“More Power!!!” For Your Finances

 Do you remember the TV show “Home Improvement“? It ran from 1991 to 1999 on ABC and it starred Tim Allen as “Tim the Tool Man Taylor”. Tim had a TV show on home improvement, and one of his most famous lines was “More Power!!!” as he was always looking to add more power to a car, a home appliance, or a tool like a power drill. Typically this led to a lot of trouble but that never stopped Tim even against the good advice of his assistant Al.

Could you use a little more power with your finances? Of course you could! You would like to squeeze everything you could out of your monthly income. As my mom used to say, “you have to stretch that dollar!” (of course she would say it in Spanish: “hay que estirar el peso!“). So whether you have a great income, a moderate income, or you are struggling with a low income, we can all use some help in getting the most out of it. What you need is a power tool for your finances and the best power tool is a monthly budget or spending plan.

You might say, “I don’t know how to do that. I am not good with numbers.” or “I have tried it before and it did not work. I still don’t know where my money went.”. I would say this: you will never get your finances under control until you have a budget that works for you. I will promise you that if you learn how to do this and develop the habit of doing it every month, you will get your finances under control. Let me just walk you through the basics.

What do we mean by a budget?

We mean a zero-based budget which is simply:

  • Total Monthly Income – Total Monthly Expenses = $0

How do you put it together?

  • You start with two lists. The first list is your monthly income. Use the figure that represents your take home pay from all sources. You have to use the “take home” figure because that’s what you get home with and that is all you have available.
  • The second list is the list of monthly expenses such as food (both groceries and restaurant spending), utilities, mortgage/rent payments, insurance, clothing, transportation expenses, etc.
  • What you do is basically you “spend” all the money on the first list against the categories on the 2nd list on paper. You allocate an amount to each category (for example, $400 for food, $500 for utilities, etc.).
  • You are done with the budget preparation when the difference between the income and the expenses is exactly zero.
  • There are several tools available to help you This is the form we have used every month for the last 5 years for our own budget. It will work for you:

Why do it?

  • It will give you the control of deciding where your money goes instead of wondering where it went at the end of each month.
  • It will give you insights into which areas you might be overspending. These areas can then be adjusted as needed.
  • It will help you to learn how to live on less than you make.
  • It will give you and your spouse an objective way to discuss your finances. My wife and I no longer have money fights. We have discussions each month about what to do with our money.
  • It will give the required muscle to your monthly income to go as far as it can for your benefit.

Things to remember

  • Prepare a budget every month before the month begins. Every month is different in certain areas. You have two days before August ends so you still have plenty of time before September begins.
  • Discuss the budget with your spouse. One of you will prepare the budget (typically the detail-oriented person or the person who is the nerd in the house). In our house, that’s me. But, both of you have a vote and you both have to agree.
  • Live the budget. It does you no good if you don’t stay on plan. Keep track of your expenses. Adjust as needed. You may need more than one budget committee meeting with your spouse as you get started to make changes. That’s totally normal.
  • If you are single, find a trusted friend who will look over your budget and give you candid, honest, loving feedback. Pick someone who is actually winning with money.
  • Keep it simple! The nerd in the household might be tempted to come up with too many categories and a 17 tab excel spreadsheet. Resist that temptation!
  • Understand that it will take you a little time to get it right. With any new skill it takes time to master it. My estimate is that it will take you about 3 months of doing this to get it working. But it is completely worth it so stay with it!
“The plans of the diligent lead surely to advantage, But everyone who is hasty comes surely to poverty.”
Proverbs 21:5 (NASB)

 

Cash is King!

I hope you have not been spending too much time watching the news lately. It is very easy to get discouraged with all the drama and “doom and gloom” coming from the media. On top of that there is an election next year and everyone who wants to run for something is positioning themselves as a good option to “solve your problems”. Now, I know that there are real problems out there and what I would like to do is focus on helping you take steps to get your finances under control. Ultimately, you are the key to solving your financial problems and I want to help you with that.

So over the next few weeks, I want to spend some time discussing simple tips for getting your finances in order. Today we will start with the concept of the “envelope system“. This involves selecting a few categories (no more than 3) on your monthly expenses and using cash instead of the debit card to pay for them. These are categories where you might have trouble with impulse purchases or where you consistently exceed your budgeted amount.

