Budgeting & Cash-flow Controls/Strategies

[moda0306]

The recent postings on paying down a mortgage (and my subsequent ranting) got me thinking about budgeting.  I have a system I use that I wish I would have learned back in college.  I'll post it here, but I wonder if anyone has any other good ideas with budgeting that they use, so feel free to post your own!!

1) Record and categorize your last 12 months of spending using Mint or something similar.


2) Split up spending into 3 categories:

a) Static: Expenses paid automatically (cable) or that are essentially a "bill" (writing a check for mortgage)

b) Control: Debit/credit card swipes that will occur within every monthly period (groceries, eating out, etc)

c) Dynamic: Periodic expenses that you incur unevenly throughout the year (vacations, home repair, auto maintenance)


3) Find areas to reduce spending in those categories ($50 less on cable, $200 less on eating out, $100 less on liquor store, etc).  Some areas you can't really lower much, if at all (rent, insurance, groceries, taxes, etc)

4) Figure out new totals in each of those three categories.

5) Set up bank accounts as follows:


a) Static Checking Account:

- Deposit Income into this account (probably bi-weekly or semi-monthly)
- Pay for static expenses out of this account... most of which will be auto-pay
- DO NOT have a debit card for this account

b) Control Checking Account

- Transfer money from the Static Account every 7 days in amounts calculated at approximately 1/4 of your monthly "Control" expenses in your ideal budget.
- Potentially have multiple control accounts... Typical for a married couple would be to have three... one joint one for groceries and gas kids stuff, and another one for each spouse for going out to eat, etc.

c) Dynamic Savings Account

- If you find yourself transferring money from your savings often, have this be an off-site account (Ally, maybe)
- Transfer money from Static Account every month to accrue for periodic expenses.

6) Maintain the spreadsheet that shows the transfer amounts and general allocation of what types of expenses you'd want to be paid from that account.  You can either ignore it for months at a time, or you can revisit it.


In the first few months, running out of money and setting all this up will get on your nerves.  Eventually though, it's mindless control on your spending and works phenomenally.  Especially since if you get a raise or pay off a loan, it doesn't automatically increase your discretionary cash-flow.  You actually have to make conscious efforts to go in and increase the 7-day transfer to your control accounts.  Also, I think it facilitates fair allocation of fun-money between spouses.  Lastly, even if you don't spend exactly where you think you are going to spend based on your "ideal budget," you now at least have some structure to come back and analyze where you can reduce spending if a change presents itself. 

What you DON'T have to do is revisit your budget every month and scratch your head about over-spending.  The controls work just well enough for people to prevent over-swiping of the cards.

You can add a credit card to the mix for periodic expenses (helpful when transfers take 2 days), but for the most part, unless you can set weekly spending limits, credit cards are THE ENEMY of behavioral economics.

Obviously, to the degree that you are simply accruing for expenses in your dynamic account and NOT saving any more than that, you're going to have a hard time ever getting ahead.  To the degree that you take on new static expenses (mortgage, utilities, taxes and insurance higher than rent), or bring on new dynamic expenses (home maintenance), without increases in income or decreases in other expenses, it is going to simply cause strain on your cash-flow.  But you'll SEE that strain MUCH easier if you already understand where your money is going, and what things are more pliable than others.


What do you guys think?


Does anyone else have good systems that work well?

[Pointedstick]

Hah! It's funny; you have described the EXACT system that my wife and I use. I thought it was pretty clever, myself. And you're right, it works phenomenally well.

[Mountaineer]

Very, very elaborate.  Simplest system I think, is to decide how much of your net paycheck to give to charity, then how much for your savings - do that.  Then spend the rest on anything you like but when it's gone, no more spending period until the next paycheck.

... Mountaineer

[moda0306]

Mountaineer,

I really don't mind that too much for some people.  The only problem that develops is that people don't end up limiting spending in very efficient ways.  First off, over-drafts are really common using that method, as if you have bills coming out of the same account that you're swiping a debit-card from.  Secondly, depending on when you get paychecks and pay major bills, discretionary spending (the kind that is usually the BIGGEST problem) is only being limited once or twice per month, and at a much higher spending tolerance before it triggers (running out of money), rather than 4 times per month and to a much smaller tolerance of over-spending (especially if you and your spouse use the 3-control account method).

So it's just super volatile unless you are very inclined to under-spend... in which case budgeting is probably not really that necessary for you anyway...

But it's really not as complex as it sounds.  The vast majority of the work is on the front end.  Categorizing and setting up account transfers are pretty much one-timers.  Further, I'd argue that as an adult, whether you are doing a great or poor job saving, it's simply healthy to understand the nature of your cash flows.

