10
ch-fig
creating a spending plan

If you’ve ever tried to lose weight, then the word diet likely makes you cringe. A diet represents everything you can’t eat. In much the same way, I don’t like the word budget. A budget represents everything I can’t do. It tells me everything I can’t spend money on. It constrains me from having fun on a Friday night because “Oh yeah, I’m on a budget now. I can’t afford to go out to eat or to a movie anymore.” No wonder I’d never kept a budget, although I’d made many of them over the years. Instead, I prefer a spending plan.

A spending plan, on paper anyway, might look an awful lot like a budget. It’s a layout of how much you make and how you intend to spend the money you have. But it’s different from a budget. A spending plan is permission-centered, not constraint-centered. You create a spending plan because you want to, well, plan to spend. It allows you to decide your spending priorities before you have an emotional buzz seeing a large balance in your checking account on payday. It’s not about what you cannot do, but a reflection of what you can and will do with every penny of your money. As you make planful choice after planful choice, you’ll see your money accomplish far more than you dreamed possible.

Types of Expenses

To create your spending plan, you need to understand the three types of expenses that occur in life. Every good and service in your life falls into one of three categories:

We need to understand these different types of expenses and take an honest look at how much each costs so we can plan for them.

Type #1: Predictable Monthly Expenses

Your predictable monthly expenses are the easiest to understand. These expenses are important to your daily survival, as they cover many basic needs like food, shelter, and transportation. These expenses are probably not hindering your financial progress. You likely judge whether something is affordable by looking at it in the light of your current load of monthly bills. These expenses stare you in the face every single month.

Even within this category of routine pay-them-each-month expenses, there are two types. The first are those whose payment remains constant each month, like your mortgage or your cell phone bill. We’ll call these fixed monthly expenses, since the payment is, like the name implies, fixed. Fixed monthly expenses are like a fastball down the middle. You know they are coming. They hit you right where you expect them every time.

Other monthly expenses have payment amounts that vary month-to-month. We’ll call these variable monthly expenses. These are more like curveballs. You see them coming, but they sometimes take an unexpected turn and catch you off guard. Things like utility bills, groceries, gasoline, and eating out fall into this category.

Type #2: Predictable Non-Routine Expenses

Non-routine, predictable expenses are the classic budget busters we talked about in chapter 4. They are the expenses we work hard at pretending aren’t going to cost us money—from new brakes to new eyeglasses to a new winter coat, and summer vacations to holiday entertaining to three baby showers over the span of six weeks.

I’ve included a list of all sorts of things that would qualify as predictable non-routine expenses. My list is not all-inclusive; no list really can be because our non-routine expenses are as varied as our personalities, hobbies, interests, and family structures. Use my list as a starting point to jog your thinking, but then look at the list of goals you made in chapter 4 and reflect back over the past year to everything you spent money on. Look ahead too, to the next month, three months, and even twelve to eighteen months, and imagine everything you and your family will want or need in that time frame. All those things taken together—looking forward and backward—are your predictable non-routine expenses.

Potential Non-Routine Expenses

Type #3: Unpredictable Expenses

I told you about Marco’s dad passing away unexpectedly on Christmas morning 2006 and Marco’s $2,000 plane ticket home to Rio de Janeiro. That was a bona fide emergency. There is no reasonable way we could have foreseen that trip and planned our finances to specifically accommodate it. Unexpected expenses are wild pitches that make you holler “Heads up!” and take cover to avoid being hit by a ball coming out of nowhere.

A Starting-Point Snapshot

Now it’s time for you to get to work. No, I don’t want you to create a balanced budget. That’s not your goal right now. The first thing you need to do is figure out how much your current lifestyle costs. You need to come completely clean with yourself, and your spouse, about what you have been spending your money on and how much of it you have been spending. With such easy access to credit and debt, you may have lost sight of how much you are truly spending compared with how much you earn.

If you purpose to create a balanced budget at this point, then you’ll skew all your expenses down just to make the numbers work. You want to believe that you are living within your means. We all do. But you may not be. You have to understand the magnitude of change that is being required of you, or else you’ll underestimate the effort needed for success. An honest, albeit shocking and even scary starting-point snapshot is a step in the right direction.

Something shocking happened to Marco and me when we took a snapshot of our lifestyle in June 2006. Our fully loaded, included-every-predictable-non-routine-expense-we-spent-money-on expense level was nearly $2,000 more per month than our income. That was a brutal slap in the face. After paying our bills each pay period, we seemed to have more than enough. There was almost always some money left over. Yet the black-and-white numbers of our starting-point snapshot told a different story. I looked at that little bit as extra, when in reality it was lack.

