning of my 30 steps to great finances.

With that said, here are six reasons you need a spending plan:

1. Know Where the Money Comes From

A spending plan helps you keep track of where your money comes from. This isn’t just about the money you earn working a traditional job. Your spending plan should also include money from other income sources, including investments, odd jobs, and gifts.

Examine your income trends to get a better idea of your average monthly income, as well as times of the year when you can expect more or less money. Your spending plan can help you tweak matters, and look for ways to more efficiently make more money.

2. Understand Where the Money is Going

Your spending plan helps you see where the money is going. How are you using your money? What are your regular expenses? Are there quarterly or semi-annual expenses coming up? Your spending plan helps you keep ahead so that you aren’t unpleasantly surprised each time the insurance premium is due, or you need to pay property taxes.

3. Make Long-Term Goals a Priority

It’s easy to lose sight of the important long-term goals you might have. Retirement is hard to picture when it’s 30 years in the distance. Even college for the kids is a long 10 to 15 years away. A spending plan helps you bring these long-term goals into focus. Your spending plan requires that you look at your current situation, and where you want to be. With a spending plan, you focus your efforts and work toward your long-term priorities.

4. Large Goals Become More Manageable

A good spending plan helps you break down your goals into something manageable. Large expenses, such as new flooring or a family vacation, can seem overwhelming when you look at the total cost. Instead, use a spending plan to break down your goals into something more manageable. Figure out how much money you need each month to accomplish your goal, and use your spending plan to assign funds to that goal every pay period. With your spending plan laying it all out for you, it becomes easier to see exactly how you can direct your finances to best effect.

5. Prepare for the Unexpected

Your spending plan can also help you prepare for the unexpected. Use your spending plan to designate money for an emergency fund each month. Build your emergency fund faithfully, and you won’t have to worry (about money, at least) the next time your car breaks down, or your child breaks his or her arm. You’ll be ready with your emergency fund money.

6. Increased Peace of Mind

The best reason for creating a spending plan is the peace of mind that comes with it. When you know where your money comes from, where it is going, and you now that you are prepared for emergencies and the future, you will enjoy better peace of mind. A spending plan keeps you from worrying as much. As a result, you are healthier in your life and in your relationships.

No matter how you manage your finances, make sure you include everything in your spending plan. Set it up in a way that puts you in charge. Think of yourself as a resource director, and it will be easier to give every dollar a job that will help you reach the financial destination you seek.

Your Money or Your Life, Evaluate Your Spending

Today we're going to talk about step #4 from Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century.

Last time we discussed how the book wanted us to create a budget, then convert all those spending categories into "hours of life energy" using the real hourly wage that we computed in step #2. In this step, we're now going to evaluate the fulfillment we got out of each category knowing how much it cost us in hours of our lives.

Step #4 has four parts as follows:

1. Of each spending subcategory in your Monthly Tabulation (budget) ask "Did I receive fulfillment, satisfaction, and value in proportion to life energy spent?" Mark your answer with a + (or an up arrow), a - (or a down arrow), or a 0 (for neutral.)

2. Of each spending subcategory in your Monthly Tabulation (budget) ask "Is this expenditure of life energy in alignment with my values and life purpose?" Mark your answer with a + (or an up arrow), a - (or a down arrow), or a 0 (for neutral.)

3. Of each spending subcategory in your Monthly Tabulation (budget) ask "How might this expenditure change if I didn't have to work for a living?" Mark your answer with a + (or an up arrow), a - (or a down arrow), or a 0 (for neutral) and write the estimated change on the Monthly Tabulation.

4. Review and make a list of all subcategories with the - symbol (or down arrow.)

Ok, I get it. They want us to look over our spending and then evaluate whether or not we really need it. I'm guessing that this will then eliminate some expenses so that our monthly budget decreases. And with a lower level of income needed, we can make additional life choices about the work we do and the time we spend at it. Am I right? (I have no idea, because I haven't read ahead at this point.)

The book calls step #4 "the heart of this program." If this is indeed true (which I assume it is since it's coming from the author), I'm a bit disappointed. This is it? Really? This is the "heart" of the program -- looking at your spending and deciding whether or not it's worth it? I understand that they add in the twist of the "hours of life energy", but this still isn't that different than most Personal Finance 101 books that I've read. And those are at least more practically oriented (IMO.)

But I'm not giving up on this book. So many people love it that I'm sure there's something coming up that I can hold onto. But as for now, this book isn't sharing anything I don't already know. Perhaps if I read it 20 years ago when I knew very little about personal finance, then I would have been much more impressed with what it had to say. But for now, color me unimpressed.

Update: Click here to read the next post in this series.

Your Money or Your Life, Create a Budget

Today we're going to talk about step #3 from Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century.

If you recall, last time we discussed computing your real hourly wage -- the amount you "really" make from your job after you add in all the extra time associated with it (commuting and so forth) and deduct the expenses (commuting, clothes, etc.) In general, we all probably make way less than we actually think as we trade one hour of "life energy" (as the book puts it) for money.

Step #3 has several parts but they really boil down to the following:

• Using the information you've gathered from tracking your spending by the penny, create a budget of your expenses (in dollars).


• Convert the dollars spent in each category into "hours of life energy" using the real hourly wage that you computed in step #2.

I really, really, really hope this is leading us somewhere meaningful. But since I haven't read ahead at this point, I'm not sure. I'm banking on the fact that so many people LOVE this book that it's all going to come together at some point. But here we are at 1/3 of the steps completed and I can't yet see the finish line. Maybe that's the way they want/like it.

It's not the budget part that's got me in a quandary (after all, I list developing a cash flow plan as one of my 30 steps to great finances), but the whole "hours of life energy" thing has me wondering. I realize that I'm trading time for money. I get that. I also get that for most people, what they trade an hour for is a small amount of money. Ok, fine. But what am I (or anyone else) supposed to do about it?

I know, I know, be patient. I'm sure they'll get to the point. But I'm anxious to get there NOW. :)

As for the suggestion of developing a budget -- good one IMO. This is a foundational step for anyone looking to better manage and understand their finances.

As for the whole "life energy" thing, I'm withholding judgment for now. I like it from the standpoint that it equates time to money because that's something most people don't think about (at least consciously.) And I like the "you make less than you actually think" line of thought because there are expenses that you incur from working that you wouldn't have if you didn't work. I just don't know how they are going to translate this from something that's kind of abstract into action steps that are concrete. It should be interesting.

BTW, I know many of you have read this book and know where it's going. Don't tell me!!! While I'm agonizing over the wait, I don't want to spoil the surprise. :)

Update: Click here to read the next part in this series.

The Most Important Part of the Budgeting Process

The following is an excerpt from Securing Your Financial Future: Complete Personal Finance for Beginners courtesy of Rowman & Littlefield Publishers. All Rights Reserved.

Get ready: here comes one of the most important recommendations in the whole book. It is a trick that makes your left brain happy by getting the power of compounding working in your favor but slips right by your right brain’s bag of tricks. This recommendation guarantees that you will follow the First Rule, month after month and year after year.

It is called Pay Yourself First.

Here’s how it works: the First Rule requires that you save 10%—minimum—of everything that you ever earn. So first you decide what percentage you are going to save and then convert that into a dollar amount. Next, make that amount the very first line item in your monthly budget. Think of this savings as a bill that comes to you every month—a completely nonoptional bill that you can’t ignore or delay. Then as soon as the month begins, pay that “bill” first, before you spend any other money whatsoever. The way that you pay the bill is by transferring that amount from your checking account into your savings account. It’s like saying “I know I have to pay my landlord, the electric bill, my phone bill, etc., every month, and of course I will. But I am going to pay myself first.”

This changes your mentality about spending and saving in a subtle but extremely powerful way: you no longer save what is left after spending. Instead you spend what is left after saving. The difference may sound subtle, but its power is profound.

It works even better if you can make it automatic, which I highly recommend. Do this by preauthorizing an automatic monthly transfer, from checking to savings, in the amount that satisfies the First Rule (at least), on the same day that your paycheck is deposited. Your right brain’s preference for the path of least resistance usually hurts you financially, but paying yourself first turns the tables and allows you to use this tendency to powerfully help you instead. The money is out of your account (and your mind!) before you even realize that it was ever there. You’ll never miss it, so it won’t feel like a sacrifice. You’ll be consistently doing the right thing financially, in such a way that it doesn’t hurt a bit. In fact, after you set it up, you won’t even notice that it’s happening. The only time that you’ll notice it at all is when you happen to notice your savings account balance and are surprised by how big it is getting.

By the way, paying yourself first isn’t a secret, and it isn’t new—it’s been around for generations. It’s so well known for its rock-solid effectiveness that it’s the primary technique used by the U.S. government for its own revenue collection. When you get a paycheck from your employer, you’ll notice that an estimated amount for U.S. income tax has already been taken out before you get your hands on your pay. If the IRS doesn’t want to take the chance that it won’t get paid, why should you? Paying yourself first takes the chance out of increasing your net worth and makes it a sure thing. It’s like money in the bank. Wait . . . it is money in the bank!

Getting the Most for Your Money

So far, all of our emphasis in this chapter has been on keeping your total amount of monthly spending under control by using the budgeting process. As long as you do that, you’ll be following the First Rule and your net worth will grow. In addition, the learn step in the budget process will increase your spending skills, and this is important.  Two people can spend the same amount of money in a month, but the one with the superior spending skills will be able to afford more (or better) goods and services for the same amount spent. Alternatively, two people can buy an identical set of goods and services in a month, but the one with superior spending skills will buy them for less, and therefore will be able to save faster.

People who have mastered the art of spending waste less money and get more for the money that they do spend. You’ll learn how to do this yourself as you continue to repeat the learn step in the budget process, but I’d like to give you a head start by outlining some of the key elements of spending skills. Here are seven of them.

1.  Don’t make individual yes/no decisions—prioritize.  The most basic level of prioritization is separating needs from wants. There is no debate that you need a basic level of food, clothing, shelter, and health care. But everything beyond that is a want. What prioritization is all about is ensuring that your needs are paid for before any wants and deciding which of your wants you want the most. Because you are committed to staying within a fixed amount of spending each month, every time you say yes to a want, you’re saying no to other ones. Your goal at the end of the month is to look back and be satisfied that you got the most for your money—that you spent it only on your needs and your very highest-priority wants.

The worst possible way to get that result is to make your spending decisions one at a time, as they come up or as they occur to you, as if every spending decision were completely independent of every other one. Decisions will come at you at disjointed, random times—so you’ll get disjointed, random results. Without prioritization you just spend your way through the month, saying yes when it seems like a good idea, and you run the risk of spending your monthly total before the month is over. (The technical phrase for this is “running out of money before you run out of month.”) The only possible way to end up close to a good prioritization is to look at all of your possible spending alternatives together, at the same time, so that you can compare them against one another. The wrong question to ask is “Should I buy X, yes or no?” The right question to ask is “I can afford to buy X, Y, or Z, but only one of the three. Which one of them makes the most sense for me right now?”

The budget process forces you to prioritize your spending in just this way, in advance.  This kind of “advance comparative thinking” will become a habit and will give you a much higher level of satisfaction with your spending decisions than the “serial yes/no” approach. You’ll become much less tempted to make spontaneous exceptions to your budget, because you’ll know from your own experience that you’ll have to pay for them by doing without something else that you wanted even more.

2.  Be a smart, well-informed consumer. We’re all bombarded by advertising around the clock. This virtually guarantees that we get a constant, unrelenting view of exactly one side of the story. Everybody knows what this side of the story looks like: the benefits of buying are mind-bogglingly wonderful, the price is unbelievably low, you’ll be admired by everyone you know, and unless you act now, you’ll really be missing out. Is that all you need to know, or is there another side to the story?

Of course there is—but you’ll have to do some of your own homework in order to get it. If you put some effort into this kind of homework, I’ll promise this: you’ll be amazed by how much you can save, easily. Become familiar with consumer-oriented publications and forums. Check out user reviews on the Internet. Get educated about the real trade-offs between new vs. used, and about branded vs. not. Ask friends or colleagues who have made similar purchases what they learned in the process. Spend a few minutes looking at coupons in the mail before throwing them out as junk. Learn which things you should never pay the full asking price for. Understand why Homer Simpson says, “Extended warranty? How can I lose?” If you’ve never done this kind of research before, it might sound like a lot of work. But like many other areas that we’ve been talking about, the key is to establish a habit. There is no real shortcut to becoming a smart, well- informed consumer. It takes a commitment to doing the homework, but the payoff for doing so begins early and is well worth it.

3.  Smooth out nonrecurring expenses.  Most of the expenses in your budget come to you in relatively predictable monthly amounts. But some of your expenses won’t follow this kind of monthly pattern. You might have some that are once a year, like membership fees, holiday gifts, or annual vacations. Others might be one-time expenses, like purchasing a major appliance, a new computer, or a training course.

This is where your emerging habit of long-term thinking can come into play to improve your financial life. The idea is to begin planning for these expenses early, well before you need the money to pay for them. How do you do that? By including them in your budget, in small, regular monthly amounts. Similar to paying yourself first, you simply transfer these amounts to savings each month, where they’ll earn interest in the meantime.

Financially speaking, not every month is the same. But the trick is to use your budget to make every month seem roughly the same. When it’s time to pay the nonrecurring expense, since you’ve saved for it in advance, your monthly process won’t skip a beat. For those without budgets—or who don’t use their budgets to anticipate these kinds of expenses—financial life can be a chaotic series of up- and-down months. Smoothing out your nonrecurring but perfectly predictable expenses frees you up from all of this unnecessary stress. This feeling of being in control of your monthly expenses is one of the more immediate benefits of budgeting; you’ll be surprised by how easy it is once you’ve gotten the hang of it.

4.  Plan for unplanned expenses.  Your car needs new brakes much sooner than expected, your doctor prescribes some new and expensive medication, or your microwave blows up and needs to be replaced. All kinds of things like this invariably pop up, and the one thing that they have in common is that they weren’t in the budget. We’re not talking about huge financial emergencies here—we’ll cover those in a later chapter. Instead we’re talking about those bothersome, unplanned expenses just big enough to put a painful dent in this month’s budget. That means that you’ll have to scramble to find the money by doing without some other things that you’d been planning on. Unless, that is, you’ve taken some precautions.

Look at it this way. Even though events like these are rarely planned, what is the probability that your car will never need an unexpected repair, that you’ll never get sick, or that a household appliance will never need replacing? What to do? Build a contingency fund into your budget, that’s what.

Let’s say that your goal is to do a little better than the First Rule minimum, and you intend to save 15% of everything you ever earn. The way that you plan for unplanned expenses is to put a line item in your budget called “contingency fund.” If you budget for 3% of your earnings on that line, all of your other—planned—spending will be set as if you were planning on saving 18%. The difference between the 15% and the 18% is a pool of excess savings that you can draw on when these unplanned expenses occur. At the end of the year, if it turned out that you needed the 3%, you’ve got it—and you still achieved your goal of saving 15%. If it turned out that you didn’t need the 3%, then you’ve saved more than you planned and your net worth is increasing faster than you’d planned—oh, darn!

5.  Avoid using currency.  There are many forms of what economists call cash and cash equivalents—we’ll learn more about them in upcoming chapters. But probably the most familiar of all the forms of cash is currency—coins and bills—whether in your pocket, purse, wallet, piggy bank, or between the cushions on your couch. Do you understand now what I mean by currency? Good. Now, stop using it.