PS probably felt the same way you do (and I did) initially... "holy crap that's a lot of accounts," or "holy crap that's complex."  But 1) the vast majority of the work is one-time front-end work, 2) it works really friggin' well even with just the main three accounts setting tolerances on discretionary spending, and 3) allows you to understand what changes are going to occur with certain life changes.

Moving from an apartment to a house?

Moving from a house to a bigger house?

Buying a cabin?

Paying off the mortgage?


All these things are usually done by people without an iota of tight analysis on cash-flows, and often with complete disregard for periodic costs.  But if you use the moda/PS system, you can ignore the thing for months or even years at a time and it'll not give you enough rope to hang yourself.  People go through ebbs and flows of giving a shit about their investments and budgeting... but it's not because economic abundance and protection aren't still important (and often the events that cause people to not care about budgeting are actually making financial balance/stability/health MORE important... not less)... but a cash-flow control system shouldn't require constant maintenance to limit spending... and if at any time you quit making transfers to savings vehicles, you're giving yourself an automatic permission slip that will allow rampant over-spending until you come back to revisit budgeting... and when is that going to be fun & motivating?

I think the periodic/dynamic costs of life are extremely important to understand.  If you take two of the EXACT same guy, and one of them lives in a condo, leases a car with paid-for maintenance, would rather go camping than go on expensive vacations, and has a traditional health insurance plan, and he "saves 20% of his income" on a regular monthly basis, he is going to have VERY different financial outcome than someone who owns a single-family home, drives a 10 year old car, has a high-deductible health plan, and love going on a Caribbean vacation every year, but he also "saves 20% of his income."

The latter guy is going to notice that a big chunk of his 20% has to get transferred right back into his checking account to pay for home maintenance, car repair, health expenses, vacations, etc.  That's why I cringe a bit when I hear people say how much of your income to save without explaining what "saving" really is.

So the more of those types of expenses one is going to incur, the more important that they have a budgeting system that doesn't count transfers for dynamic/periodic expenses as real "saving."  Further, it's important that as people take on new financial decisions that WILL carry those types of expenses, that they are recognizing those in 1) the decision-making process of whether it's a good decision, and 2) what impact this will have on their cash-flow on an ongoing basis.

[Pointedstick]

The latter guy is going to notice that a big chunk of his 20% has to get transferred right back into his checking account to pay for home maintenance, car repair, health expenses, vacations, etc.  That's why I cringe a bit when I hear people say how much of your income to save without explaining what "saving" really is.

Yeah, that's a great point. Personally, I only count the money that actually goes into investments. All the money that goes into intermediate-term savings accounts for car maintenance, home repairs, vacations, etc is bound to be spent eventually. It's just deferred spending, as opposed to investments, where in theory you will never spend the principal.

[moda0306]

The latter guy is going to notice that a big chunk of his 20% has to get transferred right back into his checking account to pay for home maintenance, car repair, health expenses, vacations, etc.  That's why I cringe a bit when I hear people say how much of your income to save without explaining what "saving" really is.

Yeah, that's a great point. Personally, I only count the money that actually goes into investments. All the money that goes into intermediate-term savings accounts for car maintenance, home repairs, vacations, etc is bound to be spent eventually. It's just deferred spending, as opposed to investments, where in theory you will never spend the principal.

Well yeah, and the crappy thing is is that a lot of "periodic" spending is either necessary (home maintenance and auto repair), or it's REEEAAAALLLY hard to say no to ("Hey man, I'm getting married.  Bachelor party in Vegas!").

So if you're not accounting for it properly, you're either spending money that SHOULD be allocated to it on Control expenses along the way (most likely), or you're calling it part of your "savings" when it's not really savings, and you get to age 50 with not NEARLY what you thought would be in your retirement.

Another thing about having an unhealthy relationship with periodic spending is the fact that you rationalize like garbage when you feel like an expense "came out of nowhere."  You don't do what's best for the money.  You're now in CHEAP mode.  Or you put off needed maintenance and an ounce of prevention turns into a pound of cure.  Having a healthy understanding and expectation of needed home/auto maintenance is pretty damn important to avoiding much larger problems.

[Bean]

I keep it very simple.

