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Benefits of a Cash Budget – Part 1

Written by Sam on April 28, 2010 – 11:17 am -

In this article series of articles, I have recorded somewhat of a manifesto for using cash in your budget. You can listen to the whole thing in my podcast for week 4 of my 12 Weeks to Fiscal Fitness program, Using Cash In Your Budget.

In week 3 I talked in considerable detail about how to create a budget that works. In week 4, I’m going to talk about a tip that has been crucial in helping my wife and I stay within our budget. It has also helped us decrease the total time we spend on budgeting from month to month.

That’s right, I’m talking about using cash in your budget.

If you’ve been following this program faithfully, you’re already using cash in your budget. In week 1 I challenged you to use cash for your groceries and to choose to other problematic categories to use cash in. Now, I’ll finally go into the reasons for using cash.

Using cash in your budget is a tough topic. People shy away from it and toss it aside as being too much of a hassle. I want to challenge you to put those beliefs aside for a moment and let me make a case for using cash.

The fact is, I know how you feel. Using cash in our budget was one of the things I fought against most. We started using cash as part of Financial Peace University. It was one of those concepts I was ready to ignore and tried to convince my wife that we shouldn’t use cash. But she wanted to give it a shot and since I’d agreed to follow the program, I reluctantly went along.

I’m glad I did.

It quickly became clear how powerful using cash in your budget is. I was quickly converted and became a big advocate for using cash. In fact, I now consider it a requisite for having an effective budget. REALLY! I don’t know a single family who considers themselves successful at budgeting that doesn’t use cash. On the flip side, I know plenty of people who struggle with their budget or struggle staying within their spending limits and are always trying to figure out why. Yet, they resist using cash. They just won’t give it a try. Or they give it a half-hearted try and quickly give up.

How We Saved $6,000 In One Year By Using Cash

So what was the result of using cash for me and Emily? Not only did we stay within our budget consistently for the first time in our marriage, but we actually spent $6,000 less the year we started using cash with no perceived decrease in lifestyle. It was mind boggling that we saved so much. We saved an average of about $500 a month. We spent less on groceries, ate out much less, and no longer made impulse credit card purchases to the tune of hundreds of dollars a month. But I never would have thought those seemingly little things would make such a big difference in our savings.

The Advantages Of Using Cash

There are several advantages of using cash in your budget, but there are mainly two that I want to emphasize.

First, using cash makes it easy to control your spending and to keep within your budget.

Second, using cash will cut as much as 80% of the time spent reconciling your budgeting at the end of the month. While I’ve already showed you how to speed up your budgeting process, using cash is the thing that will have the greatest single impact in decreasing your budgeting time. My wife and I spend 30-60 minutes a month budgeting. THAT’S IT!

In this article I’ll be addressing the first advantage of using cash.

Before I jump in let me point out that I’m not saying you need to use cash for your WHOLE budget. In fact, there are some cases in which using cash doesn’t make sense. You’ll mainly want to use cash in those categories in which you tend to overspend. This may only be 2 or 3 categories.

Controlling Spending With Cash

The Power of Instant Feedback

Cash is the perfect instant feedback mechanism. It easy to keep from overspending because when the cash is gone, you know you’re done spending. It’s really as simple as that.

Alternative Ways to Track Your Spending

When using credit cards you are totally disconnected with how much you’ve spend and how much is left to spend. Some people try to track their spending by writing everything down in a notebook, but in my own personal experience and hearing experiences of others it’s very difficult to be consistent with a system like that. Inevitably you stop keeping track.

Even using debit cards to keep track of spending doesn’t work because you’d have to constantly check your account balances. And when you do check your account balance you’ll just see a lump sum in your account and won’t know how much you have to spend in a particular category.

A third option of keeping track of how much you have left to spend would be to update your personal finance software. YNAB is particularly good at showing you how much you have left to spend. But again, this would require updating the software daily. It’s also prone to errors if you update it daily because you might miss purchases that haven’t posted to your account yet or purchases your spouse has made that you don’t know about. Not to mention it would take a lot of time and effort to keep things updated on a daily basis.

