My wife graciously volunteered to write this post and it’s her first post on GFD so be sure to give her extra praise and adoration!

It’s that time of year again. Rushing around, making last-minute decisions. I’m not talking about Christmas shopping. It’s the annual employee benefits festival—you come home with all sorts of insurance papers, medical, dental, life, and (my favorite) accidental death and dismemberment. It’s not enough that you still have Christmas shopping to do before you get ready for holiday traveling—you are supposed to find the time to make important financial decisions as well.

To help you on your way with minimal loss of holiday cheer, my husband has asked me to write a helpful guide to cafeteria savings plans. Even with the risk of making my debut on his site as “the cafeteria lady,” I have agreed.

How Cafeteria Plans (FSA) work

Cafeteria plans are a great thing. By using them you avoid paying taxes on medical expenses. At the beginning of the year, you determine how much you expect to pay in medical expenses for that year. Your employer deducts pre-tax money from each paycheck, and puts it into a cafeteria plan savings account. You pay for medical expenses up front, and then submit a reimbursement claim, which is paid out of your savings account.

For example, last year we put $750 into our cafeteria plan. His company deducted $31.25 from each paycheck, before taking out taxes. As we spent money on medical expenses, I collected the receipts and submitted them to the cafeteria plan company. Within a few days the reimbursement was direct deposited to our bank account.

How much can you save by participating in a Cafeteria Plan

The first question you may have—is it worth it? Well, I figure we saved at least 30% by using our cafeteria plan*, so this year it saved us $225. Perhaps it is not worth hounding your spouse for the Walgreen’s receipts for a couple hundred dollars. However, several years ago we knew I would be having major dental work that would not be covered by insurance. That year we set aside $5000 (the maximum amount allowed), and saved over $1500. Definitely worth it!

Other benefits of a Cafeteria Plan

Another benefit (depending on how your plan is set up) is that you can get reimbursed for expenses even if you have not yet paid that much into the savings account. For example, say in January we have made two payments into our plan, totaling $62, when I break my foot and rack up a $300 emergency room bill. I can be reimbursed for the full $300 immediately.

I have also found that for professional services, I never have to pay the bill out of pocket. My cafeteria plan will reimburse me with an EOB (explanation of benefits, that lovely, confusing non-bill that your insurance company sends you). So, when I had expensive dental work done, my dentist billed my insurance company. I took the EOB (which said they would not pay a red cent), submitted it to the cafeteria plan, and received my “reimbursement” within a few days. I used that money to pay the dentist.

How to estimate your medical expenses

Great! So you’ve decided that you want to use a cafeteria plan. The next question is how, in the midst of holiday madness, do you determine how much to save. This is important because any money you do not get reimbursed for is lost. So, if you plan on $750 in medical expenses, but only have $500 in real expenses throughout the year, you lose that $250—basically you lose your savings.

If you keep meticulous records, this step is easy. Look through your previous years’ medical expenses and see how much you spent—plan on saving that amount. Perhaps add any large expenses you know are coming your way (having a baby, that long-awaited hip-replacement).

For those who didn’t track every expense for the last several years, here are some guidelines:

1. Know what expenses qualify and identify which of those expenses you typically incur

I have been surprised to find that alternative healer fees, including acupuncture and hypnosis, are reimbursable. So are chiropractor visits, some over-the-counter medications, and weight-loss program fees (with a doctor’s note). Most plans will have a handy list of what expenses qualify. If not, you can refer to the IRS website or see the links at the end of the post.

2. Determine what you spent last year

Look at your last medical and dental EOB’s—many will show the total you have spent on medical visits/services throughout the year. This won’t include all your medical expenses, but it’s a start.

3. Calculate routine expenses

Eye exams, contacts, birth control pills, and any other prescriptions qualify for reimbursement. Also, those expecting a baby can plan on many well-baby visits in the first year (at 2 days, 2 weeks, 2 months, etc.), so multiply the number of visits by your co-pay.

4. Plan for non-routine expenses such as surgeries, babies, major dental work

It’s definitely worth calling your doctor’s or dentist’s office for a cost estimate. Ask to speak with the person who does the billing. I did this, and she told me how much my insurance company will allow for certain procedures. Then I looked at my plan benefits, and figured out that we will pay our deductible plus 20%. Now I have a really good ballpark figure for what we can expect to pay.

Add these figures up, and you’ve got an idea of how much you will probably spend in the next year. Now, start saving receipts, and start saving money!

