Now there’s a better and more effective way. By combining the magic of RSS feeds (don’t worry, I’ll explain) with your favorite shopping sites, you can now have your own virtual shopping servant that will happily and gladly inform you of the exact items you’re looking for at the best prices. You can even give your servant a name if you please (Reginald the Shopping Servant, RSS).

Let me give you an example. My wife and I are starting our holiday shopping early and want to get our 2 year old some choice items. In his case, whether the item is new or not doesn’t matter. Two of the items we’d like to get are matchbox cars and a Thomas the Tank train. When we search on Craigslist or eBay, we find these toys at great prices. But by the time we do the search, the items have usually been posted for a while and are already taken – especially the REALLY great deals. Instead of doing it the traditional way, we created a few custom RSS feeds. Now whenever a new post appears on Craigslist with the keyword “matchbox” in it, our happy servant delivers the good news and let’s us know instantly. BANG, we’re on the scene picking up the hottest deals in town…and at a discount.

You can use this approach to shop for new items as well. There are a number of sites that let you subscribe to RSS feeds for Amazon and Yahoo Shopping. Better yet, some sites allow you to create a single feed that tracks multiple shopping sites at once.

A great way to fill up the tree without breaking the bank

You may not like the idea of giving used toys. But if you were to buy only the newest, most expensive toys, you could easily go over your Christmas budget or go into debt. In many instances kids (or even adults) won’t care if the items are used as long as they work. My two-year-old could care less. A sword with a small scratch on it is still a sword. But even if your family members do care, by combining new and used gifts you can get one or two newer items, but still fill up that empty space under the tree with quality used gifts at bargain basement prices.

Ready to get started? Let’s jump right in.

What is an RSS Feed?

RSS (Rich Site Summary or Really Simple Syndication) is a technology that notifies you whenever information on a website is updated via an RSS Reader (sometimes referred to as an aggregator). An RSS Reader is similar to an email inbox. There you can see all the new content of websites that you “subscribe” to. It’s like an email inbox–people send you messages and you log in and check your email. Similarly, with RSS, it’s like a site sends you notification when it has been updated.

RSS (Rich Site Summary or Really Simple Syndication) is a technology that allows content from multiple websites to be combined in one place. The Google Reader Blog has a useful video comparing RSS Readers to email. They explain that you wouldn’t individually go to Larry, Cindy, and Fred to get email for you; instead it all comes to your inbox. Similarly, with RSS technology you don’t have to go to individual websites for new content. Instead, you subscribe to “RSS Feeds” which automatically deliver new content to your RSS Reader–just like an email inbox for the web. You only have to check one source. In the case of online shopping, RSS Readers allow you to see the newest updates from Craigslist, eBay, or other shopping sites, all in one place.

Have you ever seen one these images on a website?



All they mean is that an RSS feed is available for that site. In fact, GettingFinancesDone has an RSS feed (see the left-hand navigation). The images reading “bloglines,” “MyMSN,” and “Google Reader” are just links that allow you to subscribe to a feed using that specific RSS Reader (again, I’ll explain).

How to use RSS to search for products

Enough technical stuff. Let’s get our hands dirty and get you using RSS as quickly as possible. We’re going to set up your first feed. Just follow the steps below:

1. Sign up for a free account at bloglines.com. You only need an email address to sign up. Login to your account and you should see something like this:

   

2. Go to your favorite shopping site. We’ll use craigslist for this example

.

3. Select your region (this step is unique to Craigslist).
4. Enter your search term. In this case, let’s look for matchbox cars for my son. Choosing the right search terms can be an art. See the “Search Tips” section below for hints on creating effective searches.
5. Now here’s where the magic happens. See the “RSS” hidden on the bottom right of the screen? Click that.

   

6. Depending on your browser, when you click the RSS link, you will either see a summary of the feed’s content or a bunch of gobbledy-gook (it’s actually xml). Regardless of what the page shows, you can just ignore it (if you really want to see what the gobbledy-good looks like, see the screen shot in the next step).
7. Now highlight and copy (ctrl-C, or right click and select “copy”) the web address (URL).



8. Login to your RSS Reader (Bloglines in this example) and paste the web address (URL) into the search box in the upper right hand corner.



9. Select “Subscribe to URL” in the drop down menu and click the blue arrow.



10. Bloglines will show you a screen with options concerning how you want the feed set up. You can designate a folder for the feed (you can also set up folders and move feeds around later). I usually leave all the settings untouched except for the “Display Preferences” which I set to “Complete Entries.” This will allow you to read the full entry in Bloglines as opposed to just seeing an excerpt. You can also choose if you want other people to be able to see your feeds or not. Click “continue.”

That’s it! You’ve just set up your first feed. Now whenever information is updated for that search term it will show up in your RSS Reader without you doing ANYTHING.

Now simply repeat the process for each search term you want to keep tabs on. You can create feeds for your entire holiday shopping list if you want. Every time a feed is updated, it will show on the left hand side of the screen in bold. After you read a feed, it becomes un-bolded. In the screen shot below you can see there are 6 new results for my “matchbox” search.

Other shopping sites with RSS feeds

Anytime you see “RSS” or one of the RSS images, that means you can subscribe to a feed. Now let’s look at some other shopping sites that offer RSS feeds and how they work.

• eBay

You’d think with a technology as useful as RSS, eBay wouldn’t try to hide it. On the search results page, you have to scroll all the way down to the bottom of the page to find the small RSS button.




• Spendfish

Spendfish.com has a number of preset feeds like “Deal of the day,” “Hot Deals,” and “Top Savings.” But even better, it has an Amazon.com feed builder that allows you to build a feed based on category, minimum and maximum price, minimum discount, popularity, and keyword. Are you drooling yet? You can zero in on just what you want.

• Baebo

Baebo allows you to search eBay, Amazon, and Yahoo Shopping all at once. And you can subscribe to RSS feeds for specific searches or customer reviews. I had to refine my matchbox search a little by clicking on a category before I subscribed to the feed (see screenshot).





• Yahoo! Shopping

Yahoo Shopping won’t let you subscribe to an RSS feed for a specific search term. Instead they have preset RSS feeds for a variety of categories including Most Popular Searches, Most Popular Products, and New Products.

• Clipfire

Clipfire.com is a unique take on social shopping. It searches across multiple shopping sites and gives priority to items that have been “clipped” by other users. The list of sites it searches looks quite long and includes both big players like Amazon as well as lesser known stores.

• StealDeals.net

Stealsdeals.net lists some of the best offers around from a variety of stores like Target, Borders, Circuit City, and Old Navy. With stealdeals.net you just subscribe to their feed of new deals rather than a specific search term. They tend to be a little technology heavy but you can still find great deals on books, clothing, furniture, etc. Their RSS link is little hard to see. It’s there under the tabs in the header.

• Techdeals.net

Techdeals.net is similar to stealdeals.net but very technology heavy. Great if you’re looking for computer gear or electronics.

About RSS Readers

Web-based Readers

Web-based RSS Readers allow you to login using any web browser. Most Readers I’ve seen are web-based. The biggest advantage of web-based Readers is you can access your feeds from any internet-enabled computer.