So after eliminate all those possibilities, cash stands as the ultimate way to control your spending.

Lead vs. Lag Measures

Let me explain in another way why cash works so well. There’s a concept I learned about while working at a former company called lead and lag measures. Please bear with me because this is a somewhat geeky concept, but it illustrates an important point.

Lead and lag measures are simply things we can keep track of to help change our behavior or reach goals. A simple example of a measure would be weighing yourself if your trying to lose weight.

The key here is that Lead measures are much more effective in helping us change behavior than lag measures.

Let me explain the difference between the two.

A lag measure shows what has happened in the past, whereas a lead measure is predictive as to what will happen in the future. Let’s use football as an example. A lag measure in football is the score. The score shows you what has happened previously in the game, but really doesn’t predict what will happen the rest of the game.

In contrast, a lead measure might be first downs. If you want to score, rather than simply focusing on scoring, you can focus on first downs. The more first downs you get, the higher your probability of scoring. Therefore the number of first downs are going to be at least somewhat predictive of the future score. Now obviously there’s not a 1 to 1 correlation between first downs and scoring, but there is a strong correlation nonetheless.

So instead of focusing on just the score, you can break down your goals into more accomplishable steps and measures that will help you reach your goal.

Now there’s one other type of measure called a quick lag. A quick lag looks like a lead measure, but really isn’t. The best example of a quick lag weighing yourself if you’re trying to lose weight. Many people try to use this as a type of lead measure. They use this as the primary measure for losing weight. It seems like a lead measure because you get instant feedback. However, if you think about it your weight is just showing you the results of what happened in the past. It gives you no indication of what you’ll weight tomorrow or next week or next month.

So what would be a true lead measure in this case? Well, the number of calories you eat every day would be a good lead measure. The number of calories you eat WILL be a predictor of how much you’ll weigh in the future. This also points out one more thing: good lead measures need to be controllable. Some lead measures may predict future performance, but are hard to control. Counting calories is a good lead measure because it is very controllable in addition to being highly predictive of future results.

So let’s bring this back to personal finances. Most people using their credit card or bank statements as a measure for controlling their spending.

Is looking at your statement a lead or lag measure?

It’s definitely a lag measure because it shows you what has already happened. Plus it has absolutely no bearing on what will happen next month. By the time you look at your statement it’s already too late. You’ve already over or under spent and there’s no going back. This is actually about the worst way you can try to control your spending yet it’s the method most people use.

In contrast, taking cash out to use for a budget category is like the ultimate lead measure. It’s a perfect predictor of how much you’ll spend in that category this month. Of course that’s assuming you and your spouse are truly committed to using exclusively cash for that category. If you take out $400 for groceries, you won’t be able to spend any more once the money is gone. There’s no more accidental overspending. Using cash may not perfectly predict the exact amount of money you’ll spend because you may underspend, but hey, that’s a good problem to have.

The bottom line is: Cash is a great instant-feedback mechanism that allows you to see instantly how much you have left to spend. This leads us to another reason why cash helps us control our spending.

Re-calibrating Your Relationship With Money

Cash renews or re-calibrates your connection with money. Let me explain. The use of credit and even debit cards has really disconnected people from their money. It’s easy to overspend and go into debt with credit cards because it’s like play money. You don’t actually see the money leave. It’s so abstracted that you don’t FEEL the money leaving.

Cash restores this connection. When you use cash you can see instantly at anytime how much you have left to spend. As you spend cash you see and feel it leaving. You see your wallet, or budget envelope, get smaller. There’s a critical emotional piece to having this physical, visceral experience. Cash becomes something tangible and real. You get to experience that there is an end to money when it runs out. This has a big impact on how you spend money, even if you don’t notice it at first.