Marco and I considered ourselves responsible, non-extravagant folks, yet we lacked the money to cover all our predictable non-routine expenses. We were living thousands of dollars per month beyond our means. We hit our monthly bills out of the park and didn’t ever miss paying those; it was everything else in life that was beyond what we could afford. Marco and I had appointed me as captain of our financial ship, and our ship was sinking. The worst part was I didn’t even realize it. Sobering.

A From-Scratch Spending Plan

After doing a starting-point snapshot, Marco and I knew that our lifestyle was out of whack with our income—to the tune of a few thousand dollars each month. It was time for us to make a spending plan, and associated savings plans, that we could live with on a day-to-day basis and that would protect us from future debt.

The process we went through was like cleaning the closet in a child’s bedroom. You know the process—you pull everything out, make a huge mess, then look at each item and only put the most important things back inside. When you choose to put things back inside the closet, you only do so if you have a place for the item. That was us with our finances.

We started with a clean slate and called no expense sacred. Everything, and I mean e-v-e-r-y-t-h-i-n-g, was negotiable. In times past, our primary financial priority was to meet our monthly obligations. Our new priority was to save for bona fide emergencies.

An Emergency Fund

Financial planners everywhere agree on the need for families to have cash on hand that would cover three to six months’ worth of expenses should tragedy strike. The concept of setting aside money for emergencies wasn’t new, but our commitment to actually do it was. We agreed to start saving 10 percent of our income toward the goal of having $12,000 on hand to use in a legitimate emergency.

We started saving in June 2006, so when the dreaded phone call came on Christmas morning that my father-in-law had died, we did not have to worry about how we’d pay for the trip. Marco flew home to Brazil and took unpaid time off of work, but we didn’t miss a financial beat because we had money in our emergency fund to cover those expenses.

The trick to actually saving 10 percent of our income was to outsmart our two sabotaging tendencies—spending the money before we could get it into savings, and moving the money right back out of savings for non-emergency purposes.

Here’s how we did it:

1. We opened up a new bank account at an online bank

Online banks don’t have brick-and-mortar branches. You link your online bank account to your primary account so that deposits and withdrawals are made by transferring funds between them. (ING Direct is the online bank we use, but there are others as well.)

2. We scheduled an autotransfer of 10 percent of our income to happen every payday

We knew that if we had a bill worth 10 percent of our income, we’d find a way to pay it. We treated our savings the same way by scheduling the withdrawal to happen routinely and automatically. That made us account for it and kept us from spending the money before it could be saved.

3. We limited our ability to withdraw funds

With most online banks, you have a couple ways you can get money out of your account. You can get a debit-type card or old-fashioned checks, or you can transfer funds into the linked bank account from another bank. We know our tendency to take money back out of savings, so we have never had a debit card or checkbook for our emergency fund account.

When we need money out of it, we have to schedule the transfer online. It doesn’t just happen instantaneously; it takes at least three business days for the transfer to occur, which is much better than the immediate transfer that happens when your savings and checking are at the same bank. Since we can’t get the money for at least three days, we can’t use our emergency fund to cover pseudo-emergencies caused by poor cash-flow planning. It’s for real life-and-death-type emergencies, not bounced checks. Our savings is just to save.

Monthly Predictable Expenses

After our emergency fund, our next set of financial priorities was our monthly predictable expenses. You can reference our spending plan template at PocketYourDollars.com/Spending-Plan to see what we included as predictable monthly expenses, but it is all your standard stuff—mortgage, debt payments, utilities, gasoline, etc. (more on debt payments in the next chapter). Our family is deeply committed to charitable giving, so we included our charitable giving as a monthly expense. The entire time we were getting out of debt, we gave away over 10 percent of our gross income. We simply adjusted our expenses elsewhere to accommodate it.

Predictable Non-Routine Expenses

Our third priority in our spending plan were the predictable non-routine expenses. I don’t put them in third place because they are less important than the others; they’re not. I don’t put them in third place because they aren’t needed; they are. These are the group of expenses that are most flexible, which is why we addressed them last.

We knew we needed to set aside money every month for all the non-routine things that come up in life, but we had a lot of discretion over the amount we set aside. Remember, we had to shave $2,000 per month off our expenses—or we had to increase our income via a second job, which neither of us wanted to do—in order to make our spending plan work.