Software-based Readers

Software-based readers reside on your computer so you can only access your feeds from that computer. The advantage of software-based readers is speed and flexibility. They are often more highly configurable and have advanced features.

Which Reader should I use?

In my opinion the best free readers are Bloglines.com (web-based) and SharpReader (software-based). They both have plenty of features to help you manage your feeds. There are several other RSS readers available. In fact, many are integrated into tools you already use. Yahoo has an RSS Reader integrated into its email service. Firefox has an RSS Reader built into its web browser (as does Internet Explorer 7). Almost all the Readers are free so it’s worth experimenting around until you find one that fits you best. Some of the features that vary between Readers include:

• How frequently feeds are updated
• How you can be notified of new feeds
• User interface
• Options in managing feeds

If you don’t feel like experimenting, I’d stick with Bloglines. In addition to basic RSS Reader features, they have a notifier that you can download to your computer and will show you in Windows task bar (down in the bottom right-hand corner of your computer screen) when a feed has been updated. If you work at the computer for a large portion of your day, this informs you almost up to the minute when a new product is posted. The notifier will also allow you to set how frequently feeds are updated.

Exporting/Importing Feeds via OPML

If you want to try different Readers, it’s easy to export and import your feeds from one reader to the next so you don’t have to create them from scratch every time. Any Reader worth its salt will allow you to do so. The exported file will have an “.OPML” extension. You can also share feeds with others by giving them your OPML file.

List of Readers

Here’s a list of readers that is by no means comprehensive. You can find many more by doing a Google search for “RSS Reader.”

• Bloglines.com
• SharpReader
• Google Reader
• My Yahoo – Not Recommended. It doesn’t allow you to track which feeds you have and haven’t read.
• Yahoo Mail
• My MSN
• Firefox Live Bookmarks – When you’re on a site with a feed, you’ll see a feed icon in the url field.

Other uses for RSS

Do you visit the same handful of websites on a regular basis? Chances are most of them have RSS feeds. Using RSS makes it very quick and easy to check up on your favorite websites. RSS feeds are most commonly used for news sites and blogs, but as you can see there are unlimited possibilities for how they can be used.

Search Tips

Here are a few tips to help you create effective shopping feeds.

• Try to use unique terms for the product. If I’m searching for a Thomas the Tank train, the term “train” will pull up a lot of unrelated results. The term “Thomas” is a little more unique (although it still pulled up a lot of Thomas Kinkade results).
• For sites like Craigslist and eBay, you may want to use several terms for the same item. Again using the Thomas example I might set up feeds for “Thomas,” “Train,” “Thomas the Tank,” etc. You never know how someone will post an item or what description they’ll use.
• Use quotes for phrases. If I search for “Thomas the tank” using quotes, I will only get results when that exact phrase shows up. I’ll avoid results for Thomas Kinkade or water tanks.
• Use lots of trial and error. I would err on the side of creating more feeds up front rather than less. Then pay attention to which feeds produce particularly good or bad results. Delete the ones that don’t produce relevant results and keep the producing ones.

Related Links

• This article from lifehacker.com compares Bloglines to Google Reader. From Bloglines to Google Reader
• This article from lifehacker.com compares the RSS Readers built into Firefox 2.0 and Internet Explorer 7. IE7 still handles feeds better than Firefox 2.0
• This article from the “Back in Skinny Jeans” blog is a nice overview of RSS feeds. “How to Explain RSS the Oprah way”
• If you want more Craigslist goodness, check out this “Craigslist for Power Users” article on lifehacker.com

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Nevblog.com

This is another personal blog that discloses net worth. He’s a young entreprenuer.

NetworthIQ.com

This is a great site showing the net worth of individuals who register. You can search by age, income, occupation, education, and state. The one thing it doesn’t have is the ability to see averages. Instead, you kind of have to guesstimate as to how you compare.

All Things Financial Blog

Fortunately, even though NetworthIQ doesn’t let you see averages, I read this post from All Things Financial Blog containing statistics on average net worth based on age. From my guesstimate on NetworthIQ, it looks like the actual average net worth figures are quite a bit lower over all than what was posted on NetworthIQ. I’m sure people are more inclined to register with NetworthIQ and post their net worth if they’re proud of it. I woudl imagine it skews high because of this.

I enjoyed looking at these stats and comparing them to my net worth. I’m above the statistical average but comparing to NetworthIQ, I seem to be about on track with the others that posted if not on the high end.

I’ve been struck again with how constructive it is to compare net worth. I don’t think you should get overly obsessed with it. I also realize that it could be a somewhat depressing activity if you have a negative net worth. But it does produce some positive motivation for me. I’ve never seen people’s net worth so transparently and it’s a great way to make those otherwise impossible comparisons.

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Becoming a black belt and having a “mind like water” in your personal finances is very similar. It means you can take whatever is thrown at you without knocking your finances out of control. You can respond to any situation with perfect balance. Unexpected events or changes in your finances, good or bad, can be handled with optimum efficiency, and little or no stress. It means you can direct the flow of money where you need it almost effortlessly.

In an effort to help people gauge where they are in their personal finance development, I’ve defined what people at the various “belts” might look like. Where are you?

White Belt

You’ve recognized there is a problem with your finances and have committed to taking control. Recognition that there’s problem may come as a nagging doubt that you’re not meeting all your financial goals or a harsh reality check as you face mounting debt. You have a lot of stress concerning finances (even if you’re living within your means). You tend to fight with your spouse every time you discuss financial matters. You recognize your spending isn’t in line with your true values. You have no idea where all the money goes from month to month. You may be living paycheck to paycheck. If you saved $5 on your phone bill, it would just disappear somewhere but you don’t know where. Your idea of an emergency fund is a credit card or Home Equity Line of Credit. You frequently pay late fees on your bills and unnecessary bank fees. Net worth? What’s that?

Despite your lack of financial control, you have a strong resolve to take action even though the thought of facing the “deep mess” of your finances seems overwhelming. You and your spouse have agreed to work together. In an effort to get your spending under control, you’ve started using cash for your “out-of-control” budget categories. You’ve stopped using credit cards somewhat reluctantly and possibly out of the sheer pain of your dire financial straights. Despite some complaining, your family has agreed to use cash as well. You’ve taken initial steps to figure out what your basic monthly income and expenses are and have tried budgeting for at least one month even though it doesn’t match reality yet.

Most importantly, you’re no longer willing to BE IN DEBT!

You’re no longer willing to constantly WORRY ABOUT MONEY!

You’re no longer willing to FIGHT ABOUT MONEY!

You’re no longer willing to PAY LATE FEES!

You’re committed to TAKING RESPONSIBILITY FOR YOUR FINANCES!

You’re committed to WORKING THROUGH FINANCIAL ISSUES TOGETHER WITH YOUR SPOUSE!

White belts come in many shapes and sizes. Of course, those steeped in debt and on the verge of bankruptcy can be white belts, but so can those who are living within their means (see below). Being a white belt means you don’t have total control over where your money goes. Your spending doesn’t reflect your true values and is not conscious. The white belt is about recognition and commitment. You’ve recognized a need to change and are committed to doing what it takes to change.

Green Belt

You’re well under way implementing your financial-management plan. You’ve budgeted for at least 3 months in a row and have worked many of the kinks out. Your budget actually reflects reality.

