Photo by robson2313

PAYGO requires new federal spending to be offset by budgetary cuts or tax hikes. Makes sense; without paying as you go you will surely wind up deep in debt, which is exactly how we find our country. As most things political go, PAYGO seems to be more for show, as politicians on both sides have ignored their own rules, or taken advantage of lapses in PAYGO, to spend like maniacs.

Since the idea of debt first came along, people have opted to borrow versus saving for a variety of reasons. Farmers often needed to borrow money for seeds and tools to produce their first crop. Many business were started with loans, because they had significant upfront costs that owners were unwilling or unable to cough up. Homeowners cannot usually afford to buy a house for cash, so we choose to take out a mortgage.

These examples all seem relatively easy to justify, but then a little tool came along called the credit card, which made it much easier for households to borrow money for everyday items. With credit cards, the idea of paying as you go became nearly obsolete.

Every now and then I hear stories of someone who built their own home. They often saved up to buy some land, then the materials, then completed as much as they could on their own while saving to pay someone to finish up those things they lacked the expertise or physical ability to do themselves. I’ve always admired these types; not only for their self-reliance, but because they understood the pay as you go way of managing your money.

My wife and have implemented PAYGO in our own household, on a smaller scale. A few months ago we agreed not to sign up for any new subscriptions, or add to our recurring monthly expenses, without canceling something equivalent.

For instance, after living for more than a year without cable television to speed up our get out of debt plan, we decided to sign back up for basic programming. Doing so would add about $30 to our monthly budget. To pay for it, we scaled back our Netflix membership (a $10 savings), canceled a weekend newspaper subscription (I can read it online – $10 saved), and I canceled a forums membership I no longer participated in (at $9.99/month).

In our example, we eliminated two things that were no longer useful to us, or that we no longer enjoyed, so it wasn’t too big a deal. However, we have had times where we wanted to add a new service or subscription, and couldn’t identify we were willing to eliminate. Enter the other side of the PAYGO equation: Increasing income.

The government can increase income by raising taxes. Fortunately, we don’t have the ability to levy a tax on others and collect their money, so we have to raise the funds ourselves through work. If you receive a raise at work, you may want to allocate a small percentage of your new income to adding something to your household that would add value.

Perhaps you’d like to listen to audio books on the road to increase knowledge on a particular subject. Or maybe there is a cooking class you’d like to attend, or a gym membership could help relieve stress. Whatever it is, use a small percentage of your new, monthly income to reward yourself. Notice I said “small percentage.” There is a risk here of lifestyle creep – inflating your lifestyle to meet or exceed your new income. Tread carefully.

By implementing a pay-as-you-go system in your personal finances, you will not only avoid debt, but you will be able to take pride in the things you own because you really own them, they don’t own you. And yes, that’s right out of Tyler Durden’s Guide to Personal Finances.

*This article appeared in the Carnival of Personal Finance – Tour of Ireland edition

Post by Frugal Dad

If you’ve read my blog lately, you may have seen that I don’t live with my wife during the week. My current job is approximately 2 hours away. Because of the distance, I have to stay there during the week and then head home on the weekends.

There are many disadvantages of living away from my wife, both emotionally and financially. I won’t really get into the emotional stuff seeing that this is a financial blog. However, I can shed some light on how we handle our finances on a day-to-day basis.

First, let me give you a little insight into the added expenses. In order to stay in PA during the week, I have to pay for housing, groceries, parking, and fuel. All of those together add about $600 to our budget. Those are all in addition to what we already spend in MD. It’s definitely straining, but it’s better than me not working at all. My wife and I have been apart for long periods of time before (I went to TX for grad school) so we are used to being apart. However, it’s not something I want to do for more than a year.

Even though we are apart, we still need to make financial decisions as a team. Marriage is commitment and both partners need to have an equal say. Here is how we do it:

Communication Is Key

Just as the title says, communication is a key part in our financial decision making. We communicate daily about our finances on the phone and via Skype. We are constantly talking about our budget and how much we will have left over to pay down debt. We actually think budgeting is fun and are always looking for ways to save a buck just so we can pay off more debt at the end of the month.