You might ask, what’s the difference? Why give up the convenience of just swiping the plastic? Here are a couple of reasons:

  • Typically you spend more when you use the plastic that when you use cash. That’s because there is more pain associated with green dollars leaving your wallet than with a simple card swipe.
  • Having an amount of cash designated to a particular budget area will keep you from over spending. When the cash is gone, you have to stop. There is no more.

So where do you start? As I mentioned above, you don’t want to do this for more than 3 categories. Let’s say we will start with Groceries:

  • Determine what you will spend this month. For example, $400.
  • Assuming you get paid twice a month, when you get paid on the 1st take $200 cash out of the ATM or write yourself a check for that amount and cash it.
  • Put the $200 in an envelope and label it “Groceries” or “Food“.
  • When you go to the grocery store, pay only using the money that is in the envelope.
  • Next pay period (on the 16th), take out the remaining $200K and put it in the envelope.
  • For the month, only buy groceries with the money that is in the envelope. Once the money is gone, you can’t buy any more groceries.

My experience with using this system is that you will get your monthly grocery expenses under control. This will become a very predictable portion of your budget. I suggest you try this for the next 3 months (Sep-Oct-Nov). Once you are confident in the system move to another category such as “Restaurants” and execute the same process.  Once you are satisfied try it with “Clothing“. That’s exactly the approach we took in our household and we have never looked back.

Try it. You have nothing to lose and a lot of control to gain. Let me know how it goes!

What About Your Debt Ceiling?

This past week was pretty eventful in terms of financial news wouldn’t you say? First, on Tuesday, our leaders in D.C. finally “saved the day” by coming to an agreement to raise the debt ceiling and on some spending cuts. While it captured the attention of the media, did it change your life one bit? Did it improve your own personal financial situation? Did you think it would?

As it turns out, the deal did not really achieve much in terms of solving the nation’s debt problems. Because on Friday, Standard and Poor’s downgraded the U.S. Credit Rating from AAA to AA-Plus.

S&P indicated that the downgrade was driven by the large level of debt we have accumulated over the last few years and the inability of our leaders to agree on what’s required to reduce the debt. In essence, the U.S. is not taking the necessary steps to deal with our massive levels of debt. If you want to know more about the potential impact of this downgrade you can read here.

So what’s the message here? That there is such a thing as too much debt. There are consequences to continually spending above your income and borrowing money to make up the difference. You cannot continue to do that forever. At some point, you will have make some tough decisions. Money is finite.

As Chuck Colson remarked recently:  ‘Jesus asked the right question. Who would set out to build a tower who did not “first sit down and estimate the cost” (Luke 14:28). Actually, we’re worse off than that. We borrowed heavily to build the tower, only to find out now it is about to be repossessed!’

So what about you? While we might gripe at the inability of our elected leaders to solve the nation’s debt problem, what are you willing to do to solve your own debt problems?

  • Are you willing to stop borrowing money? You can’t borrow your way out of debt. Raising your debt ceiling won’t cut it.
  • Are you willing to live on a budget and spend only to the level of your income? You can’t keep relying on the banks to catch your slack. At some point, you will be too much of a risk.
  • Are you willing to make the tough decisions and cut down on those items that are not basic needs? It will be painful and unpleasant but necessary. Someone in your family will complain. Will you deal with it?
  • Are you willing to sacrifice to generate additional income to get rid of your debt?

There is only one way to get out of debt and that is with great determination. You have to be sick of paying interest. You have to get to the point of admitting that debt is not a tool that will bring you prosperity. You have to get tired of carrying your debt burden. Overextending ourselves with debt has not worked for the U.S. It will not work for you and your family.

I can show you how to get out of debt. You see, like many Americans I racked-up ridiculous levels of debt thinking that’s just the way the world works. But I saw the light. My wife and I executed a plan and we got out of debt. We have freedom from the bondage of debt and we have control of our financial destiny. You can get there as well. But is not up to Washington. It is up to you.

“The rich rules over the poor, and the borrower is the slave of the lender.”
Proverbs 22:7 (ESV)