You meet with your spouse about every two weeks to keep things on track. You often have to implement the 30-minute rule and meet several days in a row to prevent total melt-downs.

You’ve taken all credit cards out of your wallet and are using cash for all of your “in-person” spending. As a result, for the first time you feel like you have control over your spending. You’ve even started developing your own unique ways of managing your cash and have a tendency to give spontaneous testimonials about the virtues of cash whenever someone acknowledges your use of a cash envelope.

You’re well under way saving for a short-term emergency fund. You may not have it fully funded yet but you already notice feeling much less stressed having at least something in place. For the first time in your life, you may have even experienced an emergency and had the money to pay for it. You have created an initial net worth statement and have a general idea about your overall financial status.

If you saved $5 on your phone bill, you could probably redirect it rather than letting it disappear. You no longer pay late fees or bank fees. If necessary, you’ve made major changes in your lifestyle to ensure you can live well within your means.

Brown Belt

You’ve been on a zero-based budget for over 6 months and things are really humming. You may have occasional refinements, but things are mostly on cruise control. You’re able to manage your finances on one meeting a month and are able to get through most meetings without any arguments.

You’ve gone through at least one set of envelopes. You find that you’re keeping the cash envelopes the bank gives you when you cash a check or make a withdrawal because they are a better size than regular envelopes.

You’re friends have started noticing that you pay cash all the time and have asked you about it. You find yourself preaching the cash gospel and sharing your success whenever you can.

You have a fully-funded short-term emergency fund and have started reducing consumer debt or increasing retirement savings. You have a strong sense of control over your finances and can see significant improvement every time you refresh your net worth report (which you do at least once a quarter). You and your spouse have reconciled your financial differences and have a new-found sense of unity when it comes to finances. You’ve created a list of rules concerning what you both consider to be an emergency as well as what you want to do with any unexpected windfall money. By making these decisions ahead of time while you’re calm, you avoid big arguments when these events occur.

Black Belt

You laugh in the face of emergencies (mua-ha-ha) and can easily and confidently deal with anything thrown at you. Seriously, for all practical purposes financial emergencies don’t really exist for you any more. If you save $5 on a phone bill, you’re financial system allows you to know about it and easily redirect it exactly where you want. You have complete financial control over every dollar.

You no longer worry about finances. Instead of worrying about how to pay the bills on time, you think about what investments to make or which debt to pay off next. You’re amazed and shocked that people even pay late fees (you obviously are having a bout of selective amnesia). You are aggressively on track to pay off all consumer debt and/or save for retirement. In fact, sometimes you find it hard to spend extra funds because you’re so excited to become debt-free that you want to reduce your debt instead.

You finally feel like where you spend your money is a reflection of your true values. You and your spouse see eye-to-eye concerning finances. You only have major financial discussions when your financial situation changes dramatically.

You not only calculate your net worth quarterly, but also have calculated when you’ll become financially independent.

You kind of wish you’d get fired so you could find a job you really like (you have a full emergency fund and could get by for 3 to 6 months without any income). You only have to spend about 30 minutes a month on average managing your finances. You’ve cut up all your credit cards because you just don’t need or want them anymore.

Your belt level isn’t about debt, savings, or your net worth.

Some of you may have noticed that my description of the belts didn’t include savings percentages or require you to be debt-free. Your belt level isn’t about debt, savings, or your net worth. It’s about your ability to control your money, ensuring that each dollar is directed where you want. I’m sure I’ll get a lot of flack for saying this. Of course, savings and debt elimination are cornerstones of a solid financial foundation. But to enable you to save and pay off debt, you first have to get a handle on your inflows and outflows. As you gain greater levels of financial control, you can easily reach your savings and debt-reduction goals at an ever-accelerated rate.

The good news is, you can become a financial black belt even if you still have debt or haven’t reached your long-term goals. Of course, if you are a black belt, it won’t be for long before you do. As you progress in your career and get raises, or as you receive windfalls, you will be able to direct those extra funds with great focus and power to eliminate debt and reach your long-term goals. That’s the power of a black belt.

Take your finances to an “11″

I can’t avoid referencing this segment from This Is Spinal Tap. If you haven’t seen it, you should take a look.

I know many people who live within their means, pay off their credit card bill every month, and think they have arrived in terms of financial management. But the fact is, you can do these things and still be a financial white belt. I know this for a fact because I’ve been there.

There was a time when our income greatly exceeded our expenses. We saved ten percent and gave to our church. We also lived large and bought just about anything we wanted and were still living within our means. For the most part, we just accumulated a bunch of “stuff” and made a lot of emotional, at-the-register purchases. As we look back we kick ourselves for not using that money in a more conscious way. Had we been financial black belts, we could have greatly accelerated our journey to financial independence. Today, even though we have downgraded to a single income and increased our expenses (mortgage, child), we are doing more with what we have now than we did with two incomes, no children, and low living expenses. As a result we have been able to reach financial goals with tremendous speed and ease.

I’m not saying you have to choose between having fun with your money and saving it for later. As a black belt, you can set aside funds for frivolous spending and still aggressively meet your financial goals. The key is to spend consciously, making decisions as they relate to your values and your finances as a whole. If you plan wisely, you can have the best of both worlds.

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Q: what do you think about not spending anything on credit cards? everyone else is in trouble so why not use cash only!”

For the past few weeks I couldn’t get this statement off my mind. It’s one thing to have a strong position . It’s quite another to insult those who follow a perfectly legitimate and arguably superior system of financial management.

To resolve this issue, or at least let the blog-reading community decide for themselves, I challenge Ramit to a good-spirited showdown: Credit Cards vs. Cash. Ramit can present the credit-card arguments and I’ll present the cash/debit arguments. The readers on each side can also chime in. I read a similar showdown about productivity a while back and thought it was useful.

Please leave a comment and let us know what questions or views do you have about credit cards vs. cash? What questions would you want to see addressed if a showdown takes place?

If Ramit accepts we’ll decide the terms, time, and format. Let’s have Ramit express his spirited feelings in a more articulate and useful way.

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“While I try my best to “get rich slowly” I have one huge issue: a husband. My husband likes to spend money. I’m referred to as the “Thrifty One Who Won’t Allow Me To Buy Stuff” and he’s referred to as “That Jerk Who Buys Stuff”. Do you have any advice for couples that need to have the other half put on a strict budget without making them feel like a child?”

I posted a comment at Get Rich Slowly in response, but I thought this excellent question deserved a more thorough answer, so here goes.

In my experience, there are 3 keys to making your personal finances work as a couple:

1. If you don’t already have an established method of managing finances, decide together to try an established, published system. Agree to stick to it exactly, unless you both decide to deviate.
2. Make the “personal” budget category a high-priority and fund it as generously as you can.
3. Don’t discuss finances for more than 30 minutes at a time or past 10:00 at night. If you don’t get through all the issues, meet again tomorrow.

1. If you don’t already have an established method of managing finances, decide together to try an established, published system. Agree to stick to it exactly, unless you both decide to deviate.