Financial communication is a necessity is every marriage. If one partner is spending away while the other one is committed to getting out of debt, they’re not going to get far. You just need to sit down and talk about your finances. Heck, if my wife and I can do it every night when we are 2 hours away from each other, so can you!

Long Distance Budgeting

Almost all of my adult life, I have been a Quicken kind of guy. It was always easy for me to use and made my finances come together in one simple platform. Well, when we got married, I noticed one major flaw. It was only on my computer and it was really hard for my wife to understand how to use it. So, we made an executive decision to give something else a try. A written budget wasn’t really an option for us as we are more technical people. It would also be a little harder to keep track of being apart. Then came Mvelopes.

Mvelopes is an online based budgeting program that can be accessed anywhere (with an internet connection). Mvelopes is based on the envelope system which we thought was the best budgeting technique for us (and still do). It allows us to check our budget at the same time and discuss the different envelopes and what we spent during the week. It just keeps us on the top of our game. It also keeps us accountable.

Keep a Positive Attitude

It’s easy to get a little depressed when you are away from your spouse for extended periods of time. It’s especially hard for us since we were married only six months ago. However, we continue to be positive about our situation and are trying to get things straightened out. Currently, I have an interview next week for a job in MD working for the same company. If all goes well and I get the job, my income will increase about 10%. It will also eliminate our need for addition expenses such as the rent.

Well, hopefully you will never have to find yourself in my position. It’s tough,  but we are making it work. If you do find yourself in this predicament, hopefully these tips can help you out. These are actually good tips for couples who are living together too. You need all of these to manage your marriage and finances.

Have a great weekend!

Post by Frugal Dad

Yes, budgets can set you up to succeed, or set you up to fail. Make them too strict, and you’ll never stay within a spending category’s limits. Have too many budget categories, and you’ll spend too much life energy hunting and recording receipts. Like everything in life, try to find some balance when setting up your budget, but err on the side of simplicity. Here are a few reasons why.

1. Strict budgets are as successful as strict diets, they aren’t. Ever tried to lose weight by drastically cutting calories or eliminating all foods you enjoy from your diet? Let me guess – you lost weight the first two weeks, had a slice of cake at a party, and derailed your entire progress.

Humans just don’t like big changes. We are more successful over a longer period of time when we implement small changes that continue to put us on the path towards reaching a larger goal. Like the old saying goes, you have to eat an elephant in small bites. But hold the butter, or you’ll have to go right back on that diet!

2. Strict budgets create money micro-managers. A couple years ago we took the kids to the Smoky Mountains, their first trip to see a hill over 300 feet high. My wife and I were enjoying the vistas along the Blue Ridge Parkway, but noticed our kids had their heads buried in a book, or their Nintendo DS, and were missing the scenic views. I spent a great deal of the time reminding the kids to look up at the overlooks. Sometimes they did, most times they didn’t.

That’s how adults who are consumed by managing their money appear. Our heads are buried in spreadsheets, or Quicken, and we forget to stop and look up at the overlooks. Pretty soon, we were off the Parkway and realize we missed an opportunity to see the sights; to stop and smell the roses.

3. Budgeting is boring. I confess; I just don’t like budgeting. I don’t like creating them or updating them. I realize they are necessary for proper money management, so I create one each month. However, I make it as simple and painless as possible. I haven’t always been this way.

When I was younger I had dozens of budget categories. Instead of a simple “Food” category, I had a category for meals out, snacks from the vending machine, groceries, etc. I meticulously tracked debit card (and at the time, credit card) purchases, and receipts to be sure I put the expenditure in the correct category. Oddly enough, this was also the time when I accumulated the most debt. In my attempt to be sophisticated, I failed to recognize and adhere to one of the simplest personal finance principles around: spend less than you earn.