When you spend coins and bills, they leave no trail. Unless you want to collect paper receipts all month, or keep some kind of transaction-by-transaction record, using currency short-circuits the compare and learn steps in the budget process. It’s like mystery spending—who knows where, when, or how it was used? All you know is that it’s gone.

When you spend with a debit card, a credit card, or by check, you leave a specific record of what the purchase was for, which greatly facilitates the budgeting process. The best approach of all is to select just one of those three (debit card, credit card, or check), and use that for every transaction. (We’ll cover which one of the three is best a few chapters from now.) That way, the results for the entire month are available online, all in one convenient place, in downloadable form. This makes the compare step a snap, and you can spend more time in the learn step.

Yes, there are exceptions. It may not work particularly well to pass your debit card down the aisle at a baseball game to a hot dog vendor or to write a check at an automated turnpike toll booth. But the more you can avoid using currency, the smoother your budget cycle will be.

6.  Small transactions repeated a large number of times add up. Sounds obvious, doesn’t it? But this is one of the most common spending traps that those who don’t budget fall into. Why go to the trouble of bringing your lunch to work? It’s always easier to go out; bringing your lunch might only save $5 or $10. The key is to understand that it is not a $5 or $10 decision—multiplied by 200 lunches a year, it is a $1,000 or $2,000 annual habit. Maybe those lunches are worth that much to you, or maybe they’re not, but the point is to make the decision consciously, prioritizing the lunches against other things that you could spend that same amount of money on.

Budgeting forces you to look at the small-dollar, high-volume transactions and see them realistically. Operating without a budget, or letting these kinds of expenses escape scrutiny by using currency to pay for them, will allow you to be lulled into thinking they’re much smaller than they really are.

7.  Beware of the subscription effect. Many service providers charge for their services on a regular monthly basis. Often it is convenient for both you and the service provider to set up an automated payment scheme, which calls for you to preauthorize payment from either your bank account or a credit card. Examples include services like cell phones, cable or satellite television, club memberships, and insurance coverage. If you are completely certain that the monthly amounts will never change and that the duration of the agreement cannot be extended without your explicit permission, then you are on safe ground. But if the monthly charges are subject to variation, or if the agreement can be automatically extended or renewed automatically, then watch out! This situation leaves you vulnerable to what is sometimes called the subscription effect, and it is financially dangerous; you might end up paying much more, and/or for a longer period of time, than what you had originally preauthorized. Here’s how it works.

It starts with highly visible advertising for a very low monthly rate for a certain set of services. (The rates are often especially low if you are switching over from a competitor.) These low rates are only temporary, but you will only find that out in the fine print. These temporary low rates are called teaser rates. Before long, the teaser rates go up—sometimes very substantially. The seller heavily encourages you to preauthorize an automatic monthly payment, allegedly for your convenience. But the seller’s real motivation is to encourage an “out of sight, out of mind” situation so that you (hopefully) won’t notice when the teaser rates expire and the higher rate takes effect. After several more months, the seller may implement yet another price increase. If you’re notified at all, the communication is usually in the tiniest print available and specifically designed to encourage you to ignore it. A similar tactic may be used when it’s time to renew your agreement; it isn’t uncommon for service providers to automatically assume that you want to renew unless you specifically notify them to the contrary.

Here’s another twist. Let’s say that the seller has three levels of service: red, white, or blue. You sign up for blue. A year or so later, the seller redesigns all their service packages and now has four levels: bronze, silver, gold, and platinum. The seller notifies you of this exciting new development and advises you that “gold” is the closest to what your current “blue” service level is. So, supposedly for your convenience, they offer to make the assumption that your choice is to switch to gold, and if you agree, you don’t have to do anything—they’ll take care of everything automatically! Well, gold may be the closest to blue, but it is a safe bet that gold has a higher price than blue. Unless you are the type to read every line of fine print in what looks like a routine piece of mail, you’ve just “agreed” to pay a higher price—by doing nothing. Suffice it to say that these sellers know all about the paths of least resistance. The idea is that they’ve got a little hidden drain in your financial bathtub, and they want to steadily open that drain up as wide as possible without your noticing a thing.

Your budget process stops this tactic cold. They’re hoping you won’t notice the steady increases, but your budget forces you to notice every increase. Each increase is a trigger for you to reprioritize the spending against all of your other spending and make conscious decisions about whether to accept the increase, downgrade your service level, or cancel it altogether. If it sounds like I’m making a big deal out of one small part of your spending, wait until you set up your first budget. If you’re like most people, you will be surprised by the large percentage of your total spending in the automatic monthly billing category. It is a big deal!

Decision Time

Earlier in this chapter, I noted that many people choose not to adopt a budget process at all because it doesn’t seem like much fun. And even though I’ve done my best to convince you, point by point, of the many advantages of a basic budget process, I’m sure that some of you still aren’t ready to commit to it. I won’t sugarcoat it; even though the budget process eventually becomes a breeze, the first few cycles are likely to be time consuming and maybe a little bit frustrating. That’s because you’re learning lots of very valuable lessons in a concentrated period of time, and I highly recommend that you begin right away.

But for those of you who just can’t stand the idea, let me offer this alternative. Strictly speaking, you don’t have to use a monthly budget process, but if—and only if—you faithfully follow the First Rule (which, as you’ll remember, precludes any form of borrowing whatsoever) and pay yourself first every month without exception. If you follow these two rules, you can just spend each month until you run out of money—and then stop.

If you choose this alternative, there is good news and bad news. The good news is that your net worth will continuously grow—maybe even as fast as it would if you were doing monthly budgeting. You’ll also be able to use every other tool and recommendation in the book; none of them are dependent on your doing a monthly budget. Now here is the bad news: your financial life will be quite chaotic. Especially when you are in any kind of transition (a move, adding a spouse or partner, new dependents, new job, etc.), you’ll find yourself running out of money before you run out of month and having to scramble. And you definitely won’t get as much for your money as if you’d budgeted. Once you’ve had enough of this bad news, you can always change your mind—when it comes to budgeting, better late than never!

The choice is yours: implement the monthly budget process as was just described, or skip it and instead rely only on the First Rule (which precludes any form of borrowing) and Pay Yourself First shortcut.

Before you decide, consider this: would you invest in a company that doesn’t budget, when there is overwhelming evidence that most successful companies do? Isn’t investing in your own financial future at least as important?

The Two Ways To Track Financial Success

How do you know if you're reaching your financial goals or if you're making financial progress? And what can you do to get to where you want to be at a faster rate? These questions get to the heart of one simple matter: you need to keep track of your finances by calculating two simple measures on a regular basis.

These two measures are net worth and cash flow. Knowing them will tell you how you are doing financially. They will also give suggestions on actions you can take to improve your financial situation. With these two key metrics alone, you can measure and track your success in growing your net wealth.

What is net worth?

Net worth is simply the total amount of assets that you own less the value of the debts you owe. Another way to think of it is it's what you would have left over if you sold everything and paid off all your debts.

Written as a formula it looks like this:

Total assets - Total liabilities = Net worth

For example, if you had a $200,000 home, $50,000 in a Roth IRA, $20,000 in credit card debt, and a $100,000 mortgage, you would have a net worth of $130,000 ($250,000 - $120,000).

Net worth reveals your true wealth. In today's media we often hear "wealth" described in terms of income (how much someone makes annually.) But it's not what you EARN that makes you wealthy, it's what you KEEP. This is what net worth measures.

Taken at a point in time, net worth tells you little. Sure, it can let you know if you are in positive territory (own more than you owe) and give you a relative comparison to how others are doing, but those uses are rather limited. Net worth is most useful when it's tracked over time. In this way you can see if you're making financial progress -- if your wealth is increasing. This is why Free Money Finance's tagline is "grow your net worth." Because if you're growing your net worth, you're making financial progress and becoming more wealthy.

As such, it's vital that you measure your net worth on a regular basis. Personally, I update mine once a month (which is pretty easy to do using Quicken) and this is probably the most frequent you'd want to monitor your net worth (any more frequently doesn't really give you enough time to see progress.) Others measure their net worth quarterly or twice a year. I recommend that you check it every three months at the very least.

What is cash flow?

Cash flow measures the amount of income you make less the expenses you pay. It's what you have left over each month after you pay all your bills.

Written as a formula it looks like this:

Total income - Total expenses = Cash flow

For example, if you earn $2,000 a month after taxes and have expenses of $400 for food, $300 for a car payment, $500 for rent, and $500 for all other costs, your monthly cash flow is $300 ($2,000 - $1,700.)

Cash flow is a bit more complicated to track than net worth because it involves so many different moving parts. For instance, income can be made up of several sources such as salaries, dividends, interest, side jobs, hobbies, and any other payments that you receive. Expenses involve everything from taxes and mortgage/rent payments (generally among the largest costs most people have) to small purchases like a daily coffee, a magazine subscription, a sandwich, and everything in between -- anything you spend money on.

People track their cash flow over different periods of time depending on their stage in life, financial constraints (such as when income is made, when expenses are due, etc.), personal preferences, and the like. I recommend younger folks (people in their 20's and early 30's) and those who are close to having a cash flow at break-even (where income equals expenses) or, heaven-forbid, a negative cash flow (where expenses surpass income) track and record their cash flow once a week. Those who have a bit more space between income and expenses and those who have proven to be able to manage and control their finances with less tracking mechanisms can measure their cash flow less frequently like monthly or once a quarter.

I measure my cash flow once a month. Again, it's quite easy to do using Quicken. I suggest people look over their cash flow status at least once a month at the very minimum.

How net worth and cash flow work together

Tracking both net worth and cash flow is important because of how they work together to improve your financial standing. Your cash flow drives the assets you can purchase and debts you can pay off. Through careful planning of your cash flows every month, you are able to grow your net worth -- your true wealth. Here's how the cycle works:

• Each month, you make income from various sources.


• Each month, you have expenses from various commitments.


• The difference between income and expenses is what you have left over -- your cash flow.


• This cash flow is an asset -- which then adds to the "good" side of your net worth.


• In addition, you may have made debt payments from your cash flow that month that lowers the "bad" side of your net worth.


• If you create a surplus in this way month after month, you will grow your net worth over time and thus become wealthier over time.

In the examples above you have $300 every month left over in cash flow. In addition, let's say of the $1,700 in monthly expenses you had, $400 went to debts and decreased liabilities you had. As such, your net worth increased by $700 that month ($300 + $400). If you did this for a year, your net worth would increase by $$8,400 a year ($700 per month * 12 months).

Tips for growing your wealth

If you've followed along so far, you've probably realized that the formulas are pretty simple. If you want to become wealthier (which means increasing your net worth), there are only a few steps you can take to do so. They are:

• Earn more income. This has the result of increasing your cash flow and thus allows you to add more money to your assets and/or pay off more debt every month -- both of which increase your net worth. For ideas on how to make more money, see 11 Great Ways to Earn More Money.


• Decrease/limit your expenses. This has the result of increasing your cash flow and thus allows you to add more money to your assets and/or pay off more debt every month -- both of which increase your net worth. For ideas on how to lower your expenses, see my various "saving money" categories in the FMF archives (at the bottom).


• Do both. You can significantly improve your finances if you do both of the above -- grow your income AND decrease your expenses. This super-charges your cash flow and allows you to grow your net worth at an even faster rate.


• Increase the value of your assets. This involves managing your assets so they grow in value at a faster rate than they might if left on their own. For instance, $100k left in a CD might earn you 1% a year, contributing an extra $1,000 to your net worth annually. But the same $100k invested in an index fund could earn you 8% a year or $8,000 total. See how the actions you take can grow your net worth? Of course this is a very simplistic example and there are many other factors to consider. But for the purposes of this post it illustrates nicely the benefits to your net worth when you work to grow your assets.

Putting it all together

For the more experienced FMF readers, this post has probably provided few new insights. But for others, this information may be overwhelming. If that's the case, let me simplify the entire process for you. Here's a list of what you should do with the information above:

• Calculate your net worth. Do it soon so you know where you stand. Then set in place a regular update (like monthly) so you can monitor your progress.


• Calculate your cash flow. Do it soon and also plan to update it at least once a month if you fit the circumstances I've noted above.


• Look over your cash flow to identify ways you can grow your income and decrease expenses. Make a list of next steps to take and start knocking them off one-by-one.


• Look over your net worth and see if there are any assets you can grow. While it's difficult to increase the value of some assets (like your home), others (like investments in stocks and bonds) can often be sources for additional growth. Start to educate yourself on the potential options for making what you own work as hard as possible for you.

In the end, by tracking these two simple measures on a regular basis, you can take steps to significantly grow your net worth over time and ultimately meet almost any realistic financial objective you set for yourself.

How Often Do You Balance Your Checkbook?

I saw a tip the other day where a personal finance blogger said you should "balance your checkbook as often as you can." I'm not sure what this meant. Balancing a checkbook isn't something you determine the time frame for, is it? Isn't it something you do when you get your bank statement?

I suppose you could go online, see what had cleared, and balance your account as often as you like. But this seems a bit like overkill to me.

I balance our two checking accounts (they are both joint accounts -- one at a bank and one at a credit union) each month when we get the statement. It takes about three minutes using Quicken. Nice and simple. And as you might imagine, I balance to the penny. In most months, it's no problem. But maybe once a year I'm off by 10 cents or so and have to hunt down a problem check. But it usually works out without too much angst.

So here's my question for you:

How often do you balance your checkbook?

Or maybe I should be asking "do you still have a checkbook?" You tell me. ;-)

Five Reasons to Have a Budget

US News lists five reasons you need a budget as follows:

1. To set and reach financial goals.
2. To spend according to your priorities.
3. To build wealth.
4. To plan for retirement.
5. For peace of mind.

My thoughts:

• When you are first starting out (after college -- perhaps even before you graduate), you need a budget. You need it for control more than anything else IMO. It helps you see what you can and can't spend and make adjustments as you get your hands around managing your finances.


• After many, many years of successful money management, I don't think you really need one EXCEPT for specific planning purposes. More on that below.


• This is what we did. The first 15 years or so of our marriage we had a budget. We developed it annually based on our goals for the year. We updated it monthly initially. As we got better at managing our money (controlling our spending) we then updated it quarterly. Then twice a year. Then once a year.


• Eventually, we got to the point where we didn't need a budget, and we haven't had one for about 5 to 7 years at this point.


• But now that we've set our retirement number and have an annual goal for it, that document serves as a quasi-budget. In addition, I use Quicken to look at spending categories every year. I do it in hindsight (not in advance like most people develop budgets) but it helps to see where we need to make adjustments.


• In retirement, we may need to go back to a set annual budget. I guess it depends how close our income and expenses are. The closer they are, the more need for a budget IMO. The bigger your gap, the less you have need of a budget. Perhaps this is why we needed a budget early in our lives but not as much lately.

How about you -- do you have a budget? Why or why not?

How Much Do You Spend on These Items?

Moneyland lists what the average American spends on a variety of purchases annually as follows:

• Gasoline: $4,155


• Overall Driving Costs: 15,000 miles per year, $8,776


• Christmas: $700


• Cell Phone: $605.95


• Electricity: $1,419


• Health Insurance Premiums: $15,073


• Pets: Average dog owner: $1,542; average cat owner: $1,183


• Shoes: $370

I thought it would be fun to see what my family spent on these, so I ran a report in Quicken and found the following for 2011:

• Gasoline: $4,382. We're just a bit over average. We drive mostly my car, a Toyota Highlander, and gas mileage isn't that great.