As you start using cash, you’ll begin to develop a type of intuition regarding spending. When you go to the grocery store and look at your remaining cash for the month, you’ll start to get in tune with how much that will buy. If your wallet it thin, figuratively or literally, you’ll know that you need to buy only essentials; it may be bread and milk and not much else. In contrast, if your wallet is thick, you’ll know you can be more liberal in buying additional items. Either way, it definitely will INFLUENCE YOUR DECISIONS and that’s something that rarely if ever happens when using a credit or debit card.

The Big Question

There’s one last reason why using cash helps to control spending. It help you ask what I call the BIG QUESTION and that is “where is this money coming from?” When using cash, it becomes clear very quickly that you can’t be too squishy in your spending. In fact, you can’t be squishy at all. If you spend money it has to come from one of your categories and/or cash envelopes. Once we started using cash Emily and I found ourselves asking each other quite frequently “where is this money coming from?” If the expense comes from a well-defined category and we have money left for that category, the answer is self-evident. However, if we need more groceries, for example, and the cash is gone, we’d have to decide what other category we were going to take it out of.

This simple pause in the decision-making process is responsible for Emily and I saving $6,000 the first year we started using cash. By making our spending conscious we often changed our behavior not out of self-deprivation, but out of common sense.

For us, the big question seems to come up most often when eating out. Are we going to use “date night” money, “grocery” money, or “personal” money? The fact is, we will sometimes use money out of all those categories for eating out, but we still have to ask the question. Sometimes, if we’re really tight and all those categories are empty, or we need the money for something else, we’ll decide not to eat out.

Some people may view this as overly strict or restricting. But asking the big questions creates the exact decision we should be making when we spend money. Spending money is ALWAYS a trade-off decision. If you spend money on one thing you simply can’t spend it on another. Using cash just makes this decision explicit. While that can come as a harsh reality for some, it is reality nonetheless.

Now I’m not saying using cash has to force you to live a life of self-imposed restriction. If you have more money to budget to various categories and you choose that you value those categories over others, by all means increase your cash categories to the point where you almost always have money left over. I really don’t care how much you allocate. The main point is to simply live within your means and to reach your important financial goals.

But for those who are on a tight budget, using cash and learning to ask “where is this coming from” will become the key to surviving and eventually thriving.

Well, hopefully I’ve convinced most of you that using cash in your budget is worth a shot. In the next post I’ll talk about the second main advantage of using cash in your budget…decreasing your budgeting time.


Posted in 12 Weeks to Fiscal Fitness, Budgeting, Cash | 1 Comment »

Using Cash In Your Budget – Week 4

Written by Sam on April 27, 2010 – 2:13 pm -

This week I’m going to talk about using cash in your budget. I was once a skeptic of using cash and didn’t want to leave the convenience of using credit cards. Now, I’m a huge proponent. Maybe that’s because we saved $6,000 the first year we started using cash. But there are other reasons as well that are detailed in this podcast.

Cash is so powerful because it will not only help you control your spending and stay within your budget, it will also help you decrease the amount of time you spent reconciling your budget at the end of the month. In fact, it’s probably the single biggest factor in decreasing the headache of reconciling your budget.

I’m going to be posting this content in a text format as well throughout the week so look for that if you’d like to read rather than listen.

 
icon for podpress  Week 4 - Using Cash In Your Budget: Play Now | Play in Popup | Download


Posted in 12 Weeks to Fiscal Fitness, Budgeting, Cash | 3 Comments »

How To Create Your First Working Budget With Excel Or Pen And Paper

Written by Sam on April 9, 2010 – 9:19 am -

This video shows how to create your first working budget with excel. If you want to use pen and paper I would recommend printing out a blank copy of my Working Budget Excel spreadsheet. You can get a free copy by subscribing to my newsletter on the right. You could also create your own spreadsheet if you know how to use Excel or another spreadsheet program.