4. Strict budgets limit opportunities. By opportunities, I mean opportunities to experience something or save money by buying something at a deep discount. How many times have you passed on something you’d really like to do, or really like to own, because it “wasn’t in the budget.”

It is almost as if the budget is controlling us, rather than the other way around. Then again, for the most impulsive shopper, that’s probably how it should be. But for those who have displayed discipline with their finances, a strict budget feels more like a tight-fitting jacket than a useful tool. It restricts us, and keeps us boxed in from the chance to live a little.

5. Budgets cause money fights in relationships. I saved the best for last. My wife and I don’t see eye to eye on the concept of budgeting. She is the free spender, and I’m the nerd, at least when it comes to finances (though she would probably say the nerd label extends further!). Early in our relationship I tried to force my elaborate budget system on her. It didn’t work. For a period we scrapped the idea of budgeting altogether.

These days, we have compromised and met in the middle when it comes to budget categories. Instead of including infinite layers of budget granularity, we now separate our money into larger piles of logically separated categories. Here’s a sampling from our monthly budget (I’m leaving out the amounts because I don’t want to get hung up on the numbers):

• Mortgage
• Utilities
• Food
• Auto
• Household Supplies
• Savings
• Debt Repayment
• Insurance
• Clothing
• Medical
• Entertainment

Our goal was to keep the budget at ten categories or less, but we did add one for entertainment. It’s hard to think of an expense that doesn’t broadly fit into one of the categories. Last month, we thought we ran into one such example:  birthday presents for kids’ friends. We decided to just take it from “Entertainment” for now, rather than create a new category for infrequent purchases (although I made the argument that friends’ birthdays seemed to happen at least once a month!).

Another way to combat budget fatigue is to create a number of sinking funds for irregular expenses. We’ve done this in our household. Notice in the budget above I’ve simply listed “Savings” as a top-level category. That represents a single transfer to our ING Savings account, but from there the money is split into several “buckets,” or sinking funds.

We have a sinking fund established for things like the annual renewal of our car tag, the semi-annual payment of our auto insurance, Christmas shopping, vacations, and a couple others. When these expenses come up, we transfer the money from the sinking fund and write a check. No impact on the monthly budget.

I have written this post with sort of a negative spin on budgeting. I hope that’s not what you will take away. Rather, I’d like for you to take away the idea that by making your budget too complex you are setting yourself up for failure. I urge you to consider consolidating categories, or setting up sinking funds, or allowing yourself more “fun” categories so that you can enjoy life. And please, remember to look up at the overlooks!

Post by Frugal Dad

Unfortunately, no magic debt eraser exists, but like I tell my son, “let’s pretend.” Let’s pretend for a moment that you do not have any debt. How much different might your budget look?

That’s the idea behind creating a dream budget, an exercise I have toyed with informally a few times, but was sold on after reading a post at Enemy of Debt. Here’s how I created our “Dream Budget.”

1. Grab a copy of your most recent budget. Highlight the amount of total expenses, total income and any savings contributions you are making.
2. Make a second budget minus any payments related to debt. Leave the mortgage payment for now, but remove credit cards, student loans and car payments.
3. Using this new “dream budget,” calculate the difference between total income and total expenditures. This difference is the amount you are spending each month to service debt.
4. Find a new home for the difference. What will you do with this new excess? If you are like most families with a $400 car payment, and several thousand in credit card debt, you could easily free up $700-$800  a month by paying off debts.
5. Break out “savings” category into more targeted goals. Finally, there is enough money to invest in a Roth IRA, save for the kids’ college tuition, put a little away towards a replacement car, and maybe even a little towards a down payment on a new home.

What’s standing between you and your dream budget? Debt. Debt is like a soul-sucking black hole in your financial world. Being in debt is worse than the worst job you’ve ever had, and the worst relationship you’ve ever been in, combined. To put it bluntly, being in debt sucks.

Most of us are aware of this fact, at least intellectually, but by creating a dream budget you finally have evidence of the things debt is robbing from you with each required payment, and it has a way of getting you fired up, emotionally.