My wife and I have always lived within our means and have never had debt problems. However, we never saw eye-to-eye on the specifics of how to manage finances. I always felt like we were doing great; we were living within our means and saving 10% of our income for retirement. I figured we could spend the rest however we wanted. My wife always felt like the rest of our money was just wasting away on things that were useless. Even though we were doing better than a large portion of the population, she continued to experience significant anxiety and discontentment.

We both had read several personal finance books and tried to persuade the other to adopt the principles, but to no avail. I realize now that in many cases we weren’t rejecting the ideas, we were rejecting the messenger (the spouse).

Finally, after 10 years of marriage we faced a series of emergencies that forced us to either move from our home and dramatically reduce our standard of living or get a tight grip on our financial management. We figured we could barely make it through if we carefully managed every dollar.

In our desperation, we decided to attend Dave Ramsey’s Financial Peace University, a 3-month, weekly course in managing personal finances. Knowing that one of us had always rejected financial ideas proposed by the other, we agreed that we would follow the program to the letter, even though we didn’t know what it would consist of. If we BOTH disagreed (which we did at points) with the program, then we could alter it. But if only one of us disagreed, we would have to follow the program as the default.

This was one of the BEST decisions we’ve ever made in our personal finances. It allowed us to stop fighting each other. By having a completely objective third party telling us what to do, it was easier to accept the concepts. If we both felt there was a better way of doing things, we weren’t tied to Dave Ramsey’s system and could discuss how to alter it to better fit our needs. In short, it factored out personal grudges and judgments. We were left to judge the actual content and not the content-delivery system.

If you’ve always had a hard time agreeing upon a system, TRY THIS OUT! Don’t get stuck on a particular method. If you’re convinced a certain system will work and your spouse is not, find a different system you can both agree to try. Otherwise, your spouse will be resisting you rather than the content. It’s way more important to just get on the same page. Most main-stream systems for managing finances are theoretically sound. If you first get a system established, then you’ll at least have a base system from which you can discuss deviations.

2. Make the “personal” budget category a high-priority and fund it as generously as you can.

The “personal” budget category is a key to helping a budget work. Having personal money that you, and only you control makes budgeting as a couple tolerable. It’s easy to imagine why couples are financially miserable when they have to negotiate every single purchase with their spouse.

My “personal” funds are what I really care about the most. I don’t really care that much about groceries or household items or hair cuts. Sure, I care on a large scale – I don’t want to spend so much that we can’t meet our other goals. But I’m not that emotionally tied to them, so I can discuss them with my wife non-emotionally. On the other hand, if I had to negotiate every personal purchase – every book, CD, and soda – I’m sure we’d end up in endless arguments every month!

The fact is, many couples end up spending personal money anyway. They just hide it or manipulate the system. Why not explicitly budget “personal” funds and reap the benefits of knowing that money is yours.

Here are a few of guidelines for your “personal” budget category:

Separate checking accounts are ok for personal funds

It’s important to have at least a small financial slice to call your own. You can manage it however you want. If you don’t want to budget it, that’s ok. Waste it all if you want. Or save it for that new electronic gadget. While my wife and I keep separate checking accounts for our personal funds, we still have access to look at each others’ accounts if we want. But I don’t think I’ve looked once and don’t really care how she spends her funds.

Be as generous as you can afford

My wife and I budget $100 each for personal funds. Whenever I mention that to someone, they are always shocked the figure is so high. Well, you can afford to do that when you don’t have a car payment . Seriously, I give our personal fund a huge amount of credit for making our budget work and go smoothly. $100 is more than enough to feed my book-buying addiction. It’s also substantial enough that I could fairly quickly save for large purchases of several hundred or even a thousand dollars. There’s almost nothing I couldn’t afford over time, even that new HDTV I really want.

Personal funds can also act like a shock absorber, similar to the “cushion” budget category. Sometimes I want to eat out with my co-workers more than I have money allocated for. No problem, I just use personal funds. Similarly, I often buy my boy a toy now and again with personal funds. It’s easier than waiting and negotiating it with my wife. With such a generous personal fund I really don’t feel a loss from $5 or $10 every now and again.

One last benefit that can be a huge plus in marriage; having personal funds can make gift giving more meaningful. Before we started budgeting personal funds, gifts seemed less meaningful because all our funds were pooled and negotiated. Budget meetings were like, “Hey hun, I want to buy you some roses this month, so let’s budget $20.” How romantic. Now, when I give my wife spontaneous gifts, they are even more meaningful because I use my own money. I’m sacrificing my own interests for her sake. Let the romance begin.

Obviously, not everyone will be able to afford $100 each for a personal fund. We started out at $20 each and grew it from there as we could. Do the best you can. I recommend allocating at least $20 each for “personal.” That’s enough to buy one medium-size purchase like a book or CD a month. You certainly need to be meeting your debt reduction and savings goals first, but your “personal” and “cushion” categories should be close behind in priority.

Keep it even

This one’s easy. You always allocate the same amount to each person. I’ve never found a good or fair way to do it otherwise. This also goes for personal funds that we allocate from bonuses or other windfalls. If we get an unexpected windfall and I want that new road bike for $600, I should expect my wife to get $600 to spend how she wants as well. You can discuss variations to this rule if you like, but it should be the baseline assumption.

3. Don’t discuss finances for more than 30 minutes at a time or past 10:00 at night. If you don’t get through all the issues, meet again tomorrow

Doing finances as a couple is hard enough. Why complicate things by dragging a tired or distracted spouse through sometimes tedious and intense discussions. I’ve found that almost exactly after 30 minutes of discussing finances, I start to tire of the conversation. Suddenly I become contradictory and hard to work with.

Similarly, after 10:00, financial discussions should be prohibited. We’ve tried discussing finances after 10, or even 11pm and it wasn’t a pretty sight. I disagree with everything and am very grouchy. Every time it’s ended with contention and bad feelings.

These guidelines should be adjusted based on the personalities involved. Maybe both partners have a nicer demeanor and higher tolerance for talking about finances than me. Or maybe both are night owls. Great, expand the limits. On the other hand, you may need to shrink the allotted 30 minutes or move up the evening cut-off time if finances are a really tough issue. Just try to meet for a minimum of 15 minutes or it will be hard to make progress.

If you’re establishing a budget for the first time and have lots of issues to discuss, you may need to meet several nights in a row for 30 minutes to get through everything. That’s ok and should be expected. At least you’ll be able to do so in a civil manner.

Limiting the time spent discussing finances has a great benefit. You become much more focused on the issue at hand. Agendas for budget meetings are entirely appropriate and helpful. A time limit will help you get clarity on exactly what needs to be addressed. Rather than allowing yourselves to digress, you will stay on topic and have more efficient meetings. This can also have the side effect of making things less emotional which is a VERY good thing when talking about finances.

Conclusion

It’s no surprise money is the #2 cause of divorce. In our marriage, even when our financial situation has been good, it’s still been one of our major issues. Following these steps has helped us get to the point where finances are no longer a major issue. For the first time in tens years, we see eye-to-eye. Sure, we still have an occasional disagreement, but these steps have alleviated a huge amount of tension and stress in our relationship. I hope they can in yours too.