Additional Resources

• WageWorks.com – Flexible Savings Account Savings calculator (I thought this was the most useful of the bunch)
• WageWorks.com – Qualifying Expenses Summary (an incredibly useful and thorough summary of expenses that qualify and don’t qualify)
• MyUHC.com – FSA expense calculator (click on “Calculate FSA Spending”)
• MyFlexResource.com – A very useful FSA FAQ (that’s a lot of TLAs, three-letter acronyms)
• Financial Planning Toolkit – Comparison tool (participating vs. not participating)
• Sentinel Benefits – Another comparison tool

*Savings of 7.65% FICA (Social Security), 7% State, and at least 15% in Federal taxes

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Unfortunately you can’t subscribe to specific search terms. But there is a main RSS feed and you can search on the site for specific items. Check it out!

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Greg over at StackBacks.com has a unique and GTD friendly way of managing cash involving envelopes, index cards, and paper clips. His method is a great way of divvying out your cash so you don’t spend it all at the beginning of the month, leaving you living like a pauper at the end of the month. It’s essentially a sort of cash tickler file (look under “Tools and techniques”).

Please let us know how you manage your cash!

Cash Allowance File

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Last week I mentioned in passing a great site called ShopLocal.com that allows you to see Sunday shopping circulars online. It’s almost a tradition for me to browse the shopping circulars every Sunday looking for deeply discounted items and rebate deals that allow you to save a lot of money. With a little patience, you can usually find the specific types of items your looking for. That is, as long as it’s not Black Friday.

ShopLocal.com makes it even easier to find deals in the Sunday circulars. It catalogs every item in every circular and makes them searchable online. When I’m look for a specific item, it’s much easier to just perform a search rather than sifting through the other 99% of the items that aren’t relevant.

When you perform a search be sure to notice there are two areas you can search: online and local. When you perform your initial search, you’ll see the online items. To see the local items, you need to click on “switch to local offers” in purple on the right side of the screen. Once you switch to view local offers, all subsequent searches will also be for local deals.

Power Browse the Circulars

Sometimes I’m not wanting maximum efficiency, but rather want to browse the circulars to find unexpected deals. With ShopLocal you can do that too! In fact, you can power browse. To view the actual circulars, click on “See all Circulars” in the left navigation. Once you select a circular there are two different ways to look at them. By default you will see a small picture of the circular with the individual items for sale listed on the right.

You can also view a larger version of the circular by clicking “Enlarge this page” (under the circular). When you roll your mouse over an item, a box shows with the description and pricing. To get more information you just click on the box and wallah! You can also save items to a list which is useful when I find several deals on the same item and want to compare later.

The site has several other features such as browsing by category or store. Give it a try next time your looking for a specific item or if you want to have an enhanced circular experience.

Feel free to share more of your favorite shopping sites. Also check out my list of online shopping websites that use RSS feeds.

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The best source for free software is SourceForge.net. SourceForge is a repository of open source programs. They have everything from photo-editing software, to games, to word processors, to mind-mapping software. Whenever I need additional software I always start my search here. Sometimes you have to be a little patient and try several programs to find the one that fits best, but the process can be fun.

If SourceForge doesn’t produce adequate results, I will also check the social bookmarking site del.icio.us. It searches the online bookmarks of thousands of people. I find it more effective than Google or Yahoo! when looking for specific software tools. If one exists, someone has usually found it already and bookmarked it.

By finding free software to substitute for high-priced software, you may be able to save literally hundreds of dollars. I find I rarely need to buy software anymore. You can find very effective replacements for almost any major program. Some are even compatible with the paid equivalent. Here’s a list of examples:

• Microsoft Office Suite: Open Office Suite
• Microsoft Word: Open Office Writer
• Microsoft Excel: Open Office Calc
• Microsoft PowerPoint: Open Office Impress
• Microsoft Visio: Open Office Draw (also does image manipulation and creates flash files)
• Microsoft Access: Open Office Base
• Adobe Photoshop: Gimp
• Adobe Illustrator: Inkscape.org
• Adobe Acrobat: CutePDF
• Mind Mapper: Freemind
• HTML/Webpage Editor (e.g. Dreamweaver or MS FrontPage): Nvu

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As I researched my post about holiday shopping using RSS feeds, I realized how convenient it would be to have a summarized list of all the shopping sites that offer RSS feeds. I also received some great suggestions for shopping sites I didn’t know about. In my previous post I failed to look at MSN shopping which offers RSS feeds for specific search terms and searches a large list of major retailers.