• Overall Driving Costs: I didn't figure this out, but between me and my wife we drive about 20,000 miles a year, so I'm sure we're over the average.


• Christmas: $1,104. Again, over the average. Ugh.


• Cell Phone: $100. My phone is paid by my employer and my wife has a seldom-used Tracfone.


• Electricity: $1,243, a bit below the average.


• Health Insurance Premiums: $960, well below the average.


• Pets: Ha! We don't have pets, so we don't have the costs.


• Shoes: Really? Who tracks shoes as a category?

How about you? Are you either really high or really low in any of these categories?

Money Commandment #1

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #1 as follows:

• The old-school rules: Live within your means.
• The bubble economy rules: Live to the max, with easy low payments.
• The new rules: Use the 50/30/20 budget to know what you can really afford and what you can't.

To explain the last section the 50/30/20 budget takes after-tax income and divides it as follows:

• 50% goes to "must-have" expenses like food, housing, utilities, etc.
• 30% goes to "wants" like vacations, gifts, entertainment, etc.
• 20% goes to savings and debt repayment.

Now, here are my thoughts on all of this:

• I guess I'm old-school a bit because I still like to have "spend less than you earn" as the foundation for my personal finance advice.
• Next, I'd recommend anyone considering adopting a new budget to start with the 10-10-80 budget. It's simpler than the one above IMO.
• That said, the 50/30/20 budget does give more detail as well as encourages people to save more -- two things I like about it. So I'd say after a year or two on the 10-10-80 budget, a person could advance to 50/30/20.
• It all comes out of the same pot, so if you want to spend more in one area, you need to spend less in another. I just wouldn't mess with the last 20%. So, for instance, the 50/30/20 budget my morph into the 60/20/20 budget or the 40/40/20 budget based on your personal situation, but it shouldn't get to something like the 60/40/0 budget or 50/40/10 budget. The last 20% needs to remain firm -- especially for those who have had budgets for several years (and should now be out of debt.)
• And yes, you need to work giving into the first 80% of the 50/30/20 budget -- don't take it out of the last 20%. You'll need to work up to this over time (that's why I suggest starting with the 10-10-80 budget), but it can be done.

There's a lot of worthwhile stuff in this book and I'll be sharing much of it over the next couple of weeks. Stay tuned.

What Are the Biggest Three Items in Your Budget?

Wise Bread recently asked its readers what is the biggest item in their budget. I thought it would be fun for us all to do something similar by naming the three categories that we spend the most on.

I'll go first. As I noted in Insights into My 2010 Finances, my top three budget items are:

• Giving
• Taxes
• Food

A few notes of explanation:

• "Giving" includes amounts given to my church and other charitable entities. It also includes donations of goods (clothes given to Goodwill, for example) as well as gifts given to needy friends/acquaintances (like blessing boxes) for which we receive no tax deduction.
• "Taxes" includes all the different taxes we pay directly (not sales tax, for example): federal income tax, state income tax, Social Security tax, Medicare tax, real estate taxes, and...did I forget any?
• There is a big drop off from the first two to the third. "Food" is #3 because we don't have a mortgage -- and haven't for years (over a decade).

Now for a guess. Here's what I think most people would have as a list of their top three costs each year:

• Housing/mortgage
• Taxes
• Some form of debt (car or college)

How about you? What are your top three spending categories?

For Valentine's Day, Work on a Budget Together

The following is a guest post from Marotta Wealth Management.

An overwhelming number of people in failed marriages cite financial troubles as a major factor in their breakup. It's not surprising because the way we use our time and money reflects our values. Without a strong set of shared values, marriages may founder. But dealing with finances together can bring a couple closer. Developing and remaining faithful to a budget is probably the best way to build both your wealth and your marriage.

You may think financial planning is unromantic, but marriage is so much more than gazing into each other's eyes. It is as much a business merger as any corporate contract. And nothing is more romantic than planning how to realize your shared hopes and dreams for the future.

Finances tend to be a taboo subject. Often engaged couples do not know what their prospective mates earn or how much savings or debt they have accumulated. Most couples have deeply conditioned emotions and expectations about financial matters that they unconsciously project onto others. So in addition to selecting a china pattern and the floral arrangements for your big day, make sure your marriage has the financial footing and monetary habits to meet life's challenges.

Planning for financial security helps engender a loving environment of shared goals, respect and communication within which romance can flourish. If you can't share details about your finances, it doesn't bode well for your relationship. A professional may help facilitate the necessary discussions. An advisor can ask sensitive questions without judgment, listen to each person's goals and make recommendations to which the couple can respond without any hurt feelings.

I especially enjoy working with young families. Wealth management is all about small changes that produce large results over an extended period. And young couples have enough time to grow richer year by year as they age gracefully together.

Many new couples mistakenly believe they are doing well if they live within their means. This is a common misconception. Couples should keep daily expenses within 65% of take-home pay and reserve the other 35% for very specific purposes.

Ten percent should fund your retirement accounts, and an additional 5% funds your taxable savings. Set aside another 10% for large unexpected purchases. Without budgeting for these large emergencies, anything could swamp your finances. The roof might leak, the car could require major repairs or you could need to fly home for a family emergency. And finally, you may decide to put aside an additional 10% for charity and gifting.

If you add these values up, 35% of your regular take-home pay can't be spent on daily living expenses, leaving only 65% that can. Without this foresight, your finances or savings will be deluged by the regular large waves of unexpected immediate needs. This might be the single choice separating those who will grow their finances and those who won't.

Having a budget gives you more freedom, not less. Couples without one often fight about every dollar they spend. Each purchase becomes a battleground where values and priorities clash. And there are always impulsive purchases that provide fodder for an argument.

Disputes about how to spend money can be ongoing in families that are struggling to make ends meet. But a spending plan should never be exploited as a weapon. It can only be used as a tool for couples who are working together toward a common goal.

Most people occasionally buy something that their spouse considers frivolous. The way to contain the havoc these purchases wreak on a budget and a marriage is to set a boundary within which they can be enjoyed and beyond which they will not threaten other financial goals.

We recommend that couples make a line item in their budget for a husband's frivolous purchases and a wife's frivolous purchases. I suggest 1% total or half of 1% for each spouse. So long as spending stays within the budget, there should be no arguments.

Couples who have worked together on a budget already agree on the big picture. Once they make the hard decisions about what will help further the family's values, specific purchases in each category are much less critical.

When people follow a carefully constructed household budget, they do not need to worry about spending until a category exceeds the prescribed amount. Having decided how much money the family can afford to spend on clothes for him and for her, for example, it doesn't matter if he prefers lots of inexpensive clothes and she prefers a few more expensive outfits. A budget allows a certain degree of freedom that forestalls any controversy.

And when a family does overspend one category, they can decide in a monthly budget meeting how the category allocations might be adjusted going forward. There may still be disagreements, but at least with a budget there won't be petty discussions about every dollar or even an attempt to figure out where the money was spent.

As we grow older we can enjoy great peace of mind if we have resolved our money issues together. For Valentine's Day, work on a budget together. It is a calorie-free way of building lasting harmony.

Insights into My 2010 Finances

Last January I gave some insights into my finances. I thought I'd add on to those thoughts with a review of 2010's financial highlights (FYI, I'll do a net worth update later in the month, this one deals mostly with income and spending.) The summary:

• 2010 was my second-highest earning year ever. 2009 was #1 due to great year at work (and corresponding bonus.)
• 86% of my income came from my job. The rest came from FMF and some investment dividends/capital gains.
• Here's what I did with my income:

45.4% was saved (401k, 529's, SEP IRA, etc.)

23.6% was given away

30.9% was spent (spending is all cash outflows less giving)

• Of the spending, here are my biggest expenses and the percentage they were of spending (which does not include giving):

Taxes -- 63.1%

Food -- 5.4%

Utilities -- 4.7%

Misc -- 4.6%

Home repair -- 3.6%

Gas -- 2.9%

Vacation -- 1.9%

School -- 1.7%

Car insurance -- 1.6%

Car repairs -- 1.5%

FYI, I expect to get a good amount back on my tax return this year since a big part of this year's bonus was taken out for taxes. Of course I'd rather have had the money upfront, but there's no way to predict bonus amounts and they take out what they take out.

An interesting fact: if you take out taxes, I actually "lived" on 11.4% of my income. Of course, you can never "take out" taxes completely, but even so, if my income was reduced dramatically, taxes would go down significantly. So I could live on a fraction of my income -- perhaps 20% or so.

So, how does this relate to past years' results? I usually shoot for a 1/3, 1/3, 1/3 split between saving, giving, and spending. I was close on the spending category, but increased savings at the expense of giving. That said, giving was still a good amount and was my biggest "expense" (even bigger than taxes) for the year.

Why Budgeting is Important

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Here are two verses from the Bible that I find interesting:

Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations. Proverbs 27:23-24 (NIV)

Here's what these say to me:

• Be sure you keep a good handle on your money -- what's coming in and what's going out.
• If you do not, your wealth/money will disappear (and I'll add -- and you won't know why).

So what's the solution here to make sure we get a handle on our money? IMO it's a budget ("spending plan" if you like) or some other method for tracking/managing your money.

Early on in our marriage, we had an annual budget that I updated monthly because we needed to keep a tight rein on our money and ourselves. As time went on, we still had an annual budget, but I only updated/reviewed it quarterly. Years later it was an annual budget reviewed annually. For the past five years or so we haven't had an "official" budget, but we do track our finances with Quicken. It's an easy way to make sure we know where our money is coming from and where it's going.

Notice the progression over time -- as we got to be better money managers, we didn't need as much budgetary control. But we still have some. After all, we want to be sure to "know the condition of our flocks" and "give careful attention to our herds" because we know that if we don't our "riches will not endure forever" and our "crowns will not be secure for all generations." ;-)

A Budgeting Guide For The Burgeoning Entrepreneur

The following is a guest post from Financial Planning Tips.

About five months ago, some events transpired in my personal life that set the small flame of entrepreneurship - that I’ve had inside for years - into a raging fire.  My longstanding desire to get out of the corporate game and work for myself in some capacity has finally been set in motion after years of fears and doubts.  Given that I’ve worked a day job for most of my life, I knew that my mindset around my finances and budgeting - or lack thereof - had to shift completely.  I still am working my day job and moonlighting on nights and weekends, while I begin to make money in the world of blogging and online business.  I’m quickly seeing the fruits of my labors beginning to pay off, while concurrently locking down my finances to ensure success in the long term.

A Complete Shift In Financial Mindset

A seemingly small but important shift had to occur in my mind. As a worker, I’ve primarily been concerned with either saving or spending money for personal use.  As an entrepreneur, I’m now far more concerned with having capital that I can use to grow my business, and to actively generate cash flow every month.   When I think of spending money now, it’s on tools and resources to make more money for the business.  I’ll spend on something if it’s going to make me money, otherwise I guard my cash stash.  I also resist personal spending more than ever before.

From Carefree Spender To Budget Master

Not that you have to be poor by any means, but when starting out on the entrepreneurial path, I believe you must take a good, hard look at where you spend money, especially in terms of what you actually need to make you happiest in life.  Then you can ask “what are my monthly income goals for my business and dream lifestyle as an entreprenuer?”  Every last precious dollar that you save will be going into your business - you can count on that.

For three months I tracked all of my expenses, right down to the can opener I bought for $2.97 at the local drug store, when my old one broke. As a single working-class male in New York City, my expenses came to around $4000 per month – and I don’t spend my money unreasonably in any way, just perhaps a bit loosely. I definitely have friends that spend loads more.

After taking a look and deciding where to trim the fat, I was able to quickly crank my spending down to around roughly $2600/month.

Six Easy Areas To Reduce My Entrepreneurial Budget

Here’s what I did to cut my monthly budget by almost $1400/month in one-fell swoop:

• Entertainment: Cut out almost all entertainment expenses –meals out with friends, karaoke, drinks out and at home. This was not hard to do as I spend most of my time working now. Money saved: ~$350/month
• Housing: Going back from living alone to back to living with a roommate to cut rent by ~$600/month. If you own an apartment or home, this is a great place to consider renting out a room or two to cut back on monthly mortgage payments.
• Subscriptions: Cutting out non-essential subscriptions/memberships that I won’t have time to participate in or read. This also help keep down distractions when working from home, to increase business revenues. Money saved: ~$100/month.
• Over-Indulgent Luxuries: Dropping expensive little luxuries like Starbuck’s, dark chocolate bars. Also junky luxuries like late-night Doritos or gummy worm binges. I’ve noticed this is a double-whammy, as many consumer expenses also tend to be unhealthy – so you gain health benefits here as well.

I found this is really an easy thing to do.  Just ask yourself “what do I enjoy the most?” and order your list accordingly. Pick your top 3 things and cut out all the rest.  It’s most likely that as you go down the chain of your luxuries, so does your percentage of enjoyment in them.  I would also throw clothes/fashion into this category – though I’m not a big spender on clothing, and haven’t bought any clothes in many months.  You might even find you don’t need any of these luxury items for your happiness.  Money saved: ~$100/month.

• Cell phone: Plan dropped to minimum monthly minutes, but with unlimited text option. I’ve started using Skype regularly to talk with business associates, friends and family for free. I use text messaging for most all communication needed via cell phone. Money saved: ~$40/month
• Eating Out: Buying cheap, bulk food to make at home, replacing most meals that I used to eat out - that weren’t entertainment based. Once I began to see what I ate, and also how much nutritional value, how filling the meal was, etc, it was very easy to cut food expenses. This country sells an inordinate amount of junk food; most of it is worthless nutritionally and thus monetarily. Since I’m spending loads of time at home working, I’m also becoming a rather handy cook. Money saved: ~$200/month.

A Few Extra Tips

• If you are going to buy a tool or resource to grow your business, make sure you really need it. It’s easy to get caught up in all the gadgets and promo ideas other entrepreneurs sell to entrepreneurs. We don’t want these expenses replacing our Starbuck’s lattes for no reason. Although if you think it could benefit you in growing your business in any way, get it. Just don’t fall into the craze of buying a bunch of tools you won’t use, or playing around with them and you don’t get any work done.
• Get a free or low-fee rewards credit card and pay for both personal and business expenses on it. Since you’ll be spending plenty of money along the way for your new business, why not reap the rewards?
• Selling off old clothes you no longer wear, and household items you no longer use on eBay or Craigslist. It’s more seed money to use for growing the new business. Especially if you’re on the path of the “digital nomad” like I am, where traveling is a big part of the future, it pays to reduce one’s belongings. Heck, it just pays in general to have less stuff.

So that wraps up the budgeting guide. I find that becoming an entrepreneur really is an exciting mixture of fun, fright and worthwhile challenge.  Every day is a new adventure and I can’t believe how far I’ve come in only a few months time.  Can’t wait to see where it all leads.  Until then, remember to use budgeting as a tool to bring your entrepreneurial dreams to life!

How Does Your Spending Compare?