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Personal finances are such a private thing and are managed behind closed doors. People avoid in-depth discussions about how they manage their personal finances out of fear that they’ll be judged or will feel inadequate. Understandably, people don’t share specifics of their financial situation. But unfortunately, we don’t even talk in general terms. This creates a vacuum of real-life information and a lack of yard sticks to measure our progress against. Instead, all we see of others is the exterior. We see their new car, fancy house, and weekend toys. What we DON’T see is how they achieved such external glitz. Debt statistics indicate that for a large portion of “joneses,” their external wealth comes with some degree of debt. Even more hidden are the other financial goals the joneses have given up to achieve their external wealth.

I applaud those who have posted their net worth for others to see. It gives us a new standard to reach for. It’s a new, more productive and healthy way to keep up with the joneses; one based on savings and living within our means rather than external appearances regardless of the “internal” cost.

Links

• Blueprint for Financial Prosperity

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Starting a new personal finance or budgeting system can also be a deep mess. It will usually get worse before it gets better. But it WILL get better with consistent effort.

One of the painful things about getting control of your finances is that you inevitably find out you don’t have nearly as much income as you thought to pay for all your expenses.

My wife and I came to this stark realization and it wasn’t easy. We allocated all our income to our necessities and high-priority goals and realized we didn’t have any left for vacations, gifts, or other desires. Over time, as we’ve improved our financial management and increased our income, we’ve been able to meet some of these desires, but we still frequently have to face the stark reality of a limited income.

Some friends of ours also recently felt the “deep mess” of their finances. After going for years living on the edge of their means, they finally sat down and took a hard look at their finances. When they realized that they weren’t setting themselves up to win financially, it wasn’t pretty. All of a sudden they had to look really hard at their values and what expenses and goals were the most important. Heated discussions ensued as they worked out their differences concerning personal wants, lifestyle desires, and financial goals. It’s hard to realize that you can’t keep living the way you’re living. We are creatures of habit and comfort. But after working through their differences, they were able to make better decisions that set themselves up financially to win. In fact, they made some significant changes in their lifestyle including their housing situation.

For some people, facing the hard truth and uncovering the deep mess forces them to make major lifestyle decisions. The biggest single expense for most people is housing. If you are constantly squeezed financially and have already done your best to lower your spending, you probably are paying too much for housing and may need to downgrade. Especially recently with interest rates rising, those who got into a house with a variable-rate mortgage may not be able to meet the inflated monthly payments. They become “house poor,” barely able or unable to meet all their needs and none of their wants. Of course, it ends up being a values issue, but I personally would rather downgrade my housing to be able to have more of my other wants.

Dealing with finances is certainly not easy, especially as a couple. The good news is, once you take all of your finances “out of the closet,” at least you’ll know what you’re dealing with and can make intelligent decisions from there. It’s better to know the stark, sometimes harsh truth than to live in ignorance, hoping or inaccurately assuming you’re on track to meet your financial goals.

What have been your experiences uncovering and reorganizing the “deep mess” of your personal finances? How did it turn out?

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I was wondering if you could mention some practical ways of building a STEF; any advice would help, especially for those on irregular incomes.

There’s really no trick to building an STEF. It’s mostly a matter of focus and making it a priority. That being said, here are some ideas to help get you started.

1. Make it a priority – Once your fixed bills and necessities are funded in your budget, your next highest priority should be building your STEF. You’ll hear many financial advisors talk about paying yourself first. While they typically are referring to saving for retirement, saving for a STEF would also apply.

2. Use easily-divertible savings or debt reduction – One of the quickest ways to build your STEF is to temporarily divert money that you’re currently using for savings (retirement or college) and debt reduction. Often these amounts are relatively large and can accumulate quickly.

I DO NOT recommend diverting funds going into a 401K or that are hard to divert. At my work it would take paperwork to divert my 401K and then I would have to wait until the open enrollment period to start contributing again. In such cases, it’s better to leave it alone.

3. Sell “stuff” – Most people have hundreds, if not thousands of dollars of “stuff” laying around; Electronic gadgets that are no longer used, old mp3 players, sporting equipment, TVs, furniture, clothing, toys, computer games. Have a huge garage sale!!! Not only will this give you a nice jump start on your STEF, it will also lighten your load physically and even emotionally. This method can be so effective, some people can even save their whole STEF by selling stuff.

An alternative to a garage sale is selling things on ebay.com, half.com or craigslist.com. There are many great auction and second-hand sites that allow you to sell your stuff (if you know of a good one, leave a comment). My wife commonly buys clothes on ebay for our son in bundles. She just bought a bundle that cost about $1 an item and it came with about 20 items. Suddenly older clothes that seemed worthless can now make you a tidy sum.

4. Buy large-ticket items at a discount – I have a friend that almost always checks ebay first when he wants to buy something over $100. I wouldn’t necessarily recommend buying everything used. If you’re buying less-expensive items and only saving a dollar or two, it’s probably not worth the effort, at least for me personally. If you have the time and inclination, go for it. On items over $100, however, your savings can be significant. Buying used items on an auction or second-hand website, going to garage sales, or shopping at second-hand stores can yield tremendous savings on big-ticket items.

If you have kids, you can really take advantage of second-hand items. By visiting a quick round of garage sales on a weekend, you can find a ton of used toys, clothes, and kid furniture at a small fraction of the “new” price.

5. Go on a spending fast – I wouldn’t recommend doing this for the long term, but for a month or two you could consider a spending fast. Find all the variable expenses that you could significantly lower or eliminate for a short term. Take your lunch to work for a month, put your newspaper subscription on hold for a month, clip coupons, go to the library instead of the movies. Making small adjustments can add up with enough focus. A word of caution though; this suggestion alone won’t get you enough for a full STEF very quickly. You will also need to use one of the other methods. If anything, this suggestion puts you in the right frame of mind and helps your focus.

6. Cancel unnecessary billed “stuff” – Many people pay well over $100 a month on various subscriptions such as cable, internet, cell phones, publications, movie-rentals (netflix), etc. While you want to be careful about incurring large cancellation fees, see if you can cancel or eliminate those you don’t need or use. Or try to live without them for a month or two. I’ve never tried it, but I bet you could put your satellite or cable service on hold for a month or two. You might even get out and do something active (gasp)!

7. Get temporary employment – Get a newspaper or pizza delivery job for a month. Or better yet, find some freelance work involving something you enjoy. Doing so may even lead you down the path of becoming self-employed. If you work as a web developer, call some local small businesses and see if you can do website work for them. You’d be surprised at how open many businesses are open to hiring temporary contract work to solve small annoyances.

A good place to start is a friend or family member’s place of employment. You could simply have them ask a manager or executive if there are any small, annoying projects they would like to get done and out of the way. I can almost guarantee they will think of something if they think long enough. One of my co-workers has his wife do mailings for our company that go out periodically and she makes a nice side-profit.

One last suggestion on this topic. Find some skill or job you would like to have and see if you can get a job learning it. Have you always wanted to learn to do construction? Ask around and see if there’s a builder that will let you work with him on weekends. Most people don’t take time to be creative when it comes to making money. A little creativity can go a long way and make you stand out, while simultaneously helping you achieve your financial goals.