This time, with this plan, we didn’t just give lip service to the numbers we put down. We committed ourselves to put forth whatever amount of effort was needed to actually live out the numbers we agreed upon. The first couple rounds of expense cutting weren’t too hard. All the obvious you-don’t-fit-in-our-financial-plan-anymore expenses came off—cable, magazine subscriptions, highlights for my hair, trips to most anywhere, new throw pillows, and other nonessential items.

Then we got to the place where we knew it would hurt. In order to prioritize our emergency fund savings and our monthly expenses, we had to figure out how to live our life on significantly less money. Throughout the conversations Marco and I had, I often heard the voice of a former co-worker in my mind. She and her husband had both been laid off in the economic downturn that started in the year 2000. When my company hired her, she was amazed that her family had made it through. They had not lost their home, but they had used up most of their savings just trying to make ends meet. Poignantly, she commented that she never knew she could live without paper towels until it was required of her.

I’d think of her and her dishrags that replaced paper towels. When she and her husband were forced to reduce expenses to a bare minimum, they did it. If she could do it, then Marco and I could do it too.

We talked through our plans, wants, and needs for the months ahead and laid out numbers that would move us toward that future without requiring us to go into debt. But like anything, a plan is useless if you don’t walk it out. Again, we needed to find a way to actually save the money that we’d dedicated in our spending plan for non-routine expenses.

We followed a similar three-step process like we’d done for our emergency fund.

1. We opened up a new bank account at a different bank

I would have been fooling myself to think that I could build a nest egg of any sort in a savings account attached to my checking account. I’d tried it dozens of times and failed every single one. I could not trust myself; therefore, I needed to create some distance between me and my money. We opened a new checking account in a different bank than the institution where we had our primary checking account. Yes, this is our third bank account, but this is not an everyday account; this new account’s sole purpose is to pay for our non-routine expenses.

2. We scheduled an autotransfer of the lump-sum total of our non-routine expenses once per month

To force ourselves to set aside money for our non-routine expenses, we had to automate the process. We completed the paperwork to establish an ACH transfer (like a direct deposit) from our primary checking account into our secondary checking account once per month. The deposit was a lump-sum total of what we figured out were our non-routine expenses.

We treated this monthly payment like a bill. It could not be stopped or reversed on impulse, the way online transfers can be stopped with the push of a button. The only way to end the ACH transfer was for us to complete another form at a branch of the primary bank a few days before the transfer would happen.

Although we made a lump-sum monthly deposit into this account, we didn’t think of it as one large slush fund. The deposit had money earmarked for various categories. We kept an Excel worksheet updated with deposits and withdrawals by category. That meant we could have money in the overall checking account but not have any earmarked for new clothes. Our choices then were to go without new clothes that month, find a legal way to get free clothes, or borrow money from another account with a repayment plan.

3. We made it somewhat painful to get the money out

When we talked about saving money for these non-routine expenses, both Marco and I could foresee a problem. We could imagine ourselves justifying the things we wanted and reaching for these funds to cover our impulses and whims. We needed to protect ourselves against our own impulsivity.

As a result, we chose a small credit union with a limited number of branches, a limited number of ATM machines, and limited hours. Our plan for this savings account for non-routine expenses was to decide in advance what we might need, figure out how much it would cost, and physically go to the bank to get the money for it. We skipped getting debit cards but did allow ourselves old-fashioned ATM cards, since the branch had such limited hours.

Results

Six years ago we started managing our money to account for the full range of expenses in life. The day we started this we were deeply in debt. But day after day, month after month, our savings balances grew and our debt load decreased.

No rich uncle has died and no bags of money have fallen from heaven over the years. Yet since we started living by a spending plan and an associated savings plan, we’ve done all these things in six years without having borrowed a dime:

Before you dismiss this list as impossible for you because you think we must have some sky-high income, let me correct you. We don’t. We have accomplished all these things without debt because we have planned and saved for them in advance.

No Yo-Yo Budgeting

I began this chapter by comparing a budget to a diet. If we look more closely at that comparison, we can see even more ways in which these things are similar. Just like when you’re choosing an eating and exercise plan, you want to choose a spending plan that you’ll stick with over time rather than one you’ll try for a few weeks and then give up on. You want one that is flexible enough to work around numerous changes in circumstances. And you want one, first and foremost, that works.

Diets with long-term results, such as Weight Watchers, focus more on what you can eat than on what you can’t. It’s not a matter of figuring out what you won’t be allowed to have anymore in your life. It’s a matter of making the very most of what you do have.