Consider just the interest accumulation on your debts. How would you react if your bank was reaching in and grabbing $148 a month out of your checking account? You would be outraged, and rightfully so! Well, that’s the equivalent of allowing credit card companies and other loans to tack on interest each month on a large balance of debt. Get rid of it once and for all, and free your budget up to do bigger and better things.

Keep this dream budget handy if you feel motivation for your get out of debt plan waning. It might just be the kick in the pants you need to get back on track and make your dream budget a reality.

When the time comes to set up your debt free budget, consider using Mvelopes to create a virtual envelope budget.

Post by Frugal Dad

Budget Committee Meeting Minutes

Balance checking account.  The first item addressed is our checking account, which by this point in the month could usually use a quick balancing and reconciliation with our online account.  We make sure all outstanding checks are accounted for before “closing out” the month’s final balance and begin tracking the new month.

Review last month’s budget.  It is also at this point that we perform a final review of our budget categories together to determine where we missed the mark, and where we were successful.  The review for March revealed I spent too much money on eating out.  My excuse was that I was on the run a lot visiting my mom (who remains hospitalized), but really that’s a poor excuse – I could have packed something to eat or waited until I got home.  Sometimes you just can’t account for everything when setting a budget a month in advance.

Update personal balance sheet.  If we have stuck to the plan this part is always something to look forward to, but if we have spent more than we should, or not saved as planned, we usually dread this review.  Take an inventory of all your debts and update their balances in whatever format you use to track your net worth.  We use a simple Microsoft Excel worksheet with a column for each month and a list of debts and assets down the side.  Looks like we are on track as our debts continue to get smaller, and our savings continue to grow.

Modify budget amounts for next month’s expenditures.  Some months we just carry forward the budget amounts from last month, but it’s rare.  There always seems to be something happening, especially when you have kids in school.  Yearbooks, camp registrations, clothing, and spring pictures were all mentioned yesterday and affected a couple categories.

When my wife and I first married I handled all of the bills by myself.  After a couple years my wife began to take a passive interest in the finances, but was never particularly interested in knowing all the gory details of debt, account balances, etc.  Basically she just wanted to know how much was in the checking account at any given time.  I recognized that to pull off our financial turnaround I would need her support, and started holding these monthly meetings to discuss our finances.

At first the budget meetings seemed like a chore, but over time my wife enjoyed having input in the process, and I certainly appreciated her input.  With us working together we were blindsided far less by unexpected expenses.

If you are not currently doing something similar with your spouse, I highly recommend sitting down tonight and reviewing finances together, even if it means missing the latest episode of Desperate Housewives.  That’s what TiVo is for!

Post by Frugal Dad

A sinking fund, in the context of corporate finance, is a sum of money identified by a corporation to be held aside over time for repayment of some item – usually preferred stock or a bond issue.  Companies do this to make it less painful to repay a bond at maturity by moving incremental amounts into this fund while the bond is outstanding, rather than having to come up with the full face value when its time to pay.

In the personal finance world we can use sinking funds to help prepare for large, infrequent expenses that come along throughout the year. A prime example of such an expense is car insurance.  Many insurers allow customers to pay monthly premiums for a convenience fee (my company charges $4.00 per monthly payment).  I can easily save $24 by rejecting the monthly payment arrangement and agreeing to pay once every six month, when the auto insurance policy renews.  But this means I have to come up with a hefty sum of money twice a year to cover the premium.  This is where sinking funds can help.

Some prefer to create a separate account for each sinking fund, but I prefer to create one account, and then simply separate the money using something like Microsoft Excel – a paper ledger will also do the trick.  The sum of my individual sinking funds adds up to my account balance.