8. Reallocate funds – Look in all your accounts and allocate the current balances. Once you know how you’re going to use every dollar (make sure you allocate enough for paying bills) see if you can reallocate any of those funds as a STEF. Most people have an amorphous blob of money sitting in their accounts and don’t know exactly what it’s for. They just hope there’s enough to pay all the bills for the rest of the month. By allocating your balances, you may find there’s some money left to start your STEF. Some will find large sums of money they can use. In fact for those who live within their means but just don’t have a very good budgeting system, you might find you already have your full STEF just sitting around (wouldn’t that be nice?).

Make it your #1 personal finance goal – Accumulating a STEF should be your number one personal finance goal. Make a goal to accumulate a STEF within a specific time period and think about new and creative ways to meet that goal. There seems to be a law of the universe that once you totally dedicate yourself to achieving a goal, things often fall into place that you could never have anticipated. In addition to specifically taking action, many find that just by focusing on accumulating a STEF, they have unexpected windfalls that help them achieve their goal; a bonus at work, an unexpected tax refund, a generous gift.

How are you going to save your STEF? Leave a comment and let us know!

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Overview

• Use cash for out-of-control categories – Since you may not know when your next paycheck will be, it’s more important than ever to keep a tight grip on variable expenses that tend to get out-of-control.
• Build up a short-term emergency fund (STEF) equivilant to four weeks of expenses – A STEF will help smooth out the bumps inherent in an irregular income
• Determine the timing and priority of expenses ahead of time – Planning the order in which expenses must be paid and allocated will relieve a ton of stress. You’ll know exactly where your income needs to go before you even get it.
• Create a sample budget as a reality check and baseline – A sample budget helps to ensure you are not only living within your means but also achieving your high-level, long-term financial goals.
• Chunk your income and allocate it once or twice a month – By using your STEF as a shock-absorber for fluctuations in income frequency, you can almost budget like a good-old corporate employee. While you may not envy the corporate lifestyle, a steady paycheck sure makes budgeting easier. By allocating your income in chunks you can budget like a corporate employee while keeping a self-employed lifestyle.
• Create a “just-in-time” budget, allocating only what you need until the next paycheck – By allocating only what you need until your next paycheck, you’ll be able to squeeze every penny out of each inflow. Don’t allocate your full grocery budget for the month if you only need half of it until your next paycheck.

1. Use cash for out-of-control categories

My first recommendation is to use cash for variable expenses that tend to get out of control. This is crucial for living within your means. You’ll be amazed at how much you can reduce and control your spending just by following this principle. Using cash will give you complete control over the total amount you spend in a given category. When the cash is gone, it’s gone. This is especially important when you need to make the most of each monetary inflow because you may not know when your next inflow will be.

2. Build up a short-term emergency fund (STEF) equivilant to four weeks of expenses

The second step is to build up a short-term emergency fund equivilant to 4 weeks of expenses. This step alone could save you hundreds of dollars in late fees and will give your life a little more peace. It will also keep you from going into debt when an emergency hits. Most importantly for those with an irregular income, a STEF will allow you more flexibility in budgeting and will help compensate for lost income during periods of unemployment or under-employment. For detailed instructions on how to create and manage a STEF, see my previous post.

What if your income varys drastically?

If your income varys drastically, you may want to increase your STEF to 2 or even 3 months of expenses. The more drastic the fluctuations the more of an emergency fund you’ll need. The goal with the emergency cushion is to store up funds in times of plenty to compensate for the times of scarcity. Start with a STEF of 4 weeks and adjust up as needed. However, don’t adjust down. A STEF should be a minimum of 4 weeks of expenses.

3. Create a “Timing of Expenses” list

A “timing of expenses” list simply shows all your bills and when you have to pay them. This will help in our next step to prioritize the order in which expenses should be paid. It will also act as a reference to help ensure you pay your bills on time. To avoid late fees, make sure all your bills are on auto-pay. If auto-pay is not available, highlight the bill so you’ll always remember to pay it on time. As you write your bills down, note on each item if the payment day changes from month to month. There are three main scenarios:

• Paid on the same day each month (e.g. on the 15th of every month)
• Paid every x number of weeks (e.g. paid every other Tuesday)
• Paid every x number of days (e.g. paid every 30 days).

Once you create this list, updating it every month should only take a minute. After a few months you should be able to predict within a day or two when each expense will occur.

4. Create a “Priority of Expenses” list

Note: The “priority of expenses” list and the “timing of expenses” list can be combined depending on personal preference.

When living on an irregular income, it’s important to have clarity ahead of time about exactly where your income will go when you’re paid. Having a pre-determined plan combined with a STEF will help you sleep well at night and decrease the feelings of impending doom and uncertainty that you won’t be able to pay the bills. The “priority of expenses” list is the main tool in helping you decide ahead of time where your income will go. It is essentially a budget arranged chronologically and by importance, rather than by grouping similar categories. You will refer to this list every time you are paid in order to determine where the money goes.

First, list out all your bills in chronological order

List all your bills in chronological order. This will show you the hard landscape that your other categories have to fit around.

Next, list out the rest of your remaining budget categories in order of importance

For most, this list will probably start with necessities like grocery and clothing, followed by high-priority items like savings (STEF, retirement, long-term savings) and debt reduction. Of course, housing would also be considered a necessity but is probably listed under “bills”.

As an example, my list might be ordered like this:

• Bills (in order of date due)
• Mortgage – 12th
• Utilities – Every third wednesday
• Car payment – 23rd
• Allocations (in order of importance)
• Grocery
• Gas
• Cushion
• STEF (if needed)
• Retirement savings
• Medical
• Car maintenance
• Haircut

This is an extremely abreviated list but you get the picture. After the bills, the most important categories are first and the least important, last. In other words, I first need to make sure I eat and can pay for necessary travel. Then I want to make sure I pay myself (retirement savings) and replenish any STEF if needed. Expenses like medical and car maintenance may not be used every month but will accumulate over time. Therefore it usually won’t matter when in the month I assign those allocations. If I happen to be sick early in the month, I could either use medical funds already allocated in previous months or move that expense up on the list for just that month. Finally, I figure I can allocate my haircut last. If I have a bad month, I could go without one entirely.

Your “priority of expenses” list shouldn’t vary much, if at all, from month to month. Include all your budget categories, even if they don’t apply every month. If you have categories that don’t apply in a certain month (like birthdays), just skip it and move to the next category when allocating funds.

5. Create a sample budget as a reality check and baseline

Having an unpredictable income makes it hard to ensure you’re meeting all your financial obligations, not to mention your financial goals. Therefore, it’s important to create a sample budget based on averages to see if you can meet your obligations AND achieve your goals, despite fluctuating income. The sample budget will give you a baseline from which you will vary from month to month based on your actual income. You should update your sample budget whenever you have a significant change in overall income or expenses to ensure you’re still on track with your long-term financial goals.

First, calculate your average income over 6-12 months. Then calculate your typical monthly expenses including contributions to savings and other financial goals (e.g. debt reduction). Enter in budget amounts for a sample month including these income and expense figures.

If you can’t meet all your obligations AND financial goals on your current average income, you’re due for a change. Otherwise you will never get ahead and always be flirting with increased debt. You need to eliminate unecessary expenses or find additional income streams until you can meet all your obligations, necessities, AND savings goals on your average income. In some cases, a dramatic change in lifestyle may be in order.