I decided to create a list of all the shopping sites I know of that offer RSS feeds. I’ve indicated whether the feeds are preset like “newest items” versus feeds that allow you to customize by search term. Feel free to bookmark this page and use it as your reference guide for holiday shopping. It’s everything you need right in one place.

I also had a commenter tell me about a nice software-based RSS reader called Snarfer that bridges the gap between web-based and software-based readers by allowing you to sync your feeds with Bloglines.com. I’ve tried it out and really like it. It may be my new RSS reader of choice.

Please post any sites I’ve missed in the comments section and I’ll add them to this list.

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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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In my last post, I covered why most budgets don’t work and how to fix them. One of the ways to make your budget work is to create a zero-based budget. Today’s post outlines how to create your first zero-based budget. Over the next few weeks I’ll be addressing various aspects of creating and managing a budget. Let’s start with the basics. Some of these steps may seem obvious or simplistic. But for those who just can’t seem to get a budget started, I hope to give you some step-by-step detail that will help make creating a budget easier.

What is a zero-based budget?

A zero-based budget is one where your total income minus your total expenses equals $0. In other words, it forces you to assign every dollar of income to an expense (or savings) category. As Dave Ramsey puts it, you’ll be “spending your month’s income on paper” before you spend it in real life.

Benefits of a zero-based budget

Using a zero-based budget and properly dealing with the difference from month to month will allow you to gain total control over every dollar you spend. If you get a bonus or spend less than you planned during the month, you can easily redirect that money where you really want it instead of letting it dissipate through unfocused spending.

A word about spreadsheets

I highly recommend using a spreadsheet to do your initial budget because it’s very easy to calculate amounts and rearrange the order of items. If you don’t have Excel, you can download the free Open Office CALC spreadsheet software or use a free online spreadsheet like Google Spreadsheets or NumSum.com. Simply using paper and pen is ok too. If you do, you may need to re-write it a couple of times and be sure to double check your calculations.

When first starting your budget I would NOT use the budgeting tools in Quicken, MS Money or other automated tools. You may be able to use those tools effectively once you have a solid hold on your budget, but for now it’s best to make your budget by yourself so you know every nook and cranny. That way you’ll be less likely to make errors due to not understanding how an automated tool is built. You will also be more likely to use a budget if you create it yourself. Once you have a high degree of confidence that your budget is working properly, feel free to experiment with pre-built tools and spreadsheets like pearbudget.com.

Preparation: Get out those statements

Before you get into the thick of things, you’ll want to do a little preparation by collecting the following:

• Pay stubs
• Records for other income such as bonuses, gifts, and tax returns
• Copies of your recurring bills
• If you track expenses in Quicken or MS Money, print out monthly reports of your expenses for the last few months
• If you use checks regularly, it may be useful to have your check register on hand

Agree to be civil

Now take a few deep breaths. If you are doing this with a spouse, agree to be civil. Ask yourself “how can I do this and enjoy it?” As you go through the initial steps of allocating, don’t nit-pick too much. If one person wants to budget funds for a category and the other disagrees, let them budget the funds and you can go back later and adjust once you know if you’re over and by how much.

If things tend to get heated, I also recommend setting a time limit for your budgeting. My wife and I tend to do well in chunks of about 30 minutes. Once we go over that, I start to get grouchy. It’s ok to do this a little at a time. If you schedule 30 minutes a night for several days, you should be able to get through everything.

Step #1: Write down all your sources of income for the month

Let’s get started. If you have a fixed paycheck once or twice a month, this step will be easy. Just write down how much you make every month. If your finances are really tight, you should do a budget for each paycheck to ensure you have the funds on hand to pay bills that occur in that time period.

If you are self employed or have an irregular source of income, you’ll want to wait until you get an actual check and then follow this process for just that check. In the meantime, you can follow this process for the money you have available in your bank account. Just use your balance as the income. For example, if your bank account balance is currently $3,000 then put that amount as your income. As we go through this process you’ll be allocating how you’ll use that $3,000 until your next paycheck.

Do I put down net or gross income?

It really doesn’t matter if you put down net or gross. If you use gross (the amount before taxes, insurance, etc that are automatically deducted from your paycheck) you need to be sure to include the categories and amounts that are automatically deducted from your paycheck in your budget. I prefer using net so that I don’t need to write the extra expenses down every month. Because taxes and insurance are the same from month to month I prefer to simply check the amounts every quarter or so to make sure everything is still the same. It’s more efficient to track them separately.