Here's a new website that allows you to compare your spending to those living near you. You simply go to the site, fill in the parameters on the left including your age group, household status, location, and income, and you'll get a listing of what the average household similar to yours spends on various expenses each month. I put in my criteria and here's what the numbers came up with:

• Health and Family - $1,539 (biggest expenses were school and childcare at $539 and insurance at $473 -- FYI, charity was $139)
• Shopping - $1,280 (biggest expenses were general shopping at $622 and clothing, shoes, and other wear at $399)
• House and Home (does not include mortgage/rent) - $1,143 (biggest expenses were utilities at $430 and home improvement at $403)
• Getting Around - $977 (biggest expenses were autos at $538 and gas at $439)
• Travel and Leisure - $688 (biggest expenses were travel at $434 and entertainment at $142 -- FYI, cable/satellite was $92)
• Food and Drink - $622 (biggest expenses were groceries at $419 and dining out at $203)

It's an interesting exercise, but I'm not sure about their numbers. Why don't they include mortgage/rent or taxes -- the two biggest expenses for most people? Kinda puts a crimp in the results, doesn't it?

I've already shared all my finances with you, but there are a few things to comment on regarding the numbers above that I just can't resist:

1. Most of their numbers are way over what I spend. Way over.

2. The one thing that is right on is grocery spending.

3. Charitable giving is way below what I actually give.

4. $92 for cable? In Nowheresville, Michigan? Yikes!

How about you? Anyone out there interested in trying out the site and reporting your results back to the rest of us?

Plan on Budgeting Surprises

The following is a guest post from Marotta Wealth Management.

Thrift is having a sure hand that controls your spending so your spending doesn't control you. The goal isn't to be rich but instead to be thoughtful, industrious, content and thrifty.

To avoid unplanned budget busters, set three rules for your spending: Set a dollar limit, wait at least a week each time you're unsure of a purchase and be aware of the categories where you are most likely to make impulse purchases.

But raising your awareness on impulse purchases is only part of the battle.

Many budgets are doomed to failure because of the challenge of planning for unplanned spending. Here are some of the items you either did not put in your budget or they shouldn't be in your spending.

Interest on debt

The average American family carries close to $10,000 in commercial credit. At 18% interest, that's $1,800 a year or an unnecessary $150 every month per household. If you put that payment into the markets every month over your working years earning an average 10% return, you would retire with an additional $1.5 million.

There's no reason to buy anything on credit. If you find yourself considering an expensive purchase and then trying to find the payments in your budget, you are planning for failure. The only two loans you should even consider are a home mortgage loan and a student loan for an education or training that increases your earning potential. Money makes money. Credit does the opposite. Debt breeds poverty.

Paying bills late

Debt is terrible. Paying bills late is just bad. By establishing a system for paying your bills on time, you will save every $15 payment from getting a $35 late fee tacked onto it. These foolish expenses add up over time and will quickly undo your efforts at frugality.

Many people believe that paying bills as late as possible gains them a few days of extra interest. In reality, a year's worth of interest isn't worth even one late payment. Late payments also hurt your credit score, which ultimately will mean getting charged a higher interest rate. Pay your bill early, and put your efforts to better use.

Organized people are simply disorganized people who have found a system to help them get things done. Don't think being disorganized is an innate unchangeable quality. It is common to everyone before they take the time and effort to get organized.

Pay monthly bills at least twice a month in order to be on time. These cannot be postponed. Many people find the assistance of online bill pay systems invaluable. It may also help to have a calendar reminder system or a bill organizer. Others have their credit or debit card charged automatically so they are never late.

Unknown unknowns

None of us can anticipate all our expenses. Every stage of life brings a whole new set. Perhaps extensive study and research could help you prepare. But it is easier simply to budget 10% for unknown unknowns.

The first question I usually get asked regarding this category is "Like what?" The truth is that even after identifying every expense you can think of, there will still be significant new expenses that may push you toward deficit spending. But every surprise expense is an opportunity to anticipate and plan for that expense in the future.

Insurance deductibles

Review the insurance coverage for your car and home. A deductible and perhaps a 20% copay often apply. Out-of-pocket expenses could run several thousand dollars. It is more important to limit the maximum expense than to make sure the deductible is low. Budget for the deductible and copay expenses.

Medical costs

Medical expenses are rarely planned. To prepare your budget, have some insurance in place that will limit your catastrophic loss. Second, set up an emergency fund that will cover your expenses if they reach that limit.

For families who are relatively healthy, we recommend Health Savings Accounts (HSAs). As long you spend the funds you save on qualified medical expenses, all contributions, capital gains and withdrawals remain untaxed. And like any other bank account, HSAs come complete with debit cards and checks.

To protect you against catastrophic medical expenses, Health Savings Accounts are coupled with a High-Deductible Health Plan (HDHP). The deductible can be as high as $6,000. Because you might be required to spend up to your deductible, you need a savings plan that funds your HSA up to your deductible within two years. For example, if your deductible is $6,000, put $250 a month into your HSA. Once you have amassed at least that amount, you can take comfort knowing you can at least cover your deductible from your medical savings.

We have coverage for a family of four with a maximum out-of-pocket expense of $3,500. We pay $322 a month to protect our budget and cap our potential losses. We are also allowed to contribute $6,150 a year pretax into our HSA. So we know the most our health-care costs could be is $614 a month and we budget for them accordingly.

Unfortunately, "Obama care" threatens to eliminate consumer-driven care like HSAs by requiring minimum packages and removing the freedom to choose using insurance for disaster coverage. Forcing families to have low deductibles and be pooled with everyone else is like requiring grocery store insurance for the first dollar spent. Frugality disappears, and everyone tries to buy filet mignon.

Insurance should be only used for disasters, not everyday expenses, which provides just the right amount of negative feedback. The first $3,500 as an out-of-pocket expense works as a natural incentive to keep medical costs low.

Car repairs and replacement

Your car won't last forever. It will need major repair at some point and ultimately replacement. Decide how much you are willing to spend for the lifestyle you want, and then budget for it. Don't buy a new $30,000 car and think you won't have any car expenses for the next five years. Even if you plan on driving your new car for the next decade, you have to start budgeting for repairs and your next new car now.

Whatever you pay for your car, new or used, start budgeting to purchase another car in five years. Prices will be higher in the future, but maybe you can stretch the time to seven years so it will all work out.

If you buy a new car for $30,000, you must be able to set $6,000 aside every year ($500 a month) for the next new car. Don't borrow to buy a car and then start making payments. That's nearly always a bad idea and simply ensures you won't save, invest or grow rich. If you can't afford to save the payments in advance, you are stretching too much. Buy used or wait.

House repairs

Owning a home and surprise expenses are practically synonymous. The roof might leak. The plumbing could need replacing. A tree may need to be taken down before it falls. The heating or cooling system could need repairs. The carpet will need to be replaced.

Set aside at least 1% of the value of your house for repairs, not enhancements, each year. If you have an older home, increase the minimum to at least 2% of its value.

Emergency travel

Another unexpected category is emergency travel. Family illnesses, weddings or funerals impose themselves on a family's budget with some regularity. Sometimes even family vacations, graduations or other gatherings can strain finances. If you are both of humble means and have a large extended family, your budget could break under the strain. These are not easy decisions.

Here are some alternatives to help you cope. Perhaps you could send a letter to be read or a videotape. Maybe not everyone in the family has to attend. Consider sending a representative. Ask for help with travel or accommodations. I know that family expectations can seem unreasonable, but speaking the truth in love is always a good response.

Avoid sacrificing or jeopardizing the finances of your family simply to attend the birth of another family or a distant wedding. If you are rich in both time and resources, that circle can include a plethora of friends and family. But the rest of us need to be on a more modest plan.

No budget can anticipate every major expense. Life serves up surprises with some regularity. Putting a healthy margin in our daily living expenses gives us the stored resources to weather these major bills and then better plan for them going forward.

The Two Financial Measures that Determine the Health of Your Finances (AKA Two Financial Measures to Track Your Finances)

The following is a re-post of a piece I originally wrote for Dumb Little Man.

I wasn't really sure what to title this post (as you can tell from the double title I did choose), but here's the gist of what I was trying to get at: there are two basic measures that I believe people need to track when it comes to their finances. These measures will both guide your money-related decisions as well as monitor your progress (for better or worse) as you try and grow your personal wealth. They are:

• Net Worth
• Cash Flow

Net Worth

Net worth in its simplest sense is assets less liabilities. IMO, it is the single-most important financial measure for us all to track (it gets the edge over cash flow since cash flow could be viewed as a subset and/or feeding into net worth). Net worth tells you whether or not your wealth is increasing and by how much. It's an accurate and (unfortunately in bad times) ruthless measure of how you're doing in growing your wealth.

There are different ways to track your net worth, but which you choose doesn't really matter. As long as you're consistent, you'll be able to determine if what you're doing is helping to grow your wealth or not. As such, tracking your net worth on some sort of regular schedule is a must for any serious money manager.

Personally, I track mine monthly. Each month in Quicken I update the performance of my investments, put in my income and spending, and run a net worth report. I then record it in a spreadsheet and compare it to the other months of the year as well as my status for the same month the prior year. Doing this gives me a quick report card on how I'm doing managing my money as well as highlights where I might need to make changes. In addition, I record my final net worth at the end of each year (and have done so since the early 90's.) That's how I know that my net worth has grown at a compounded annual rate of roughly 16% since then.

I used to update my net worth weekly, but that was simply too obsessive even for me. In addition, there were too many wild swings (up big one week, down big another) as the market went up and down, big bills were paid, etc. Looking at it only once a month seems to level the swings a bit. As such, this time frame works best for me.

Now I'm not saying that monthly is how often you should review your net worth -- simply that you need to review it regularly. Whether it's monthly, quarterly, semi-annually or whatever, you simply need to check it on a regular basis and make adjustments based on what you find.

Cash Flow

Cash flow is simply income minus expenses. It's the amount you have left over after you earn all you can and then spend all you need/want to spend. The difference is then what you can save and/or invest. This is the amount that fuels the growth of your net worth. It's this difference that buys the homes, investments, and the like that drives net worth higher and higher.

This is why I talk about the two parts of creating a strong cash flow -- maximizing your income and limiting your expenses -- so often. If you can grow the former and keep the latter in check, your cash flow will skyrocket, fueling your net worth to new and glorious heights.

The budget is the method most used for tracking/setting/managing cash flow. My belief is that in the early years of managing your own money, a budget is invaluable. It will help you see where your finances are going and how they are spent. It will help you catch things that otherwise might not be noticeable. It will help you make good financial decisions. I highly recommend having a budget for people just starting out handling their money.

After you become a bit more proficient in managing your money, I think you can go to a less detailed and less frequently updated budget. If you've proven that you can manage your money (and especially control your spending) a budget isn't needed nearly as much to ensure your cash flow remains strong.

For the first decade or so of our marriage we operated on a detailed budget that was frequently revised. We created it at the beginning of the year, tracked it through each month, and updated it at the end of each month based on the previous month's results. It took a good amount of time and effort to this, but as I detailed above, doing this had some great benefits and was well worth the effort.

But as time went on, our budget became less detailed and was updated less frequently. It started by being revised quarterly, then twice a year, then once a year. Now we're at the point where we don't have an "official" budget. Our 15+ years of spending put into Quicken is our budget. Other than unique spending each year (like buying a new couch or taking a big vacation), we pretty much spend what we spent the prior year. We've demonstrated that we can manage our spending so tracking it so closely is not needed to make sure our cash flow keeps pumping out the money.

Those are the two financial measures that I think are most important for all of us to track and manage. If you can create an ever-growing distance between what you make and what you spend and if you can convert that difference into savings, investments, and other assets, your net worth will grow like crazy. It really is that simple.

Investment Return

The one other measure that I considered adding to this list is the return on your investments. After all, once you've spent years socking away money into investments like index funds, the growth or decline of those investments will be the single-biggest factor determining the direction of your net worth. That said, I didn't include it for two reasons:

1. I view the return on your investments as a subset of "managing your net worth." If you're tracking your net worth and analyzing it on a regular basis, you will come up with some steps you'll want to take to growing your net worth and making the most of your investments will be one of those. In other words, it's tracked and/or looked at simply by reviewing your net worth regularly.

2. The return on your investments is not the biggest determinant of how well your investments will perform -- the amount of time you invest is much more important. As such, the sooner you can get your cash flow to the point where it allows you to invest a good chunk of money, the better off you'll be. Sure, return can make that performance much better, but TIME is the key factor that will make your investments grow the most.

How about you -- what measures do you track? Do you agree or disagree with how I do it?

2009 Budget Review

When I shared some insights into my finances, I said I'd be reviewing my 2009 budget in a later post to see if anything interesting turned up. This is that later post.

I'll start by listing my top 10 expenses as a percentage of my total spending (and from the earlier post, you'll remember that my spending -- what I labelled then as "spending" and "giving" -- was 60% of my gross income):

• Giving -- 41.9%
• Taxes -- 35.2%
• Home Repair -- 5.4%
• Food -- 2.9%
• Miscellaneous -- 2.4%
• Depreciation -- 2.1%
• Furnishings -- 2.1%
• Utilities -- 2.0%
• Gas -- 1.0%
• Car Insurance -- 0.7%

And the comments on these:

• Giving includes our tithe, gifts above that to charities (like these), and non-deductible gifts to those in need (mostly friends or acquaintances)
• Taxes includes all taxes -- income (federal and state), Social Security, Medicare, and real estate.
• Home repair is such a high number because we got a new furnace and AC in 2009
• Food is rather steady from year to year.
• Miscellaneous are odds and ends that don't fit elsewhere. It's about the same each year as well.
• Depreciation is the loss of value on our two cars. I estimate the year-end value of our cars using Kelley Blue Book. I then deduct the same amount each month to make sure the value of the cars at year-end matches the book value. (Yes, it's a non-cash expense.)
• Furnishings is higher than usual because we bought a new couch and some office furniture.
• Utilities includes all utilities -- gas, electric, phone, internet, cable, water, and trash removal.
• Gas is simply gas for our cars.
• Car insurance -- it is what it is.

Add all these up and you account for 95.6% of our spending.

It's almost as interesting to see what didn't make the top 10 as it is to see what did. Some highlights:

• Clothes were 0.4% of our spending. My wife and I don't need many new clothes, and the bulk of this was for our kids.
• Entertainment (including babysitting) was 0.4% of spending. Most of our entertainment is getting together with friends, kids' activities, or church events -- all of which don't cost much. And our cable bill is accounted for in utilities.
• Eating out was 0.4% of our spending. We try to limit how much we eat out. We MAY go out once per week on average, but hardly ever go to a place that's over $35 for all of us.
• Vacation was 0.4% of our spending. We took a big Disney vacation a couple years ago and will be due for a big one this year or next, but most of our vacation expenses are associated with traveling to see our family (we did visit Niagara Falls this summer, but combined it with a family trip.)