6. Creating your actual budget – tips and tricks

Now it’s time to create your actual budget. All the steps until now have helped you create a solid set of reference materials to help you make budget decisions. In fact, you’ve basically made all the decisions about your budget already. Now you simply need to adjust the timing of payments and allocations based on when your income is available and how much there is.

Dealing with income

There are two ways to deal with income depending on how frequently you’re paid. If inflows are infrequent – roughly once or twice a month – treat each check individually and allocate it only for the time period until your next check. If inflows are frequent – roughly more than four times a month – group the inflows and allocate them once or twice a month.

Allocate infrequent inflows check by check

If you’re paid once or twice a month, it’s most efficient to allocate each check individually for the time period until your next check. Let’s look at an example. Let’s assume you are paid $2,000 on the first of the month and you anticipate you’ll be paid again in ten days. Refer to your “priority of expenses” list, determine which bills are due in the next ten days, and allocate the $2,000 accordingly. If the $2,000 doesn’t cover all your bills, or it doesn’t cover the bills and your necessities (e.g. food) for the next 10 days, use funds from your STEF and allocate it as needed. In this case you would designate the STEF amount used as “income” on your budget.

If the $2,000 covers all your bills and necessities for 10 days, continue on down your “priority of expenses” list allocating until the $2,000 runs out. Remember, after your necessities are allocated, replenishing your STEF should take top priority.

Allocate frequent inflows in chunks

If you recieve inflows more than four times a month, it’s easiest to allocate your income in chunks rather than each inflow individually. If you recieve your income in the form of checks, save them up and deposit them twice a month. If your income is automatically deposited into a bank account, just wait and allocate it all every two weeks. It’s easier to allocate a larger chunk of income twice a month than to constantly be allocating fragmented deposits. With your full STEF in place, you’ll be able to safely deal with income twice a month without worrying about negative bank account balances. The STEF acts as a shock absorber, allowing you to budget almost as though you had a regular income.

Split up single budget categories and allocate them in smaller pieces to create a “just-in-time” budget

Occaisionally you may want to split up a single category, allocating part of it with the current inflow and part with a later inflow. If income is tight, this type of optimization will help you squeeze every penny out of a paycheck. By doing so, you create a “just-in-time” budgeting system, allocating only what you need, when you need it.

For example, Let’s say you have an inflow of $2,000 at the beginning of the month. $1,000 may go to a housing payment, $200 to utilities, and $300 for a car payment leaving you with $500 to allocate. Even though you could fully fund a $300 grocery budget category with the remainder, doing so wouldn’t leave enough for other categories like gas, personal, and cushion. Instead, if you think your next inflow will be in two weeks, just allocate what you think you’ll spend in the next two weeks on each budget category. Instead of allocating the full $300 for grocery, you might be able to get by on $150, leaving you more money to allocate to your other important categories and making it less likely you’ll need to dip into your STEF.

Allocate bills/obligations first, then everything else

Every time you allocate money for a period, follow the “priority of expenses” list, first allocating your bills and obligations and then allocating the rest to your other expense categories according to priority. Your allocations may vary from month to month but having the “priority of expenses” list should make the process much easier.

What if I make more than average in a month?

If you make more than average in a month you should have already referred to your “priority of expenses” list and funded all your budget categories. With the remaining income you should fully replenish your STEF to prepare for future months when you recieve less than average income. Allocate the rest however you want.

What if I make less than average in a month?

First cover all the expenses you can from your allocated categories. Hopefully you will already have most of your expenses allocated already. If you run out of income to allocate, you can either take money from your STEF or skip the remaining categories if they are optional (like “haricut”). Fortunately, by the time you run out of income to allocate you should be near the end of your list where the categories are less important. Depending on how much your income varies, you may need to dip into the STEF quite a bit. It’s ok, that’s what the STEF is for. In the worst-case scenario, you should be able to cover a whole month of expenses on NO INCOME.

Conclusion

With a little planning and a methodical approach, budgeting on a self-employed or irregular income can be just as easy as budgeting on a regular income. By using the techniques above, you can take much of the variability out of your planning and know ahead of time exactly where your money should go.

Please let me know your comments and questions. Also let me know if there are points that need additional explanation or clarification. Do you have any additional tricks you’ve learned? Please leave a comment and let me know!

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Why most budgets don’t work

There are three major problems with a common budget:

1. They don’t reflect reality.
2. They don’t connect from one month to the next.
3. They don’t track the surplus money left over after all the categories are filled.

1. Most budgets don’t reflect reality

Budgeting is an exercise in being wrong. Every time you sit down and write out all your categories and how much you think you’re going to spend, you’ll be wrong. Being wrong month after month quickly can get discouraging and many people give up. What’s the point in trying to predict how much you’ll spend each month if you know you’ll be wrong.

So you overspent. Ok, at least you know you overspent and that could be helpful in planning next month but where did that overspent money come from? How are you going to reconcile the difference?

Unfortunately there’s no way around being wrong. There’s really no solution besides developing obsessive tendancies and even then…good luck. You must first accept that you’ll be wrong…every month. My wife and I have never been right even though we’ve had an established budget for years. Accept it.

Now I’m NOT saying you won’t start getting really close. In fact, in many categories you will be right. But so far I’ve never been 100% right. Don’t get discouraged if you’re just starting out because for the first few months you’ll be REALLY wrong. It took us about 3-4 months until we started getting into our budget groove.

One way to get your budget closer to reality is to allocate every dollar of your income. If you have money left over after addressing your needs, allocate it. I don’t care where; put it in a “fun” category or direct it towards meeting a financial goal. Don’t just say “oh, I have leftover money. I must be doing really good at budgeting.” If you don’t allocate everything you will end up wasting that which is left over and your budget will be broken from month to month.

Another way to close the reality gap is to be realistic about what your needs are. Things like shelter, clothing, and food are not optional. Many people have unrealistic expectations about what they will spend on these categories. I’m certainly an advocate of being thrifty and looking for good deals but you can only take it so far. If you refuse to face how much you really need to spend in these categories to survive without eating ramen every night, your budget will not be an effective tool.

Yet another way of helping your budget reflect reality is to make sure you have a way of dealing with the difference between your budget and actual spending. And that leads us into our second problem.

2. Most budgets don’t connect one month to the next

Quicken is a great example of why this problem exists. Quicken’s budgeting feature seems great. It allows you to easily enter budget amounts and will even pre-populate projected amounts for you. At the end of the month you can run a nice neat report telling you how much you over or under-spent. There’s just one problem. There are no tools for helping you deal with the difference (if there are, please let me know about them). You just enter in the next month’s budget amounts using the exact same process and projections as the month before. This makes for a nice, neat, pretty budget sheet but not a very useful one.

Many people think a budget is a static document. You fill out one template reflecting all your categories and how much you should spend each month and use the exact same sheet from month to month. That’s not a budget. It’s a dead document. A real budget is a living document or series of documents. It changes from month to month and should be a reflection of reality, not a theoretical exercise.

The fact is, your expenses change from month to month. Car registrations sneak up on you. Unexpected birthdays pop up. Unexpected expenses happen. And you can’t always just take your yearly expenses and divide by 12. If your car registration is coming up in 3 months and you haven’t saved anything for it, dividing by 12 will only leave you with a quarter of what you need to pay it. The unique expenses for every month need to be dealt with individually, not just from a nice clean Quicken projection.