The advantage of doing a budget exclusively in Excel is that it’s pretty straight forward and you only have to deal with a single software tool. The downside is that you have to calculate and enter all your expenses manually which not only takes a long time, but can result in mistakes. But if this approach works best for you, check out the screencast below.

Overall, I recommend using You Need A Budget (YNAB) software for your budget. Check out my YNAB review or my YNAB overview screencast for more information.


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How To Create Your First Working Budget With Quicken And Excel

Written by Sam on April 8, 2010 – 9:23 am -

To start off, if you haven’t viewed Emily’s screencast on using Quicken with your zero-based budget, you’ll want to do that first.

You can receive a copy of the Working Budget excel file shown in the screencasts below by subscribing to my newsletter on the right.

Step 1 – Set up your accounts

If you choose to use Quicken to keep track of your money, I’m going to assume you already use Quicken and know how to set up your accounts. If you don’t already use Quicken, I would recommend using You Need A Budget software. You can read my You Need A Budget Review or watch my screencast You Need A Budget Overview.

Step 1 is to simply set up your accounts in Quicken so do that first.

Step 2 – Allocate existing account balances

Allocate any existing account balances. There are three general ways to make your allocations.

  1. Funds are reserved for a specific purpose. If you already have a specific use in mind for the funds in your accounts, allocate them accordingly. For example, you may have some money reserved for a large purchase or vacation.
  2. Use funds for this month’s budget. If you’re starting your budget mid-month or are tight financially, you may need to use some or all of the money in your account for this month’s budget. If that’s the case start allocating the money according to the priorities you established in your Master Budget.
  3. Use the funds for next month’s budget. If funds are neither reserved for a specific purpose nor are needed for this month’s budget, put them in a “buffer” category and start building up a month’s worth of expenses so you don’t have to live from paycheck to paycheck. It will also will act as an insurance policy to ensure you don’t overdraw on your account

You’ll want to allocate funds in your Working Budget and within Quicken. Watch the screencasts below for more details.

Step 3 – Budget your income

As you receive your paychecks, enter them and allocate the total amount into your budget categories according to the priorities you established using your Master Budget. Allocate your income in both your Working Budget excel document and in Quicken. See the screencasts below.

Step 4 – Print your budget.

If you have a buffer of one full month’s worth of expenses and can budget the whole month at once, print the Working Budget once all the funds are allocated. If you are allocating paycheck to paycheck, print out your Working Budget each time a new paycheck is received and allocated. Put the print outs into your financial binder.

Step 5 – Entering expenses.

You don’t need to enter expenses into your Working Budget until the end of the month when you’re ready to reconcile your budget. You can, if needed, enter transactions throughout the month into Quicken. You should do this if you are very tight and need to keep tabs on your accounts to ensure you don’t overdraw.

Reconciling

In a couple of weeks I’ll detail how to reconcile your budget at the end of the month. Until then you don’t need to worry too much about entering transactions unless you are very tight financially and risk overdrawing your account.

Conclusion

That’s it you are now up and running on your first working budget using Quicken and Excel. If you want a copy of the Working Budget spreadsheet, just subscribe to the newsletter and you’ll be automatically emailed a link to it.


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Posted in 12 Weeks to Fiscal Fitness, Budgeting | No Comments »

Zero-based budgeting with Quicken

Written by Sam on April 8, 2010 – 9:21 am -

For years my wife and I had to make due with trying to make Quicken work using a zero-based budget. While Quicken simply isn’t made for zero-based budgeting, we did find a cool hack that lets us keep track of our money in a way very similar to a zero-based budget. It’s kind of like zero-based accounting.

Using this method combined with a zero-based budget spreadsheet, we were able to get the control we needed. In the screencast below, my wife Emily takes you through an overview of this hack and how it works.

For those ready to create their working budget, you need to watch this video first before you read about how to create your first working budget using Quicken and Excel


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Posted in 12 Weeks to Fiscal Fitness, Budgeting | 1 Comment »

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