A few other notes:

• Not sure if you caught it, but I mention at the top that was spend 60% of our gross income. That leaves 40% for savings. Our savings rate hasn't always been that large. But over the years we worked to increase our income while keeping expenses in check, and the gap between what we make and what we spend has grown and grown. Just wanted to point this out so you all know that I practice what I preach. ;-)
• If we had to, we could live on much less than 60% of our income. Giving alone is 26.3% of our gross income, so we really only need 33.7% to live on. Again, we've focused on creating the biggest possible gap between income and expenses.
• None of these results happened overnight. They took two decades to achieve. But with the right effort (working to increase income and keep expenses in check) as well as a ton of time, most people can get similar results.
• We have fun. Some may read this, see the amounts we spend on entertainment, vacations and the like and think we live a boring life. We don't! It's just that most of our fun is centered around family events, interacting with friends, and so on -- things that don't cost much money. We don't need all the latest and greatest gadgets to have fun, we don't need to go to the movies every weekend, and we don't need exotic vacations each year to be happy. We simply need our friends and family. And believe me, they are very entertaining. ;-)

How about you? What's your annual spending look like?

Insights into My Finances

Earlier this month, I had a reader send me the following questions:

1. How much were you giving when you still had a mortgage?
 
2.  Is your 1/3 to savings 1/3 to live 1/3 to giving Net income or Gross? I'm assuming 1/3 is actually taxes?

These are a couple of interesting questions and instead of just emailing her back, I decided to answer them here. Just to note, I'll be dealing with GROSS income percentages in the numbers below (i.e. if I say we spent 5% on food then that would be 5% of our gross income was spent on food.)

We'll start with question #1 and a few points of clarification:

• I've already detailed how we paid off our mortgage. Read that post if you want some background.

• One correction to that post -- we actually paid off our mortgage in 1998, not 1997. 1997 was the last year we had a debt balance of any sort at the end of the year. Everything was paid off in 1998 and we ended that year with $0 owed.

• Given the above, we're now in our 12th debt-free year. Yes, it's as nice as it sounds.

The years we had our last mortgage were 1995 to 1998 (we had moved from another area of the country and used the proceeds from a home sale there plus some savings to make about a 30% downpayment.) During those years, we tithed (10%) as well as gave offerings above the tithe to make our total giving the following:

• 1995 -- 13.7%
• 1996 -- 18.3%
• 1997 -- 16.4%
• 1998 -- 21.1%

A few notes on these results:

• Yes, we gave AND paid off debt AND saved for retirement, etc. How did we do this -- like everyone does it, we made the gap between income and expenses as large as possible.

• The percentage given dropped in 1997, but the absolute amount was about the same as in 1996. It's just that our income was higher in 1997 and the increase went to pay off debt.

• Once our debts were all gone, our giving levels jumped.

Now to the second question.

I'll start by saying the following:

• The 1/3, 1/3, 1/3 budget that I've talked about now and then is a ROUGH estimation of what I was spending. The numbers below are the exact amounts.

• The giving numbers only reflect cash gifts. We give away physical items each year as well (in 2004 we gave away two cars, but they won't be in these numbers.)

I looked at Quicken to find the splits for giving, spending, and saving for the past five years, and here's what I found:

• 2005 -- 58.0% giving; 33.4% spending; 8.7% saving
• 2006 -- 38.9% giving; 28.3% spending; 32.8% saving
• 2007 -- 31.8% giving; 27.0% spending; 41.2% saving
• 2008 -- 25.7% giving; 29.2% spending; 45.1% saving
• 2009 -- 26.3% giving; 33.7% spending; 40.0% saving

• Total for five-year period: 35.0% giving; 30.2% spending; 34.9% saving

Some comments:

• In 2005 and 2006 we gave more to one special charity that we made an over-and-above commitment to. We actually paid it off early, but as such had lower saving levels.

• Spending is relatively consistent, though is up in 2009 due to some home purchases (TV, furnace and AC, furniture, etc.) we made.

• Saving is very strong. I hope to keep it up.

The emailer asked about taxes, and after giving, taxes are my biggest expense. They averaged 18.9% of gross income (so my actual living expenses, after taxes, are 11% or so of gross income). Two thoughts here:

1. Most of you know this, but people don't pay taxes on gross income, they pay it on taxable income (gross income less a whole bundle of deductions that the government allows. I have a bundle of deductions.)

2. It's still a HUGE amount of money. If I had my taxes back from just the past five years, my net worth would be 20% higher!

So there you have it. It was an interesting exercise for me to go through Quicken and dig out these numbers. I hope you found it insightful as well.

Four Things I Like About Quicken

I've mentioned several times that I use Quicken to manage my personal finances and have done so for years. In fact, I now have almost 15 years of data in my Quicken file -- quite a good amount of past history to refer back on if need be.

I know I only use a fraction of what Quicken can do and that's fine by me -- I use what I need and let the rest fall by the wayside (FYI, I get a new copy of the software each year courtesy of the people at Quicken -- thank you again -- so I don't feel like I'm "wasting" money on something that I don't use completely. But even if I didn't get a free copy, I'd buy a new one every few years just to keep my version up-to-date.) Anyway, I thought I'd tell you what I like about the software and what features I like the most. Here goes:

• It tracks all my expenses. Cash payments, credit card charges, and checks written -- all go into Quicken. This then allows me to look back on what I'm spending now versus what I spent in the past and make adjustments if needed. In addition, it's a lifesaver when it comes tax time since all my info is in one place.

• It tracks my investments. I enter in all the purchases, reinvestments, etc. into Quicken and use it to update the value of my portfolio automatically once a month. It tracks everything and makes it easy to see where I am and how my investments are doing. Again, it also helps greatly at tax time since it records my gains or losses when I do sell an investment.

• It tracks my net worth. This is the key measure I look at every time I log on to Quicken (it's on the left-hand side of my main page). Quicken makes it very easy to see how I'm doing in managing my finances by keeping this metric front and center.

• It has tons of charts/graphs/data that allows me to slice and dice the information in really useful ways. In particular, I look at the net worth and spending reports once a month to see how I'm doing on these measures and list and steps I need to take to make adjustment. Again, Quicken makes doing this very easy.

You might think that all of this takes quite a lot of time, but it doesn't. I probably spend an hour and a half twice a month (three hours a month in total) doing what I've outlined above -- and this accounts for about 80% of all the time spent on managing my finances (the rest is spent on paying bills, thinking through plans, etc.) But the truth is, most of my finances are on auto-pilot (set to automatically move from my checking account to various accounts each month after my work check is deposited) so I don't need to spend a lot of time or money on managing them.

How about you? What's your favorite financial planning software? Any other Quicken users out there?

Budgeting with YNAB

The following is a guest post from Nate Williams, a CPA who works with You Need a Budget. For a special savings offer on You Need a Budget, see the end of this post.

As an 18 year old I had more discretionary income than I've ever had since.  I worked as a waiter at Red Robin and averaged $100 per night in tips plus $4.75 per hour - yes, selling burgers.  OK, so it wasn't exactly rolling in dough, but my expenses were low.  Life was good, and fun.

Unfortunately, I have nothing to show for that period of life other than the fact I can (and do) advise all my friends on the vast Red Robin menu whenever we go (personally I like the Banzai Burger).  After several months in the fast lane I went to see a financial planner acquaintance.  He was kind enough to spend 30 seconds with me and told me to pick the Templeton Growth Fund (TEPLX).  I didn't understand what it was, but a mutual fund sounded grown up, plus the stock market always goes up.  $50 a month was my contribution to my future self, well, for about a year anyways until I needed that money elsewhere.

More than a mutual fund, I needed goals - a purpose - and a budget to make it happen.  Years later I heard a fantastic definition for a budget: "budgeting is deciding beforehand how to spend your money, instead of wondering after the fact where it all went."  That's perfect.  I still look back and wonder where the money from those Red Robin days went.

A budget.  That's what I needed.  These days, budgeting has a broke connotation.  We hear things like, "how to feed your family on a budget;" or "decorating your house, on a budget."  "On a budget" has become synonymous with "____ with no money."  Because of this misrepresentation, many people feel that they don't need a budget, and definitely don't want one.  Well, you do need one, and you should want one.

Three years ago, my wife and I stumbled across You Need a Budget.  After using several other software programs, and many hand-crafted budgeting charts, we've found this to be the most effective money management system.

Here's how YNAB helps us:

• The software is designed to have you earn your money first (one month's worth to be exact).

• Following point one, we start each month with an exact dollar amount to budget and we decide beforehand what each dollar is going to do.

• We can easily prioritize our most important goals, paying for them first.  This aligns our spending with our values.

• Once we have decided where we will spend the money, YNAB allows us to easily track our progress (seamlessly imports data from our bank/credit cards).

• Last, and most importantly, we have tremendous peace of mind.  This peace of mind comes from knowing with certainty that we are progressing towards our goals and not over (or under) spending.

Unlike the careless (and progress-less) days of Red Robin, during the past three years using YNAB we know exactly how much we have spent on everything.  Additionally, we have made significant strides towards our financial goals, many of which we have accomplished.  I'm lucky that at some point in time I realized that I needed a budget.  And so do you.

FMF readers seem to love You Need a Budget so I asked the people there if they would offer a special deal to my readers and they agreed! Go to You Need a Budget and use the coupon code "freemoney" to save 15% off your purchase. But hurry -- the coupon is only good through October.

Freedom from Budgeting

The following is a guest post from Luke, the guy behind NeoBudget, an online budgeting system using the envelope method.

The title of this article is intentionally deceptive.  This is not an argument against budgeting.  Contrary to what you may have heard, budgeting is a liberating experience.  Creating a budget and sticking to it can be one of the most freeing experiences of your financial life.  I've seen this happen in my own life and in the lives of several friends.

Just so we're all on the same page, let me define what I mean by the term "budget".  A budget is simply a plan for your money.  In order to plan your money, you need to know where your money comes from and where it goes.  Budgeting is a way of controlling where your money goes.  It doesn't mean you can't eat out every night, it simply means you would plan for eating out every night and know you have money available to do so.

I've never seen anyone regret budgeting once they get the hang of it.  I've helped many people get started with a budget, and they all say the same types of things: "It's great knowing I will have money at the end of the month for all my bills," "My wife and I don't fight over money any more," and "I actually spend more on recreation now that I'm not nervous about paying my bills."

Here are some of the freedoms provided by a good budget:

• Freedom in your marriage.  Money is one of the leading causes of divorce in the US.  It stands to reason that even when it doesn't lead to divorce, money can still be a significant cause of stress in a marriage.  One spouse may spend a lot of money, while the other is working hard to find money to pay the bills.  More likely than not, they both think the main problem is with their spouse, not themselves.  Creating a budget together and sticking to it together can relieve the stress.  You both have defined goals, and both can work to meet those goals.

• Freedom to sleep.  A budget lets you know how much money is coming in, and how much money is going out.  You should figure out your bills and other expenses, and reserve enough money to pay them.  Money left over is yours to spend (or save) how you want.  No more sleepless nights wondering if you have enough money in the bank to pay your bills for the month.  You know that you do, or you know that you don't.  If you discover that you don't have enough money to pay the bills, you have the information necessary to take action and resolve the problem by cutting expenses and trimming back.

• Freedom to give.  One thing I've enjoyed most about budgeting is that I can budget a certain amount to give.  Without a budget, I would be a hoarder.  I would be afraid that I couldn't pay the bills, so I wouldn't spend or give anything away.  With a budget, I know how much I can give away without hurting my family's financial stability.

• Freedom to remember.  It's amazing how money can slip through your fingers without you realizing it.  This happens to me all the time if I carry cash in my wallet.  It's gone before I know it, and looking back I have a hard time remembering how it was spent.  Keeping track of your spending helps you see where you spend your paycheck.

• Freedom to have fun.  As I mentioned in the introduction, creating a budget doesn't mean you have to stop spending money on fun.  If you want to eat out every night, budget for it.  You'll know if it's going to hinder your ability to pay the bills.  If you can afford it, and you budget for it, then you can eat out every night without feeling guilty when you pay the check.

Shining light in the dark corners of your financial life can be a frightening experience.  Enough so that you might consider keeping the truth about your checking account in the dark.  But, once you honestly evaluate your financial situation and create a budget you'll discover, like I did, the financial freedom and peace of mind that can follow.

Simplicity Can Streamline Your Budget

The following is a guest post from StretchyDollar.

Budgeting, in one form or another, is an essential part of financial success. Knowing where your money is coming from and where it is going will help you see the big picture, and keep things in perspective.

In the beginning, budgeting is a bit like trying to ride a 2,000-pound bull in a rodeo. Not only do you have to try and keep from falling off a huge galloping steer, but that same animal is angry and wants to kill you.

In all of your excitement to document the life of every cent you call your own, it’s easy to get overwhelmed, distracted, or discouraged. All three of those emotions are notorious budget killers – they’ll suck any desire to maintain your budget right out of you before you finish your first week.

Remember that keeping your budget as simple and accessible as possible will benefit your financial health in the long run. As with anything else, it can grow and scale up as you become comfortable with it. Here are some of the lessons in simplicity I experienced as we wrangled our finances into control with our attempts at budgeting.

Focus On the Numbers, Not the Tools

I remember shortly after I found my motivation to get our finances in order I spent an entire Saturday afternoon cruising around the Internet, looking for a tool my wife and I could use to keep track of our money. There are a variety of sites that match up with different styles and tastes, and I wanted the right one. Each tool has bells and whistles and is geared towards different audiences.

I wanted to use a website, but I admired the classy “old-school” feel of a spreadsheet. I was comfortable with Excel, too – so I knew that was an option. The only thing I wasn’t sure about there was how my wife and I would be able to both have easy access to it.

Before I knew it I had signed up for two different budgeting sites and tried to design my own budgeting template in Google Docs. Needless to say, we didn’t stick within our budget that month.

We tried different things, but ended up checking a couple of different sites, confirming that with the online statements provided through our bank, and then trying to reconcile a spreadsheet. Ha. Budget – FAIL again.

After a couple of months trying a few different things, we’ve finally figured out our system. We use an online budgeting site mostly to get a quick overview of all our accounts at once, but our budget has found a home as a spreadsheet in Google Docs.

In and Out and Where Is Good Enough

One of the things that intrigued me about the websites and other tools I was finding online was the depth of the information they provided.

I could find out how much I spent on gas each month (sure – useful!) how much I spent on the 16th of each month (remotely interesting), or even how much I spent on toilet paper compared to Americans (less than average – wonder what that means?) All of that information can be useful, interesting, or humorous on certain levels, but at some point, it just becomes clutter.

Tracking certain trends like month-to-month spending on groceries or average spending on “eating out” can be useful and help you find the things in your budget that are working and the things that aren’t. Past that, though, you really need to decide how much information you want.

If you’re able to stay focused on the basic information, you’ll spend less time staring blankly at your budget, trying to figure out how much lunch money you have left, and more time out doing whatever you like to do when you’re not hanging out with your budget.

Keep The Overall Goal In Mind

Your budget should govern your spending. If you’ve already spent your allotted amount of cash on “entertainment” for the month, you shouldn’t spend any more. Is it really a big deal to go over on your budget, though? Should you sweat every little time you go over a certain category in your budget? If it happens consistently, yeah, you should. That is an indicator you need to go back and re-evaluate your spending habits and determine if you need to make a sacrifice, or increase the amount of money you have to spend in that category.

Always remember, however, that your budget is like the Pirate Code – it’s “more of a guideline” (to quote Disney’s Pirates of the Caribbean).

If you’re under in some areas and over in others and the excess balances out the deficits at the end of the month, you’re doing well! Don’t sweat every little thing. Emergencies and mistakes happen, and are part of life no matter what you do.  Simple and dedicated focus on the end goal of keeping your spending less than your income will help you gain traction and move on to doing more with your money.