1) Income goes into a single checking account 
2) The checking account is treated like a sinking fund
3) All my expenses that can go on a credit card are charged then paid off monthly
4) All my other expenses that can be automatically drafted are set up accordingly
5) Investments are treated like expenses (good old pay yourself first)
6) All investments are goal based.  X dollars needed on Y date, requires Z monthly input at the strategies historical return
7) I have a savings account that has static monthly transfers on the 1st, 7th, 15th, and 22nd that I use to pull money in and out of the checking account to give it a more “even”? balance over time
If the checking account drops below specific dollar amount, I transfer money in from the cash portion of investments (in particular the PP is well suited for this)
9) We actually rarely have to pull from investments.  What happens more often than not is our checking account gets high and we pick a new investment goal to after and contribute to

[moda0306]

Bean,

Could you clarify the nature/reason of in/out flows to that savings account with a bit more detail?

It sounds like you're pretty good at not over-spending on the credit card.  I'm assuming that is just will-power and not spending limits?

[I Shrugged]

In the early years of our marriage, the plan was this:

1) Set the goal for the savings balance for the end of the year.
2) Meet the goal.

The details take care of themselves if you are serious about meeting the goal.

[moda0306]

In the early years of our marriage, the plan was this:

1) Set the goal for the savings balance for the end of the year.
2) Meet the goal.

The details take care of themselves if you are serious about meeting the goal.

It's all about where your natural daily motivations are. If you have natural motivation in your daily life to meet a financial goal, you don't need cash flow controls.

If you have financial goals, but your natural motivations don't take you there's, you have to develop artificial motivations.

I love simplicity.  But I think we have to recognize where we are naturally motivated to be our own worst enemies and take actions that will continuously counter-act that, and just let them work.

If I could implement a system that made me do a set of squats, cleans or bench press for every beer I drank, I would push that button in a heartbeat.

[Pointedstick]

I have concrete goals and strong motivation to reach them, but I find that a structured system helps anyway. It puts achieving the goals on autopilot, letting me concentrate on other things.

[WiseOne]

Thanks for the tips moda!

However, I've fallen to the siren song of cash rewards credit cards, which nets me 1.5-6% on each purchase.  I used a system that was effectively the same as your "Control" checking account for quite a while, except that the "account" was a physical space in my wallet. I took out a fixed amount of cash every week.  Then whenever I charged something, I took that amount of cash and stuck it in a separate section.  At the end of the week, the saved cash became part of the "withdrawal" for the next week.

I stopped doing this when I started using Mint, with the idea that reviewing spending weekly and letting Mint warn me if I was over budget would suffice.  It does help but not as much.  I did a plot of my spending over time and saw that expenses have been rising, so I might just go back to the wallet method.

[WiseOne]

Yeah that's what I said...

My current "go-to" cards are:

Capital One:  1.5%, no fee, no foreign transaction fees (very worthwhile for me)
AmEx Blue Cash:  6% at most supermarkets up to a limit of $6K/year, 3% at gas stations and certain dept stores (no limits).  This card carries a $75 fee so if you spend the full $6K, the cash back rate is effectively 4.75%, still respectable.
Chase:  5% in rotating categories.  I find that to be super irritating, but hard to turn down.  No fee.

Note that if you don't hit the $6K spending limit at supermarkets, you can buy gift cards at groceries which lets you effectively buy anything you want at the 6% discount.  The company used to have no limit on the grocery spending, but instituted it after people discovered the gift card dodge.

It seems the credit card companies are desperate for people with good credit ratings.  These cards all offer cash bonuses for signing up too.

[Mark Leavy]

The recent postings on paying down a mortgage (and my subsequent ranting) got me thinking about budgeting.  I have a system I use that I wish I would have learned back in college.  I'll post it here, but I wonder if anyone has any other good ideas with budgeting that they use, so feel free to post your own!!

<...>

Does anyone else have good systems that work well?

I had a very good friend mention to me one time that *everything* can be reduced to one number, and that you should just track that number.  For her health, she checked her weight every morning - and used that number to guide her day.

I thought about that for awhile and decided that my financial number was my daily bleed rate.

Every morning, I update my spreadsheet with my current account balances and my cash in pocket.  Out pops a daily bleed rate.  The average amount of money that I am spending per day.  Every time I move, I update the epoch and the average counter starts over.

If my bleed rate is higher than I like, I eat less steak and stay at cheaper places.

[Mark Leavy]

I had a very good friend mention to me one time that *everything* can be reduced to one number,

Was it this guy?

"The day ain't over yet"

That's funnier than you know...
I'm still working on the one armed pushups.

This is the gal that has taught me more than even Jack Palance:
https://www.linkedin.com/in/margaritaquihuis

[moda0306]

The recent postings on paying down a mortgage (and my subsequent ranting) got me thinking about budgeting.  I have a system I use that I wish I would have learned back in college.  I'll post it here, but I wonder if anyone has any other good ideas with budgeting that they use, so feel free to post your own!!

