I have budgeting on the brain. Who doesn’t, considering the budgeting brouhaha we’ve endured from Washington, D.C.? While our budget isn’t nearly as dysfunctional as the national one, our household could use a brush-up. We try not to go overboard and, once the month is over, we look to see whether we blew it.
J.J. Sessions calls that the “trip-down-guilt-lane” form of budgeting.
Sessions, a Maple Grove, Minn.-based financial planner, believes managing cash flow is as critical as investing for retirement. It’s so easy to get carried away with day-to-day spending, which hinders the ability to reach big financial goals. Sessions didn’t have a good system for his own family, let alone one for his clients. Then he found First Step Cash Management.
The system, created by advisers at the Planning Center in Moline, Ill., encourages families to take their paychecks and divvy them into three buckets.
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The first is the “Static” bucket. That’s the bucket for money to pay for your fixed expenses such as mortgage, debt payments and day care, preferably with automatic bill pay.
Then there’s your “Control” bucket. Think of that as your weekly walking-around money – the money that will be spent within the next seven days on everything from going out with friends to groceries and gas.
Finally, there’s the “Dynamic” bucket, or money set aside for future use on vacations, gifts, charitable giving, home improvements, financial emergencies or nonworkplace retirement savings. Sessions has clients set up a savings account for each specific goal, funded by automatic transfers from their main checking account.
He tested the system with his wife. With five kids ages 7 months to 9 years, the couple needs to manage their finances closely with limited time to spare. Since they started using it, he claims they haven’t had one fight about money. “There’s no more ‘Where’d all the money go?’ conversation,” he said. There’s no more overspending at Christmas. “My wife knows by Black Friday how much money she’s going to have.”
It takes an investment of time to comb through your finances and set dollar amounts for various buckets. Then there are the necessary tweaks when you realize that the amount you want to set aside for future spending far surpasses the amount available in the bank.
Depressing, yes, but that’s where the heart-to-heart conversations about money and what matters most begin. Do you love to travel? Then shrink your seven-day control-money bucket and eat out less so you can vacation more. Shocked by the pathetic amount you give to charity? Slice the birthday-gift budget and funnel more money into the “for a good cause” account.
Sessions says some clients bristle at first, saying it feels too restrictive. He tells them, “It’s the freedom to dream.” He suggests they focus less on the “nos” and focus on the “bigger yes.” In other words, don’t fixate on having to bring lunch from home every day. Think about getting to sit on a beach for a week in the middle of the winter.
There’s also something liberating about putting the fixed and future elements of your finances on autopilot and just worrying about the next seven days.
First Step can also help with the “What ifs?” and forecast the effects of current money decisions on future financial security. If a client comes in wanting to buy a bigger house, a quick spin in First Step shows how a higher mortgage payment would affect the bigger picture.
HOW TO SAVE
More than one in three Americans say they’re saving less now than a year ago. And 33 percent say they do not have any nonretirement savings, according to a March survey by the National Foundation for Credit Counseling. To get started with savings, here are some how-tos:
Over time, even a little bit saved adds up.
Put 10 percent in a rainy-day fund
At year’s end, you’ll have socked away more than one month’s income, enough to get through most short-term emergencies.
Get a part-time job
Commit your wages to savings.
Have a ‘money buddy’
This can be someone to help you stay accountable for your spending. Never pull money from your savings account without his/her permission.
Track your spending for 30 days
Without knowing where your money is going, you’ll never be able to plug spending leaks and find hidden savings.
Pretend they never happened
Put all raises, bonuses, birthday checks, etc., into your savings, rather than a checking account.
Never buy on impulse
Go home; take at least 24 hours to evaluate whether you truly need the purchase.
Pay with cash
People who use cash typically spend 20 percent less than those who charge with plastic.
Save for a specific goal
When you reach it, reward yourself.
Put your credit cards on ice
Stick them in a bowl of water in the freezer so you’re not tempted to use them. (And no thawing in the microwave.)
Source: National Foundation for Credit Counseling