YNAB versus Mint

As promised when I compared You Need a Budget versus Quicken, I'm now going to list what YNAB's website says is the benefit of their product versus Mint. The summary:

• Proactive Money Management - Mint’s technology to have your transactions automatically downloaded and categorized is impressive, but therein also lies a weakness. With YNAB, you’re proactively planning where you will spend your money, not just reacting to what’s already happened.

• Your Data Stays With You - YNAB will never ask you for your bank login information, and your data stays with you on your machine, not tied up in some server. Mint.com is secure, no doubt, but would you still have your data if you decided to switch to another provider?

• No Embedded Advertising - With YNAB, you purchase once and you’re done. Mint examines your transactions and shows you embedded ads for credit card offers, new bank accounts, etc.

• Community and Support - YNAB offers free weekly small-class coaching via webinars, a robust online community of helpful users, and a real person responds to your emails in less than 24 hours.

My take on these:

1. Proactive Money Management - I'm kind of in the middle on this one. I like a bit of automation, but I often get circumstances where automation doesn't help but it hurts -- it does things I don't want done, reports things ways I don't want them reported, etc. Hence I prefer a good balance between automation and hands-on.

2. Your Data Stays With You - This is a HUGE one for me. Of course online financial companies are "secure", but have you ever heard of any being compromised (hacked website, data stolen from some exec's laptop, etc.)? Sure, all the time. Of course your data can be compromised from a home PC too, but at least you have some control over that (such as up-to-date security software). I'm very leery about all my data -- and especially my financial data -- in someone's hands besides my own. (As much as possible, of course. I realize that many companies already have a ton of data on me and my finances, but I don't need to aggravate the problem by giving them more, do I?)

3. No Embedded Advertising - Personally, ads don't bother me as long as they aren't too intrusive and in-your-face. I've never used Mint, so I don't know how bad their ads are. Anyone out there care to comment on this?

4. Community and Support - I'm guessing Mint has something similar, don't they?

One thing that isn't mentioned here is cost. YNAB has a one-time fee of $24.95 to $49.95 (software updates are free) depending on which version you buy. As far as I know, Mint is free. Of course YNAB isn't costly, but why pay for something if you can get the services elsewhere for free?

What's your take? Anyone out there tried both of these services and come up with a preference for one over the other?

Answers from Quicken, Quicken PC

A little while ago, I asked if any FMF readers had questions about Quicken since I had a Quicken expert available to answer them. Well, now we have the answers. Here is the second wave of them -- these dealing with Quicken PC.

This is Chelsea from Quicken. Thanks for the chance to help out your readers. If they want to stay connected with Quicken on the Web, they can follow me or Quicken Online on Twitter (@QuickenPRChels and @QuickenOnline), read the Quicken blog, or become a fan of Quicken or Quicken Online on Facebook. Hope these questions and answers help, and feel free to put me in touch with any readers that follow-up with you for more information. I’m going to watch the comments too so I can help out.

Raise in the Budget Function

Q. Issue 1: There's no good way to account for a raise without the budget function assuming that raise is retroactive. For example, if I receive a $1k raise in July, and update my paycheck accordingly, Quicken calculates the funds as if I had that raise during January through June, which makes it look like I have more available cash than I really do.

A. When you use “automatic update,” it changes the whole year once you update your paycheck. Instead, choose “no” and then update the months manually for the 5 to 6 months left for an accurate financial picture after your raise.

Budget Adjustments

Q. Issue 2: There's no way to account for month to month budget adjustments over the course of more than a calendar year. For example, if I adjust my personal spending budget each month, once it rolls over from December to January of the following year, I have to start overwriting my previous budget. This means I can't run a report for a greater than one year time period, because my spending in January 2007 was lower than in January 2008, and there's no way to account for that in Quicken.

A. The “My Savings Plan” feature is a possible solution for you. It is designed for month-to-month budgeting.

Product Suggestions

Q. I converted from MS Money to Quicken, but one major component of Quicken is driving me batty. When is the budget feature going to be updated in Quicken? I had Quicken 2006, and updated to 2009, and there have been ZERO improvements to the budgeting function.

Q. Why did you get rid of the ability to download QIF files? I've been using Quicken for years and my credit union doesn't do QFX. I know of a workaround for this, but only for cash accounts. Why not open it back up to all account types? Please bring QIF imports back!!!!

Q.  I've noticed a /lot/ of people use a categories (like "car payment") instead of a split transaction between a loan account and the interest paid "category" , perhaps Intuit should do a tutorial on how to do loan and asset accounts properly.

Q. Why doesn't Quicken provide some options for an "envelope" based budgeting approach?

Q. When are they going to do something about the whacked out column widths on their reports and provide more of a WYSIWYG approach to report creation?

A. All of the comments above include great product suggestions and ideas. I’ve made sure the Quicken product team has seen them already, but there is a way for you to have more influence over future Quicken features too. We don’t share product roadmaps publicly, but there are other ways to give us input and learn ahead of time what might be coming. On Feb. 25 we launched the Quicken Inner Circle. Inner Circle will give you a chance to share your thoughts about current and future Quicken product features. Read more on the latest Quicken blog entry about it, and sign up here.

QIF Importing

Q. A second for QIF import. My biggest complaint is the inability to import QIF files, I have to create a cash "suspense" account, import to there, then cut and paste all the transactions into the real account. ...this is the only way to import Paypal transactions and it's a big time waster.

A. Thanks again on the QIF import suggestion. I think this is something you should definitely bring up in the Quicken Inner Circle. It’d be helpful to talk about why QIF files are important to you as a user. Quicken does support PayPal download directly into the product, so let FMF know if you’re still having trouble so I can help you more, or visit www.quickencommunity.com.

Access from Different Computers

Q. Is there a way to have multiple user access form different computers? One of the problems I have with Quicken is my wife doesn't get up-to-date information on how we're doing because it's on my computer and not on hers. Is there a way to store the Quicken data on a file share (or better yet a SQL server, then I could write my own reports and queries for her to run) and allow multiple people to access it (even if one session is read only)? I can't use Quicken online because it won't import all my eight years worth of data and it doesn't support a lot of the advanced features I use. What suggestions do you have?

A. Quicken Online is a basic personal finance service, and is 100% free and Web-based, but it won’t be the right match for every financial situation. Since it is free, some Quicken desktop users find the ability to get a quick glance at finances from any Web connection as well as text and email alerts helpful when used in addition to a desktop solution. One suggestion for accessing your account on multiple computers is to put your data file on a network drive where you can each access the file on your own computers. This is another potential product idea I’d suggest you bring up in the Quicken Inner Circle.

Tagging

Q. I've noticed a movement towards tagging in newer versions, this won't compromise the double-entry accounting (I emulate it using categories and split transactions) will it?

A. No, this will not impact the double-entry accounting.  Tagging enhances the ability to filter transactions and improve reporting. Tagging is not a substitution for categories or splits.

Quicken Life

Q. I currently use Quicken 2008 Home & Business on my Mac under Parallels. What features would I lose if I upgraded to the Quicken Life version that's coming out soon?

A. Quicken Financial Life for Mac is still in beta and will ship this summer. Quicken Home & Business is geared toward both personal finances as well as business, while Quicken Financial Life for Mac will be a personal finance solution. Beta testers are still giving us great feedback and suggestions, so the final feature set is definitely subject to change. However, you can get a good basic idea of what will be included here.

Product Discontinuation

Q. I'd love some info on their "sunset" policy where they do not support older versions of the software. I've been using quicken for 10+ years now & am annoyed that I am forced to upgrade every few years to keep getting my transactions downloaded. There is nothing that is so revolutionary in account keeping that requires me to upgrade every 2-3 years and purchase their new software.

A. I understand your frustration with product discontinuation. First, thanks for sticking with Quicken for more than 10 years. Hopefully some of this additional information will help you understand more about why we do discontinue products. I recently had a conversation here (in comments) and here with a blogger about the discontinuation. In that conversation, we talked about how the company continues to research and develop new products and improve support for existing Quicken customers. Desktop products come with three years of connectivity, and users are certainly able to continue using the products without connectivity (i.e. manual entry of transactions). Even that connectivity costs the company as well.

Since you’re such a long-time user, you might have some ideas for how we might better improve Quicken products to make upgrading worth it for you.

You said above “There is nothing that is so revolutionary in account keeping that requires me to upgrade every 2-3 years and purchase their new software.” As I’ve suggested many times in this Q&A, Quicken Inner Circle is a great place to help us do something revolutionary for you. Also, if it is any consolation, you will get $20 off a new copy of Quicken if you choose to upgrade by the end of April 2009.

Answers from Quicken, Quicken Online and Quicken Mac

A little while ago, I asked if any FMF readers had questions about Quicken since I had a Quicken expert available to answer them. Well, now we have the answers. Here are the first few of them -- these dealing with Quicken Online and Quicken for the Mac.

This is Chelsea from Quicken. Thanks for the chance to help out your readers. If they want to stay connected with Quicken on the Web, they can follow me or Quicken Online on Twitter (@QuickenPRChels and @QuickenOnline), read the Quicken blog, or become a fan of Quicken or Quicken Online on Facebook. Hope these questions and answers help, and feel free to put me in touch with any readers that follow-up with you for more information. I’m going to watch the comments too so I can help out.

Quicken Online

Q. I am looking for a good online money management tool. Obviously, I must choose between Quicken Online and Mint. My friends use Mint, but it will only store up to 3 months of financial information. Storing only three months of info makes it hard to budget for an entire year. My question is, does Quicken Online store information for more than 3 months? If it does, then my decision is easy.

A. Hi @SAH, The answer is yes. Quicken Online stores more than three months of data. We want to help people be prepared for tax time, so we’ll definitely have data for the whole year but you’ll want to start before April 15 so you get all the information you need by next year. On first download, we only grab the first three months from your financial institution, but we store everything from that point going forward so you can build a history. We’ve also just added cash tracking and have some exciting new things coming this spring.

Quicken Mac -- ELOC Loans

Q. I use Quicken 2007 and am pretty much a beginner. My question is how do I categorize equity line of credit loans (transferred to accounts to cover bills, etc.)? They show up as income on my reports. So, my reports show my income almost quadrupled what it actually is. Is there some other category I should be using? HELP!

A. Great question! Here are two tips from the product team: First, set up an equity line of credit loan as an account in Quicken and next, go back to the original account and treat these incoming funds as transfers. If this doesn’t work for you, please visit www.quickencommunity.com or let FMF know, and I can get in touch with you to provide you with more help.

Quicken Mac -- Quicken Financial Life for Mac

Q. Why has the release date for Quicken Financial Life for Mac product been pushed back so many times? If I bite the bullet now and buy Quicken for Mac 2007, will *all* the data be easy to import into QFLM when it finally does come out in the summer (hopefully)?

A. We’re rebuilding Quicken Financial Life for Mac from the ground up to take full advantage of the new Apple OS. Along the way, we re-evaluated what we need to deliver a superb experience and are committed to releasing a great product for you. Ultimately we chose to delay the product rather than release something our discerning Mac customers wouldn’t love using every day. Quicken Financial Life for Mac will be out this summer, and will come with a simple conversion utility that will help you import all of your Quicken Mac 2007 file into the new product.

Quicken Mac -- General Question

Q. Also, what the heck is up with their quicken for Mac version? I'm a new MAC user & would love to transfer my files over to my new computer. However, I've read awful review about Quicken for Mac and they are not up-to-date with the PC versions. There's no equivalent accounting software for MAC & my husband is really tired of me using his PC laptop to do our finances after we bought me a new computer that I can't use Quicken on.

A. You’re correct that our most current personal finance software for the Mac is Quicken Mac 2007. Quicken Financial Life for Mac will ship this summer. PC to Mac data transfer is one of our top priorities as we rebuild the product from the ground up. Quicken Financial Life for Mac is currently in beta, and we’ve got lots of passionate testers (both Mac novices and experts) giving us great feedback and suggestions. Here is a recent review of the beta so far (keep in mind, this is just a beta and features are subject to evolve and change): Also, here’s a video of the Quicken Financial Life for Mac product manager talking about the beta at MacWorld 2009.

Maintaining Your Spending Plan

The following is an excerpt from "I Will Teach You To Be Rich." At the end of the piece, I offer some of my own thoughts on this issue.

Once you’ve done what you can to design and implement a Conscious Spending Plan that you’re comfortable with, give yourself some time to settle into a rhythm with it. Sure, eventually you can spend your time on strategic money decisions—“Should I be contributing 10 percent or 12 percent to my monthly savings goals?”—but first, you’ve got to get the basics down. As you go along from month to month with this new system, you’ll discover some surprises you hadn’t anticipated.

You’ll always have unexpected cash expenses like cabs or an umbrella when you forgot yours. And don’t flip out if you miss tracking a few dollars here or there—the minute your system becomes too oppressive for you to use is the minute you stop using it. I try to make as many purchases on my credit card as possible, so my software can automatically download my transactions. For cash spending, try to get the receipts and enter them into your system within seven days. After that, I tend to lose receipts or let them build up so much that I forget what some of the receipts were for. Make tracking your spending a weekly priority. For example, set aside thirty minutes every Sunday afternoon.

HOW TO HANDLE UNEXPECTED AND IRREGULAR EXPENSES

It can be frustrating to have a spending plan that keeps getting disrupted by surprise expenses like wedding gifts, car repairs, and late fees. So another key to having a plan you’ll use is to account for the unexpected and build in a bit of flexibility.

Known irregular events (vehicle registration fees, Christmas gifts, vacations). There’s an easy way to account for this type of irregular event. In fact, this is already built into your spending plan: Under Savings Goals, you allocate money toward goals where you have a general idea of how much it will cost. It doesn’t have to be exact, but try to get a rough ballpark figure and then save every month toward that goal. For example, if you know you’ll have to spend about $500 on Christmas gifts, start saving $42/month (that’s $500 divided by twelve months) in January.
 
By the time December rolls around, you won’t have to take a huge hit on your spending.

Unknown irregular events (surprise medical expenses, late fees for your library card, or $100 flowers to make up to your girlfriend for something stupid you did last night). These types of surprises fall under your Monthly Fixed Expenses because no matter how hard you try to avoid them, there will always be unexpected expenses. Earlier, I suggested that you add about 15 percent to your estimate of your fixed costs to accommodate these surprises. In addition, I recommend starting by allocating $50/month for unexpected expenses. You’ll soon realize that this cartoonishly low figure is not enough. But with some time, you’ll have a better idea of what the figure should actually be and can change the amount accordingly.

Fortunately, with each month that goes by, you’ll get a more accurate picture of your spending. After about a year or two (remember, think long term), you’ll have a very accurate understanding of how to project. The beginning is the hard part, but it only gets easier.

THE “PROBLEM” OF EXTRA INCOME

Just as there are surprise expenses, there is also surprise income. It’s tempting to take a windfall and blow it all on something fun, but I urge you not to follow that instinct. Instead, work within your Conscious Spending Plan.

Unexpected onetime income. Sometimes money unexpectedly falls in your lap, like a birthday gift or from selling something on eBay. Believe it or not, I don’t encourage you to save all this money. Instead, whenever I make money I didn’t expect, I use 50 percent of it for fun—usually buying something I’ve been eyeing for a long time. Always! This way, I keep motivating myself to pursue weird, offbeat ideas that may result in some kind of reward. The other half goes to my investing account. Compare this with not having a plan and letting your money “just sort of” get spent.