For a budget to work, you must link one month’s budget to the next.

Is there too much money left over? Great. Where does it go? Should we pay off debt, save for retirement, save for a vacation, or just blow it and buy that new toy? I’m not against throwing caution to the wind as long as it’s done conciously and not by default.

Is there too little money to cover all our spending? Where did it come from? Will we be spending less on groceries, lowering our savings contribution, or going into more debt?

3. Most budgets don’t track the surplus money left over after all the categories are filled

For a budget to work, you must allocate ALL of your income to categories. As Dave Ramsey puts it, you must “spend your whole month on paper” before you spend it in real life. Other analogies that come to mind are Stephen Covey’s concept of the spiritual creation before the physical creation and David Allen’s idea of writing down EVERYTHING that is on your mind so you can get it out of your head and on paper.

Stephen Covey Comparison

Let’s look at the Covey analogy. Covey says that you should “begin with the end in mind.” One way of doing so is to create what you’re trying to achieve spiritually first, and then physically. A builder doesn’t build without a blue print. You should have a good idea of where you want to go either on paper or in your mind before you set out. Doing so makes your efforts more effective.

When it comes to finances, by writing ALL YOUR PLANNED SPENDING down on paper first (spiritual creation), your chances of actually following your plan significantly increase (physical creation). You’ll also be much more likely to achieve your larger financial goals (physical creation).

David Allen GTD Comparison

Now let’s consider David Allen’s idea of capturing everything on paper. He teaches that you should get anything and everything down on paper that occupies your mind. Doing so frees up “mental RAM” and allows you to spend your time more effectively rather than eating up endless mental cycles on the same issues, questions, and to-dos.

Similarly, by writing down how you are going to spend every dollar, you free yourself from mental worry and guilt and allow yourself to think about much more enjoyable things. Combine this with using cash for those categories that tend to be out of control and you can literally eliminate financial worry and anxiety. Every dollar you spend will be focused and controlled with very little effort.

No matter how you want to look at it, you need to allocate EVERY SINGLE DOLLAR ON PAPER for a budget to be of maximum effect. Why? Doing so forces you to really think about where you want your money to go and insures you use each dollar to it’s fullest. You’ll probably notice that when you don’t allocate every dollar, your left over dollars usually end up spending themselves. You end up with nothing to show for it, not even the concious realization that you had fun wasting that money.

Spend frivolously and feel good about it

By saying that you need to allocate every single dollar, I’m not saying you can’t have fun with your money or spend frivolously. Go ahead and conciously decide to have fun or even waste the leftover money. Allocate it as “fun” money to be spent however you want, whenever you want. By doing so you may enjoy spending that money even more. You’ll be able to do so with confidence and no guilt that you should be spending it elsewhere.

Decide before you’re in the heat of the moment

Like using cash, allocating all your funds allows you to make more concious decisions about where your money should go. Instead of waiting until you’re standing at the register, you can decide where your money will go while your looking at the big picture. Your decisions will be more rational and less emotional. You will also be able to direct your money towards meeting your larger, longer term goals. Instead of pittling money away, save for that new car or piece of furniture. Or for real financial peace, pay off debt.

Harness the power of focus

Allocating every dollar allows you to harness the power of focus. Take your plumbing, for example. Water by itself isn’t very useful in a puddle or lake. But give water the contraints and focus of a pipe and all of a sudden it can be used for your toilet or sink. Focus water through a hose and you can water your lawn or put out a fire. The constraint actually makes the water more powerful and useful. Similarly constraining your money by allocating every dollar makes your money more useful and powerful. Your ability to save and reach your goals will be increased.

See if you can identify with this personal example. Before we got our financial acts together, every time we recieved a bonus, raise, gift, or other unexpected income the money would just seem to slip through the cracks. Most people tend to expand their lifestyle to meet their income. In contrast, imagine if you were able to focus and direct every extra dollar. Every time you got a bonus, heck, every time you saved $5 on your phone bill, you would be able to easily redirect that money to another purpose. Your power and ability to aggressively meet your financial goals would increase dramatically. Without an effective budget, what is the point of trying to save a few dollars when they disappear anyway. But with an effective budget every dollar counts and is directed exactly where you want it.

Another benefit of allocating every dollar is that your budget will reflect reality more closely. If you have money left over after allocating your needs, that extra money almost always WILL be spent one way or another. If your budget doesn’t reflect that, it doesn’t reflect reality enough to be effective. To eliminate financial stress and a sense of being out of control once and for all you MUST KNOW where your money is being spent. You must TELL IT WHERE TO GO rather than letting it decide.

Using a Zero-Based Budget

A critical tool to help solve these basic budget blunders is the zero-based budget. Now if you’re expecting something flashy, you’ll be disappointed. A zero-based budget simply means that you allocate every dollar of your income so that your income minus your expenses equals “zero.” It’s as simple as that. No special forms or fancy software are necessary. Using a zero-based budget forces you to allocate every dollar and will help your budget more closely reflect reality.

Always track and DEAL WITH the difference between “budgeted” and “actual”

Make sure you follow up at the end of every month and write down what the difference is in each category between what you budgeted and what you actually spent. You then need to deal with that difference. Don’t just look at it and say “oh, there’s a difference. Good to know.” You must either reallocate the money on paper or carry the difference over to your next month’s budget.

For example, if you spent $5 more on your phone bill than you thought (a common occurance since the phone bill tends to be quite variable), you must spend $5 less in another category. One option is to see if you spent $5 less than you thought in another category that month. If so, simply adjust your allocations on paper. If there is no unspent money in your categories then you need to carry that $5 over to the next month and allocate $5 less in a category for your next month’s budget.

Implement a “grease” category

To deal with small instances of overspending, I always budget a “grease” (a.k.a. “blow,” “cushion,” “RealityBites”) category of about $100 that gives me a cushion in dealing with such instances. Since you know you’re going to be wrong (see above) you might as well plan for it. This account acts like the “grease” that keeps the financial gears turning. It picks up my slack. And if I have extra “grease” money left over at the end of the month, it directly gets realocated for something else the next month (often something fun as a little reward).

Putting it all together

I realize that I’ve skipped over many specifics. Implementing some of these concepts may seem a bit confusing at first. If so, no worries. I’ll be addressing specifics in future posts. For now, let me summarize the steps you can take today:

1. Implement a zero-based budget. Stay tuned for examples and templates.
2. Allocate every dollar of income to a category. When you subtract your budgeted expenses from your income, it should equal $0.
3. Be sure to budget a “grease” category to deal with minor inaccuracies.
4. Be realistic about how much you are going to spend on necessities. Most people under-allocate in the categories of food, clothing, and transportation.
5. Know that your spending won’t exactly match what you budgeted. If you are just starting, you may be WAY off. That’s ok. Do a little, learn a lot. It WILL get better. If you’re married, be easy on your spouse.
6. Calculate the difference between “budgeted” and “actual” spending and either adjust the current month’s allocations or deal with the difference in next month’s budget. I realize there are some BIG procedural holes and questions here that I’m skimming over for now. Stay tuned.

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