Of course, if you’re self employed, be sure to allocate for paying taxes.

Step #2: Write down a list of expenses

Write down a list of all the expenses you expect to have this month. I’ve included a list of possible expenses below to prompt your memory. Be sure to include expenses unique to only this month. Do you have a friend or family birthday? Is your registration due? This step may actually unearth some expenses that you forgot about. If you think of expenses that are coming up but not in this month, that’s ok, just go ahead and write them down and we’ll deal with them a little later.

• Income
• Paycheck 1
• Paycheck 2
• Other Income 1
• Other Income 2
• Expenses
• Taxes (if using gross income or you are self employed)
• Mortgage Payment
• Second Mortgage payment
• Household (yard)
• Utilities: Gas
• Utilities: Elect/Water/ Gar
• Auto: Gas
• Auto: Insurance
• Auto: Maintenance
• Auto: Registration
• Satellite TV
• Life Insurance
• Debt reduction
• Babysitting
• Clothing
• Grocery
• Grocery: Eat Out
• Grocery: Eat Out
• Grocery: Nonfood
• Medical
• Hair cut/personal care items
• Charitable Donations
• Emergency Fund
• New car savings
• College Fund
• Dry Cleaning
• Gifts: Birthdays
• Gifts: Christmas
• Gifts: Holidays and Other
• Household: Maintenance
• Retirement Savings
• Magazine Subscriptions
• Entertainment: Dates
• Entertainment: Video rentals
• Personal money (1 for each individual)
• Cushion

You’ll probably miss an expense or two at first and find yourself part way through the month saying “shoot, I forgot to budget for that.” To address this scenario, be sure to budget a “cushion” account (last week I called it a “grease” account, but I think cushion is simply more understandable and descriptive, so I’ll stick to that). I recommend starting at about $100 at first. Over time, you’ll be able to get a feel if this is too much or not enough.

Include savings and debt reduction in expenses

When I say “expenses,” I really mean “funds that will be spent or allocated to other purposes.” Saying “expenses” is just so much easier. Include any savings allocations, debt reduction payments, or any other monetary outflows in your expense list.

Step #3: Identify your expense types

For this step, simply go through all the expense categories and mark if they are fixed, semi-fixed, or variable. Just write an “f,”"s-f,” or “v” next to the category (or in another column if using a spreadsheet). Fixed expenses are those that don’t change from month to month like your cable bill. Semi-fixed expenses are those that may vary slightly from month to month like a phone bill. As a rule of thumb, semi-fixed expenses shouldn’t vary more than $10 in a month. Variable expenses are those that vary from month to month more than $10 like groceries or gas expenses.

Step #4: Allocate your fixed and semi-fixed expenses first

The reason we marked each expense type was to determine the order to allocate them in. First allocate your fixed and semi-fixed expenses. I recommend doing this simply because it’s easy. Your fixed expenses will probably include your largest expenses, such as your mortgage, so it will be easier to deal with the smaller amount left over. Plus, most of your fixed expenses are probably not very negotiable without dramatic lifestyle changes or disruptions so they give you a sort of “hard landscape” around which you will fill in the variable expenses.

Once we are done allocating all our expenses, we’ll circle back and see if we want to eliminate one or more of the fixed expenses. For now though, allocate them all.

Average out your semi-fixed expenses

For your semi-fixed expenses you’ll have to average out how much you’ve spent over the last 3-4 months. No need to get too crazy or precise as long as your in the ball park. You’ll be wrong anyway.

How to deal with periodic expenses

There will be many expenses that won’t occur this month but that you will need to save for like car registrations, birthday and Christmas gifts, and some insurance payments. To ensure you have enough money when the time comes you need to start saving that money now.

Most people just divide these expenses by 12 and save that amount each month. DON’T TAKE THIS APPROACH WHEN STARTING A BUDGET. You will end up short unless that expense is a full year away. Instead you need to take each expense, count how many months away it is, and divide the total payment amount by the number of months. For example, if I have a car registration payment of $100 due in four months, I will divide $100 by 4. That means I should budget $25 a month to save towards the registration. As soon as I pay the registration, I can then divide the next registration payment by 12 and save little by little for next year.