Raises. A raise is different from onetime income because you’ll get it consistently, and it’s therefore much more important to do the right thing financially. There’s one important thing to remember when you get a raise:

Maintain your current standard of living. Too many people get a raise at work and say, “Great! I’ll go on that vacation!” Sure, you can do that. Then, “I’ll buy that new sofa I’ve been wanting!” Uh oh. And then, “I think I need those new shoes. What? I’ve been working hard!” And then you want to kill yourself because you’re swirling into a downward spiral of spending.

If you get a raise, be realistic: You earned it, and you should enjoy the results of your hard work. Buy yourself something nice that you’ve been wanting for a long time, and make it something you’ll remember. After that, however, I strongly encourage you to save and invest as much of it as possible, because once you start getting accustomed to a certain lifestyle, you can never go back. After buying a Mercedes, can you ever drive a Toyota Corolla again?

The best part about setting up a strategic budget is that it guides your decisions, letting you say no much more easily—“Sorry, it’s not in my plan this month”—and freeing you up to enjoy what you do spend on. This is guilt- free spending at its best. Sure, there will be tough decisions. Deciding to change the way you spend is the most difficult part of this book. It involves making choices and saying no to certain things. Your system, however, makes this much less painful. If a friend asks you out to dinner and you don’t have enough spending money left, it will be easier to politely pass. After all, it’s not personal—it’s just your system. Remember that most people are, by definition, ordinary. They go through their twenties and thirties feeling a gnawing sense that they “should” do something about their money— tomorrow. They don’t think about saving until their mid-forties. And yet, you are now extraordinary, because you see that setting up a simple system will let you make the tough decisions up front and spend your money guilt-free.

Working retail for five years I made a goal out of saving up 10K to be able to invest in the stock market. I decided everything I saved before the age of twenty-eight was available for me to fiddle with stocks; everything after twenty-eight was to be put in a blend of investment funds safe from my amateur investing styles. I was able to accomplish saving up 10K on a meager retail wage by putting half of every raise into my 401(k) plan. Every 4 percent raise was a 2 percent raise to my retirement plan.
—Jason Henry, 33

Week Four Action Steps

1.  Get your paycheck, determine what you’ve been spending, and figure out what your Conscious Spending plan should look like (thirty minutes). Do this now and don’t overthink it. Just break your take-home income into chunks of fixed costs (50–60 percent), long-term investments (10 percent), savings goals (5–10 percent), and guilt-free spending money (20–35 percent). How does it fit?

2. Optimize your spending (two hours). Dig in deeper to your savings goals and monthly fixed costs. Try the À La Carte Method. How much does your insurance actually cost—can you improve on that? How much will you spend for Christmas gifts and vacation this year? Break these expenses down into monthly chunks, then recalculate your plan.

3. Pick your big wins (five hours). Open an account at Mint or Quicken Online. Assuming you want to cut your spending by $200/month, what one or two big wins will you target? Start using the envelope system.

4. Maintain your Conscious Spending plan (one hour per week). Enter any cash receipts into your system each week. Tweak the percentages you send to each part of your spending plan (we’ll cover this in detail in the next chapter). And most important, make sure your system is realistic enough that you’ll stick with it for the long term.

All right, deep breath. You did it. You made it through the most difficult part of the book! Now you’ve got a strategic spending plan. You no longer have to constantly worry about how much money you’re spending. Phrases like “Can I afford this?” and “I know I’m going to worry about this later, but for now . . .” will be erased from your vocabulary. Now we’re going to automate this system so each new dollar that comes into your system gets instantly sent to the right area, whether it’s investments, savings, fixed costs, or guilt-free spending.

------------------------------------------------

My thoughts:

1. I usually enter my info into Quicken with a couple weeks (I put receipts in a central place during that time), but any longer than that and records (and memories) can get hazy and lost.

2. 100% agree with his thoughts on not raising your standard of living (at least fully -- you can a bit) when you get a raise. Sure, spend a bit on something you want, but don't automatically spend all of your increase. Otherwise, you're not going to make much (or even any) progress at growing your net worth.

3. Overall, I'm a big fan of having a budget and using it as a tool to guide your spending decisions. You don't have to be a slave to it, but you certainly need a plan for your money -- which is what a budget (or spending plan if you like) is.

4. Once you get a handle on your money, you may not need a budget. But this is 10 or 15 years down the road for those just starting out IMO.

Quicken Versus YNAB

The You Need a Budget (YNAB) website has a page that compares its product to Quicken. In particular, here's what they say are the advantages of their software versus that of the "Big Q":

• Save More Money -- People following the You Need A Budget (YNAB) Methodology save, on average $235 in their first 31 days. Quicken would rather embed advertisements in their software to get you to spend more.

• No Costly Upgrades -- YNAB has never once charged for an upgrade. Quicken forces you to upgrade by crippling your software after a certain period of time.

• Software that’s Easy to Use -- Quicken is full of “bells and whistles” that you pay for, but they then sit and gather dust. Also, these extra useless features simply cause confusion and frustration. YNAB is built to have you focus on those things that actually bring results.

• Community and Support -- With Quicken you’ll get the standard corporate canned responses to emails, waiting in line in support queues, etc. With YNAB we offer free weekly coaching in a small class environment, and we have the friendliest forums on the internet. If you email us, an actual person responds!

They also include some quotes from people who used to use Quicken and now use YNAB. As you might expect, those people LOVE YNAB. ;-)

I've used Quicken for years and use a self-developed spreadsheet for budgeting. I have never used YNAB but have had many, many, many people say how much they like it.

Here's my take on what YNAB says above:

1. They kind of by-pass the issue of how much Quicken saves their users in the first 31 days, so I can't really comment on this. It could be more than $235 or it could be less, but they don't include that number. Instead, they focus on something unrelated, those annoying "ads" where Quicken asks you to buy something (which are easily ignored, BTW.)

2. It's true that you eventually need to upgrade Quicken as they phase out older versions. I upgrade every two to three years anyway, but it isn't cheap to do so.

3. I agree 100% that Quicken has a lot of bells and whistles that go unused. I basically use it for recording check, credit card, and cash transactions as well as updating stock performance. I also run reports regularly to get various data sorted the way I want it. I'd say I use about 10% of Quicken's abilities (simply a guess on my part) since I know it does so much more (but stuff I really don't need.) I wonder how much of its capabilities the average user uses.

4. Doesn't Quicken have forums for answers? I've never really needed support for it, so I can't say if it's good or bad.

In the end, I have so much historical data with Quicken that I'm "stuck with it." To switch now to a new system could be a big data headache or loss of information. Furthermore, I'm comfortable with it. It does what I want and gives me the data I want. So why would I want to switch to a new system? Maybe if I was starting from ground zero I'd look at other options, but I'm generally happy with it and don't feel it's worth it to switch.

How about you? Do you use either of these pieces of software? If so, which one and why?

(FYI, a comparison between Mint and YNAB is coming up soon.)

Two Budgeting Winners

In my post titled Mvelopes and YNAB, I talked about two of the budgeting systems that FMF readers seem to enjoy. There were many comments on the post in favor of both of these options, and I thought I'd share some of them with you today. First, here are some testimonials for You Need a Budget:

Comment #1

I have been using YNAB and I love it. I used it about 2 years ago for a few months and saved a ton of money. Then I got away from it for a while and got back into my old spending habits. Now I am back using the software and it is great.

They just added a new feature that allows you to run your budget AND balance your checking account. The software is very visual, helping you see that a reduction in spending in one category can lead to larger savings or a larger credit card payment.

The idea of creating a one month buffer is one of the most intuitive, yet simple personal finance ideas I have ever seen. It instantly breaks the paycheck to paycheck cycle and gets you thinking ahead.

Comment #2

YNAB has been great. The 4 money rules that the software supports are the key to making it work and in some ways are more valuable than the software. I no longer live paycheck to paycheck, I've paid all my credit card debt, and big, unexpected bills are no longer a problem. Support for the product is great, especially the forums and all of the updates have been free so far. It's not as comprehensive as Quicken so I still use Quicken to track my net worth and investments but it's the best way to organize and track cash flow that I've found.

Comment #3

My wife and I absolutely LOVE YNAB. It has been one of the best things for our marriage. We do not argue about money and never have to worry about whether there is enough cash in the bank to write a check. It has also helped us pay off a lot of our school debt and establish some savings as well. I would recommend YNAB to anyone. The only catch is, you have to use it and actually record every single transaction, otherwise it does you no good.

Now for some thoughts on Mvelopes Personal.

Comment #1

We've been using Mvelopes (now called Finicity's Money Manager) for nearly 3 years and I love it. My husband is a spender and I couldn't plan for expenses - if there was money in the checking account, we had money to spend and spend we did. Then, when the annual insurance bill came, we'd have to drain savings to pay it. We often overdrew our account because one didn't know what the other had spent. The credit card bills were out of control.

No more. Now we don't rely on the balance in the checking account, but the balance in the envelope you want to spend from. Non-monthly bills are saved up for in advance so there's no surprise in February when the disability insurance bill shows up.

We've saved hundreds of dollars in overdraft account charges and even more in credit card interest charges (our one card is now paid off monthly). We don't fight about money anymore.

I highly recommend this product to anyone who is visual. I also like Crown Financial's software, which is also an envelope-based budgeting system.

Comment #2

I used Mvelopes for about a year and really liked it. It hammered home for me the point that if you overspend in one area, you have to take that money away from another area in order to balance out. For some reason that had escaped me - I always looked at my cash flow as continuous instead of monthly, so it was "never ending" rather than a set number. Once I had to physically "move" the money from, say, Groceries to cover my Entertainment, I saw why I had always been playing catch up and kept having to push bills out to "the next paycheck". After about a year I had learned enough to do my budget myself on an Excel spreadsheet.

Actually, the best benefit from the MVelopes program was that I bought the workbook and book that came with it called "Money For Life", they were written by Stephen B. Smith and really worked for me.

Of course, there were some people that didn't like one service or the other, but most seemed to be positive on at least one of these. Since we're nearing the end of "budgeting season" (people who make budgets for the year mostly do so in the first couple of months of a new year), I thought I'd highlight both of these good options in case you haven't yet taken the budgeting plunge.

Personally, we use Quicken for almost everything, though we use a homemade spreadsheet for budgeting (when we do a budget, that is.)

Mvelopes and YNAB

Here's a comment a reader recently left on my post titled Mvelopes Backs Up Its Product:

I've been using Mvelopes for almost a full year and I love it. It has been extremely instrumental in our debt reduction process. I haven't had any problem with security at this point, though I know it's risky. Heck, having our banking online is a big risk and most people do that now. I love the fact that I don't have to worry about overdrafting anymore. Haven't had that problem since I signed up and figured out the system. We have plenty of money in our account at all times. It has fully changed the way I handle and look at our money. To me, it has been revolutionary.

How about you? Anyone else out there using Mvelopes?

Or maybe You Need a Budget? I'd be interested in hearing from those of you who use YNAB -- tell us all what you think of it.

It's Budgeting Time of the Year

This is a re-post of a previous piece of mine. I plan to run it a few times the next few weeks as a reminder to all to get those budgets done. ;-)

I'm well aware that the end/first of the year is the time that many people review last year's budget, develop new budgets for the next year, or start a budget for the first time. As such, I wanted to offer some links and resources on budgeting in this post. First of all, here are the links:

• Know and Control Your Spending

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

• Thoughts on Quicken vs. Microsoft Money

• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To

• Five Keys to Developing a Successful Budget

• Budgeting Part 1: Creating a Family Budget

• Budgeting Part 2: Living on a Family Budget

• Budgeting Part 3: Reduce Your Spending

Now for some resources. In the past, I've suggested that a viable budget tracking set-up could involve a combination of Quicken or Money and You Need a Budget (for more details see The Benefits of You Need a Budget and YNAB Question of the Month: How Does it Compare to Quicken and Microsoft Money?) and this is close to what I personally use (I use Quicken plus my own self-created spreadsheet). That said, I've asked readers what they think about using Mvelopes as a budgeting option, and I've received very favorable responses. As such, I've been recommending Mvelopes for those who want an electronic version of the envelope budgeting system. Here are some links to help you consider their service:

• Compare to Microsoft Money

• Compare to Quicken

• Take a tour of Mvelopes Personal

• Financial Fitness Quiz

• Free Budgeting E-book

• Free Debt Calculator

• Get a FREE 30 day trial of Mvelopes Personal

It's Budgeting Time of the Year

This is a re-post of a previous piece of mine. I plan to run it a few times the next few weeks as a reminder to all to get those budgets done. ;-)

I'm well aware that the end/first of the year is the time that many people review last year's budget, develop new budgets for the next year, or start a budget for the first time. As such, I wanted to offer some links and resources on budgeting in this post. First of all, here are the links:

• Know and Control Your Spending

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

• Thoughts on Quicken vs. Microsoft Money

• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To

• Five Keys to Developing a Successful Budget

• Budgeting Part 1: Creating a Family Budget

• Budgeting Part 2: Living on a Family Budget

• Budgeting Part 3: Reduce Your Spending

Now for some resources. In the past, I've suggested that a viable budget tracking set-up could involve a combination of Quicken or Money and You Need a Budget (for more details see The Benefits of You Need a Budget and YNAB Question of the Month: How Does it Compare to Quicken and Microsoft Money?) and this is close to what I personally use (I use Quicken plus my own self-created spreadsheet). That said, I've asked readers what they think about using Mvelopes as a budgeting option, and I've received very favorable responses. As such, I've been recommending Mvelopes for those who want an electronic version of the envelope budgeting system. Here are some links to help you consider their service:

• Compare to Microsoft Money

• Compare to Quicken

• Take a tour of Mvelopes Personal

• Financial Fitness Quiz

• Free Budgeting E-book

• Free Debt Calculator

• Get a FREE 30 day trial of Mvelopes Personal

It's Budgeting Time of the Year

This is a re-post of a previous piece of mine. I plan to run it a few times the next few weeks as a reminder to all to get those budgets done. ;-)

I'm well aware that the end/first of the year is the time that many people review last year's budget, develop new budgets for the next year, or start a budget for the first time. As such, I wanted to offer some links and resources on budgeting in this post. First of all, here are the links:

• Know and Control Your Spending

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

• Thoughts on Quicken vs. Microsoft Money

• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To

• Five Keys to Developing a Successful Budget

• Budgeting Part 1: Creating a Family Budget

• Budgeting Part 2: Living on a Family Budget

• Budgeting Part 3: Reduce Your Spending

Now for some resources. In the past, I've suggested that a viable budget tracking set-up could involve a combination of Quicken or Money and You Need a Budget (for more details see The Benefits of You Need a Budget and YNAB Question of the Month: How Does it Compare to Quicken and Microsoft Money?) and this is close to what I personally use (I use Quicken plus my own self-created spreadsheet). That said, I've asked readers what they think about using Mvelopes as a budgeting option, and I've received very favorable responses. As such, I've been recommending Mvelopes for those who want an electronic version of the envelope budgeting system. Here are some links to help you consider their service:

• Compare to Microsoft Money

• Compare to Quicken

• Take a tour of Mvelopes Personal

• Financial Fitness Quiz

• Free Budgeting E-book

• Free Debt Calculator

• Get a FREE 30 day trial of Mvelopes Personal

It's Budgeting Time of the Year

This is a re-post of a previous piece of mine. I plan to run it a few times the next few weeks as a reminder to all to get those budgets done. ;-)

I'm well aware that the end/first of the year is the time that many people review last year's budget, develop new budgets for the next year, or start a budget for the first time. As such, I wanted to offer some links and resources on budgeting in this post. First of all, here are the links:

• Know and Control Your Spending

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

• Thoughts on Quicken vs. Microsoft Money

• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To

• Five Keys to Developing a Successful Budget

• Budgeting Part 1: Creating a Family Budget

• Budgeting Part 2: Living on a Family Budget

• Budgeting Part 3: Reduce Your Spending

Now for some resources. In the past, I've suggested that a viable budget tracking set-up could involve a combination of Quicken or Money and You Need a Budget (for more details see The Benefits of You Need a Budget and YNAB Question of the Month: How Does it Compare to Quicken and Microsoft Money?) and this is close to what I personally use (I use Quicken plus my own self-created spreadsheet). That said, I've asked readers what they think about using Mvelopes as a budgeting option, and I've received very favorable responses. As such, I've been recommending Mvelopes for those who want an electronic version of the envelope budgeting system. Here are some links to help you consider their service:

• Compare to Microsoft Money

• Compare to Quicken

• Take a tour of Mvelopes Personal

• Financial Fitness Quiz

• Free Budgeting E-book

• Free Debt Calculator

• Get a FREE 30 day trial of Mvelopes Personal

A Simple Bible-Based Budget

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Recently my pastor shared what he considers a Bible-based budget. His breakdown:

• Give 10% of your income
• Save 10% of your income
• Live on 80% of your income

He noted that this budget wasn't stated explicitly in the Bible, but was a simplified budget compiled from the various teachings the Bible contains on money.