<...>

Does anyone else have good systems that work well?

I had a very good friend mention to me one time that *everything* can be reduced to one number, and that you should just track that number.  For her health, she checked her weight every morning - and used that number to guide her day.

I thought about that for awhile and decided that my financial number was my daily bleed rate.

Every morning, I update my spreadsheet with my current account balances and my cash in pocket.  Out pops a daily bleed rate.  The average amount of money that I am spending per day.  Every time I move, I update the epoch and the average counter starts over.

If my bleed rate is higher than I like, I eat less steak and stay at cheaper places.

I'm all about breaking things down to their simpler parts, but I think there are a few more elements to any decision than just one number . I think the Curly Washburn budgeting method might use a few tweaks!

[Bean]

Bean,

Could you clarify the nature/reason of in/out flows to that savings account with a bit more detail?

It sounds like you're pretty good at not over-spending on the credit card.  I'm assuming that is just will-power and not spending limits?

Sure

Inflows:
Paychecks
Bonus
Interest from Mortgage offset account

Outflows:
PP Investment Expense (This is my taxable/emergency fund)
Roth IRA Expense 2x
Play Investment account expense
Mortgage offset fund (the day this equals mortgage, pay off mortgage)
Credit Card - Literally all my daily spending goes on this (Only 1 America Express and 1 back up Visa when a bill doesn't take Amex)
Mortgage
Automatic Bills that can't go on the Credit Card
Cash

I aim to keep the account above a minimum of 5K and will transfer money into investments if it stays about 10k for months.  If it is below 5K, then I transfer from the cash portion of the PP.  If it is over 10K consistently, then I up the PP contribution.  (This covers me for 1 to 3 months of normal spend, depending on the time of year and if a vacation is near)

Note 1 : The load balancing occurs with a savings account where the net monthly transfers are $0 from all the in and out transactions.  This helps even out the balance over the month so I don't overreact from a spike or drop in the account.  For example, the mortgage is a huge % of my monthly spend and this helps smooth that out over the month.

Note 2: All investments have dividends reinvested, with the exception of the mortgage offset account

Note 3: I use mint to watch for fraudulent spending or deductions from my credit cards and checking.  I use the budget functions on mint more of as a guide.  My wife and I have a good sense of what we can and can not afford in the first place.  On top of that, I have done the hyper optimized budget in the past and the math came out to maybe buying me financial freedom 1 to 2 years earlier.  So, we decided to just live our lives and not add on a "shackle" to worry about every dollar, as long as we are thoughtful at the point of each purchase and always be on the lookout for deals.

[Tyler]

Note 3: I use mint to watch for fraudulent spending or deductions from my credit cards and checking.  I use the budget functions on mint more of as a guide.  My wife and I have a good sense of what we can and can not afford in the first place.  On top of that, I have done the hyper optimized budget in the past and the math came out to maybe buying me financial freedom 1 to 2 years earlier.  So, we decided to just live our lives and not add on a "shackle" to worry about every dollar, as long as we are thoughtful at the point of each purchase and always be on the lookout for deals.

Yep. This describes us as well.

I love Mint, but actually don't use the budgets feature. Far more effective to me is the trends feature where you can chart monthly spending and net income for the last several years. When I first started watching that, my bars would hop around everywhere and I could correlate that with various purchases. Controlling that became a game. Over time my spending got lower and far more predictable, and today without even tracking a specific budget my spending is very steady. I think of it as establishing my steady-state comfort level that I can stick to without really thinking about it. 

I personally really respond to the buzz associated with watching a long-term trend respond positively to your life actions (as opposed to simply meeting a budget goal for a month).

[Mountaineer]

Those of you who like Mint, may want to also checkout BillGuard.  It has a nice iPhone app too.  I use both for tracking and monitoring for potential fraud.

... Mountaineer

[hoost]

I use Mvelopes for this and one checking/savings setup.  Your paychecks come into an "income cash pool", from which you fund envelopes based on your planned spending.  Annual expenses are funded based on the annual cost divided by each pay period.  Monthly bills are funded in advance based on expected amount.  Excess after the bill is paid is then swept to a different envelope...usually investing.  When a transaction comes in, you assign it to the appropriate envelope and that envelope is reduced by that amount.  They have web apps and smart phone apps.  I've been using it about 3 years and we absolutely love it.  I highly recommend checking it out.  The software has a few annoying quirks and glitches from time to time causing a need to refresh the page, but I haven't found anything similar that works nearly as well in another service.