This approach may cause a little strain on your budget at first because you will need to be saving a larger amount each month for the expenses coming up in the short-term. However, once you make the payment, your monthly allocation will go down for that category freeing up extra cash that you can redirect wherever you want.

There is one other approach I should mention. My wife and I find that we will fairly consistently receive “windfall” money two or three times a year in the form of bonuses, gifts, or tax returns. Occasionally we will budget portions of the windfall to periodic expenses so we don’t have to worry about saving from month to month. The only problem with this approach is that if you don’t have enough windfalls, you could end up having a periodic expense and not enough money to pay it.

Step #5: Allocate your variable expenses.

Now that you’ve gotten a good chunk of your income out of the way, it’s time to deal with what’s left (hopefully it isn’t depressingly little). So far we haven’t worried about calculating income minus expenses. If you want to, you can do a quick calculation at this point so you know how much left over you’re dealing with. Or you can just speed through and budget your variable expenses and do a mass calculation at the end.

Try not to scrimp too much on your necessity categories like food, clothing, and transportation/gas. Most people underestimate these categories.

Personal money

I highly recommend allocating personal money for each spouse. Having your own money to spend however you want is crucial to making a budget work. Even if you can only afford to budget $10 or $20 dollars, it will help your budget feel more manageable.

Step #6: Calculate the difference between income and expenses.

Ahhh, the moment of truth. Subtract your total expenses from your total income. This is where a spreadsheet comes in handy. You might want to be sitting down when you do this.

Step #7: Adjust your categories until income = expenses

Now comes the hard part. You need to adjust your categories until your income equals your expenses. This is where you will need to make some trade-offs between one category and another. This step is usually where the most conflict occurs between couples because it exposes their conflicting values. If things get too heated, it’s probably better to take a break and continue later. Just remember that this is your first budget and you will refine things as you go. You don’t have to feel locked in to the decisions you make now.

What to do with a positive difference

If you’re in this situation, congratulations! Now you just have to allocate the remaining money. The whole point of a zero-based budget is that you need to ALLOCATE EVERYTHING. That way the remainder won’t just disappear through unconscious spending. The good news is you can allocate it any way you want. If you are going to allocate it as money to blow, that’s fine as long as you consciously do so. Some other suggestions for allocating this money include:

• Pay down debt
• Save for retirement or your children’s college
• Save for larger purchases like vehicles or furniture
• Save for a vacation

What to do with a negative difference

I’m guessing that the vast majority of people will have allocated more expenses than they have income resulting in a negative difference. Don’t be discouraged! The first time we did this, reality hit us hard. We had to do a major evaluation of our priorities and really distinguish between our wants and needs.

For many families this process will expose that they have been spending more than they make and can’t support their current lifestyle on existing income. It can be extremely hard to realize that lifestyle changes are in order, but at least you now know the truth and can fix your problem instead of going into more debt.

Here are some suggestions for adjusting your budget:

1. Identify all your non-necessities. Yes, cable is a non-necessity.
2. Each spouse should rank the non-necessities in terms of importance to them
3. Eliminate or reduce those that both spouses agree are a low priority

Hopefully by eliminating or lowering the easier “consensus” items you will now be at a zero balance. If not, you will have to negotiate which categories are most important to each of you. You may have to make a lifestyle change by either earning more income or lowering your cost of living. In some cases, moving to a less expensive place may be in order. Housing is usually the largest expense and can make the biggest difference to your expenses. Not long ago, my wife and I almost had to move in order to live within our means because we had a bad year with some unexpected medical expenses. That is what prompted us to really take control of our finances. If we hadn’t got on a budget, we would have had to move to a less expensive home.

Step #8: Print out your final budget

I strongly recommend you print out your final budget and put it in a binder. This gives you a hard-copy record of your decisions. The problem with keeping only an electronic version is that you sometimes can’t be sure if it’s been changed from the original. Printing a copy allows you to put a stake in the ground for your decisions up to that point. It will also be useful when reconciling at the end of the month and planning next month’s budget.

Next steps

Congratulations! You’ve now completed your first zero-based budget. Now that you have a budget in place you will need to execute your plan and follow up at the end of the month to deal with what you actually spent. Over the next few weeks, I will be covering some ways to make tracking your spending and reconciling your budget much easier. The first month you use a budget, review it as often as you need to stay on track. Take a few moments each day to review your spending if necessary. I recommend reviewing your progress at least each week at first. Once you get your budget down, and with a few tips and tricks, you’ll be able to stay on track with a single monthly review.

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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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