Personally, I think this is a very good STARTER budget. If someone is just beginning their budgeting, this seems like a great way to get them going. In fact, if you get to this point and never progress, you're probably better off than the vast majority of Americans. You'd certainly be among the top tier in both giving and saving if you put 10% towards each.

But as time goes on, I think you need to work to exceed the first two numbers and cut back on the third. We've been budgeting for almost two decades now, and we currently give way more than 10%, save way more than 10%, and live on way less than 80%. But it took time to get to this point. The keys: spending less than we earn (and not spending all of our pay raises) while working hard to maximize our income. It's that simple.

So, what do you think about the 10/10/80 plan -- good or bad idea? Any suggested improvements? 

Better to Budget by Year Versus by Month

Here's an interesting piece from the New York Times. It says that it's better to budget by the year than by the month. The highlights:

In one study, 87 college students predicted their food and entertainment spending for either the next year or the next month, and then kept weeklong diaries recording such expenses. When their predictions were compared with the actual expenses, as extrapolated from the diaries, the one-month predictors were laughably off. Those who estimated expenses for a year were closer to the mark.

Other studies described in the paper suggested that short-term budgeters tend to be overconfident. Long-term predictors expect to miss the mark, so they pad their estimates, which ends up making them more accurate.

My budgeting transitioned over time from the following:

1. I would budget by the year, then update my results monthly.

2. I would budget by the year, then update my results quarterly.

3. I would budget by the year, then update my results semi-annually.

4. I would budget by the year, then update my results yearly.

5. Now I don't budget at all.

As a reminder, this was over a 15-year period, so I didn't give up budgeting lightly. I still track my spending via Quicken, but I just don't have an "official" budget that I follow/update regularly.

Tracking Your Finances with a Rolling 12-Month Average

Here's a guest post from Gerry at Sailing Kitty.

The most basic measure of your financial situation is comparing your income to your expenses. It’s a simple equation. You take your income over a set period of time and then subtract your expenses for that same period. If the result is positive, you’re making more money than you’re spending; if the number is negative, you have some work to do.

The complicating factor is the period of time you use to measure. A year gives you an accurate picture but it’s too long a timeframe. Waiting until year-end to find out how you’re doing robs you of any chance to make changes in the meantime. You don’t want to find out after the fact that you’ve been spending more than you’re making over the past several months.

Tracking each month gives you the flexibility to make changes, but it tends to be inaccurate. Some months you get a windfall and your income looks great; other months you may have car repairs and income tax payments and your expenses skyrocket. In neither case, are you getting an accurate reflection of your situation.

To take advantage of the year’s long-term view and the month’s short-term flexibility, I track my finances with a Rolling 12-month Average. The Rolling Average flattens out the month-to-month peaks and valleys in my income and expenses, yet gives me a monthly measure of how I’m doing.

Here’s how it works. You need to know your monthly income and expenses for at least the past 13 months and preferably for 24 months or more. If you use Quicken or one of the web-based applications like Wesabe, these numbers are easy to come by.

• First, list the months for which you have data in the first column, put the monthly income in the second column, and record the monthly expenses in the third column. You can follow along on the Excel spreadsheet example attached below this post.

• Next, add up your total income for the first 12 months and record that total in the fourth column across in the same row as the 12th month. In the example below, the total is $65,421. Calculate your expenses for the same 12 months and put that total ($66,131) in the fifth column along the same row

• Now, subtract your 12 months of expenses from your 12 months of income and put the result in the sixth column. That number, -$710 in the example, is the dollar difference between how much you made in those 12 months and how much you spent.

• Finally, divide that dollar difference in the sixth column by 12 and record the result in the seventh column. This number tells you how much more (or less) you earned than you spent on average for each month during the period. In the example below, expenses exceeded income by an average of $59.17 each month.

• Now, repeat the process for the next 12-month interval, deleting the first month from your calculations and adding the 13th month. In the example below, you get a monthly average of $6.58. The average increased because we deleted a month in which expenses exceeded income by almost $500 and added a month in which earnings were almost $300 more than expenses.

• Complete the calculations for each successive 12-month interval until you get to the current month. Now you have your Rolling 12-Month Average. The progression of the monthly average numbers gives you an accurate picture of the state and direction of your finances.

If the trend is positive and the dollar numbers are increasing, you’re heading in the right direction. On the other hand, if the dollar numbers are negative and/or the trend is heading down, you need to get your finances on track.

One word of caution: Because the Rolling Average tracks your financial performance in successive 12-month increments, it’s difficult to see a dramatic impact in a single month. Each month has only a 1/12 impact on the average. When you string together several positive months, however, your Rolling Average will start to climb and you’ll know you’re heading in the right direction.

Download fmf_rolling_average_graph.xls

It's Budgeting Time of the Year

This is a re-post of a previous piece of mine. I plan to run it a few times the next few weeks as a reminder to all to get those budgets done. ;-)

I'm well aware that the end/first of the year is the time that many people review last year's budget, develop new budgets for the next year, or start a budget for the first time. As such, I wanted to offer some links and resources on budgeting in this post. First of all, here are the links:

• Know and Control Your Spending

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

• Thoughts on Quicken vs. Microsoft Money

• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To

• Five Keys to Developing a Successful Budget

• Budgeting Part 1: Creating a Family Budget

• Budgeting Part 2: Living on a Family Budget

• Budgeting Part 3: Reduce Your Spending

Now for some resources. In the past, I've suggested that a viable budget tracking set-up could involve a combination of Quicken or Money and You Need a Budget (for more details see The Benefits of You Need a Budget and YNAB Question of the Month: How Does it Compare to Quicken and Microsoft Money?) and this is close to what I personally use (I use Quicken plus my own self-created spreadsheet).

That said, I've asked readers what they think about using Mvelopes as a budgeting option, and I've received very favorable responses. As such, I've been recommending Mvelopes for those who want an electronic version of the envelope budgeting system. Here are some links to help you consider their service:

• Compare to Microsoft Money

• Compare to Quicken

• Take a tour of Mvelopes Personal

• Financial Fitness Quiz

• Free Budgeting E-book

• Free Debt Calculator

• Get a FREE 30 day trial of Mvelopes Personal

My Confession: I'm Not Doing a Budget for 2008

Shortly after I wrote How We Budget, my plan was to put together our budget for 2008. As I started, I wondered why I should go to the trouble. After all:

• I rarely refer to the budget throughout the year -- having "ignored" the budgets I've done for the past several years.

• We have our spending completely under control. We're frugal and we track everything via Quicken. I look at how we're doing every month through a few Quicken reports -- why create another document simply for the sake of doing so?

• We have a good amount of surplus between what we make and what we spend, so there's plenty of room for error.

Early on in our lives, a budget was vital for us. It helped us pay off debts, start saving, start giving, and the like. It was one of the key documents we used to keep us on track. Now after 17 years, we've "got it" and have other (Quicken) ways to help us manage that essentially do the same thing as a budget. So why take the time to create one?

We'll see how this year goes and if need be, I'll do one for 2009. Otherwise, 2007 could have been the last year of budgeting for me.

The Money Blog Network is doing a group writing project on the issue of budgeting. If you'd like to read more on this topic, see these posts:

• Living On A Budget: Don’t Knock It Until You Try It
• A budget in your head isn’t really a budget
• A Free and Simple Budget Planner
• The Fine Art of ‘Reverse Budgeting’
• Actual vs. Budget Report, January 2008

It's Budgeting Time of the Year

This is a re-post of a previous piece of mine. I plan to run it a few times the next few weeks as a reminder to all to get those budgets done. ;-)

I'm well aware that the end/first of the year is the time that many people review last year's budget, develop new budgets for the next year, or start a budget for the first time. As such, I wanted to offer some links and resources on budgeting in this post. First of all, here are the links:

• Know and Control Your Spending

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

• Thoughts on Quicken vs. Microsoft Money

• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To

• Five Keys to Developing a Successful Budget

• Budgeting Part 1: Creating a Family Budget

• Budgeting Part 2: Living on a Family Budget

• Budgeting Part 3: Reduce Your Spending

Now for some resources. In the past, I've suggested that a viable budget tracking set-up could involve a combination of Quicken or Money and You Need a Budget (for more details see The Benefits of You Need a Budget and YNAB Question of the Month: How Does it Compare to Quicken and Microsoft Money?) and this is close to what I personally use (I use Quicken plus my own self-created spreadsheet).

That said, I've asked readers what they think about using Mvelopes as a budgeting option, and I've received very favorable responses. As such, I've been recommending Mvelopes for those who want an electronic version of the envelope budgeting system. Here are some links to help you consider their service:

• Compare to Microsoft Money

• Compare to Quicken

• Take a tour of Mvelopes Personal

• Financial Fitness Quiz

• Free Budgeting E-book

• Free Debt Calculator

• Get a FREE 30 day trial of Mvelopes Personal

How We Budget

I thought some of you may be interested in the process we (my wife and I) use to budget. FYI, we've done this for years and have a bit more budget freedom these days than what we did when we first got married, so some of this won't apply to people just starting out on a budget, those deeply in debt, etc. who will need to monitor their spending very closely. Anyway, here's what we do:

1. At the end of the year, I look at what we've spent the previous year. Since I use Quicken to track all our spending, this is rather easy.

2. I set up a spreadsheet (by copying last year's model) that lists all our expenses and income sources.

3. I take the information from #1 and put it in the spreadsheet. I list income and expenses by month.

4. I make any needed adjustments. For instance, I may think some categories need more money and others need less. I make the appropriate changes.

5. I look and see where that leaves the bottom line. If I'm negative, I need to cut expenses. If I'm positive, I can save more.

6. Knowing I'm ok for the year, I go six months without referring to my budget. I have a general sense of what we have to spend each month on each category, but I don't hound myself or make daily comparisons to how my spending lines up versus my budget.

7. In July, I re-do the budget, updating it for the first six months of actual spending, then repeating steps #4 and #5 above.

8. That's it. The rest of the year is on auto-pilot.

As I said, we're a lot more relaxed now than we used to be. Early in our marriage I did monthly budget updates -- we had to since we had debt we wanted to pay off and didn't have any surplus income as a cushion. 

For more on budgeting, see these posts:

• Know and Control Your Spending

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

• Budgeting Part 1: Creating a Family Budget

Tips to Make Budgeting Easier

MSN Money has a guide to budgeting that offers various thoughts on how to budget, why to budget, etc. The part I liked the best was the list of tips to make budgeting easier. Here's what they had to offer:

• Write it down. If you don't, you probably won't stick to it.
• When good fortune comes your way in the form of an "extra" paycheck or a bonus, pay an annual premium, make an additional mortgage payment or use it for seasonal extras, such as summer vacation costs or Christmas presents. (See "What to do with 'extra' paychecks.")
• If you can't spend less, earn more.
• Get into the habit of thinking ahead. If you know your situation is going to change -- a new baby, new winter clothes, a new job -- plan for it and try to pay cash.
• Remember, budgeting is the means, not the end. Keep spending "mistakes" in perspective.
• As your income climbs, don't splurge until you're sure you're staying ahead of inflation. A good budget grows with you, so it's worth re-evaluating your budget every year.

Ok, it's not rocket science, but neither is budgeting (budgeting is about as basic as it gets in personal finance.)

I think I'll write a post later this week detailing how we budget, but for now let me say all you need is a simple, written budget that you live by and check/adjust from time to time. If you do this, you'll be far ahead of most others and well on your way to a solid financial base.

For more thoughts on budgeting, see these posts:

• Budgeting Part 1: Creating a Family Budget

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

And for those of you looking for budgeting help, you may want to consider this post: The Benefits of You Need a Budget.

It's Budgeting Time of the Year

This is a re-post of a previous piece of mine. I plan to run it a few times the next few weeks as a reminder to all to get those budgets done. ;-)

I'm well aware that the end/first of the year is the time that many people review last year's budget, develop new budgets for the next year, or start a budget for the first time. As such, I wanted to offer some links and resources on budgeting in this post. First of all, here are the links:

• Know and Control Your Spending

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

• Thoughts on Quicken vs. Microsoft Money

• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To

• Five Keys to Developing a Successful Budget

• Budgeting Part 1: Creating a Family Budget

• Budgeting Part 2: Living on a Family Budget

• Budgeting Part 3: Reduce Your Spending

Now for some resources. In the past, I've suggested that a viable budget tracking set-up could involve a combination of Quicken or Money and You Need a Budget (for more details see The Benefits of You Need a Budget and YNAB Question of the Month: How Does it Compare to Quicken and Microsoft Money?) and this is close to what I personally use (I use Quicken plus my own self-created spreadsheet).

That said, I've asked readers what they think about using Mvelopes as a budgeting option, and I've received very favorable responses. As such, I've been recommending Mvelopes for those who want an electronic version of the envelope budgeting system. Here are some links to help you consider their service:

• Compare to Microsoft Money

• Compare to Quicken

• Take a tour of Mvelopes Personal

• Financial Fitness Quiz

• Free Budgeting E-book

• Free Debt Calculator

• Get a FREE 30 day trial of Mvelopes Personal

Save 10% on Budgeting Software Reminder

Just a reminder that the You Need a Budget 10% off coupon is still good. (click link for details)

That said, it only applies to the first 100 people using it, so you'll need to move quickly if you want to save some $$$$. Also, there's a full, 60-day guarantee, so if you're on the fence, it may be worth it to buy the software, save the 10%, and try YNAB. You can get all your money back if you hate it for some reason.