Around the first of the year I opened an ING Direct Electric Orange online checking account to house our sinking fund.  Up to now I was using my emergency fund to cover a lot of these expenses, which is not really what emergency funds are designed to do.  Here’s a look at just four of the funds we have created so far, along with the fund balance five pay periods into the year  Note, I’ve changed the amounts to keep you guessing:

Notice that the larger annual amounts, such as vacation at $1,500, don’t seem quite as scary when you only have to set aside $58 per pay period.  I get paid every other week, so 26 times a year $110 is transferred from my paycheck to my account at ING and allocated to those four funds.  When those items are due, I simply write a check (or use online bill pay or my debit card, in the case of ING Checking) to transfer the amount due, reseting the fund balance to zero.  Interest earned from the sinking fund is swept into my savings account each month and added to the emergency fund.

It does take some discipline to leave the amounts alone as they accumulate throughout the year.  If you do need to access the account in an emergency, you can always cash in and reset the payment amounts based on the number of pay periods remaining until the item is due.  But for the most part I leave the funds alone because having the amount in place when the bill is due is such a nice feeling.

Post by Frugal Dad

Yes, you read that correctly. Could you live on $800 a year, excluding utility bills, clothing, gifts, car, and house? Your reaction is probably like mine – what’s left?  Well, a lot, actually.  Consider how much money leaks through your budget on things like food, pet food, entertainment, and other miscellaneous categories.

I stumbled across a blog post at Jane4Girls $800 Annual Budget that proves it is possible to live on an $800 annual household budget (by “household” I mean things like food, cleaning supplies, health and beauty supplies, etc.). Here’s an excerpt from her site which explains the mechanics behind how she pulls it off:

I have basically put $800 cash into an online savings account. This is for 4 people, one adult, 1 teen, two tweens and two dogs.  This averages out to 54¢ per person per day. Any time I have to pay out of pocket for something I will use a credit card that I earn rewards on, either cash back, gift cards back or college savings. Then I will transfer that purchase amount from my online account to my checking account to cover the cost of those items when the bill comes in.”

It is hard to believe a mom and three kids (and two dogs) can really live on $66.67 a month, but when you really dig in to Erin’s system you find that a lot of what she uses has been stockpiled and/or acquired by combining store sales with coupons.  That is a great strategy, and one we tried last year after signing up for the Grocery Game.  The service published a list which matched up store sales with available coupons from the Sunday paper (and a few online sources).

During weeks we stuck to the game we saw some significant savings, usually around 35% off regular, retail grocery store pricing.  However, we also found ourselves buying a bunch of stuff we didn’t really need, just because it was a “rock-bottom price.” As the stockpile of unused stuff began to grow we realized that stockpiling wasn’t working for us because we bought more of the things we didn’t need and that offset the savings of buying the things we did need.

It is an interesting exercise nonetheless, to imagine just how low you could go on annual household spending. Without knowing much more about Erin I assume she is doing this because she has to, and we are fortunate that we don’t have to mind our pennies quite as closely. I would rather spend a little more on things like food to eat healthier meals, more fresh produce, etc. rather than always hunting a coupon bargain.

Still, there are some opportunities for us to cut costs, and use more coupons on the foods we do buy, particularly basic staples.  I get bored too easily to track spending at such a granular level for an entire year, but I might just try something similar for the month April. Stay tuned.

Post by Frugal Dad

One thing I’ve noticed about this bad habit of mine is that the longer my avoidance of anything to do with my personal finances goes on, the harder it is to get caught up. And I don’t mean because I have dozens of transactions to record in a ledger, I mean because I am almost afraid to look! 

The difference in the old me and the new me is that I can now recognize this condition creeping in and can carve out adequate time to make things right; to get caught up on balances, payments, etc.  I’ve dubbed this condition Budget Avoidance Syndrome, or B.A.S. and have included some symptoms below to help you identify it should you become afflicted

Symptoms of Budget Avoidance Syndrome

• Your last checking account ledger entry is three weeks old
• You aren’t quite sure when your next debt payment is due (you have an idea, but the exact date escapes you)
• You feel a combination of anxiety and apathy towards your finances

The side effects of continuing to ignore B.A.S. can be quite painful, ranging from overdraft and late fees to non-sufficent funds fees and missed credit card payments, which usually result in a higher interest rate charged to your remaining balance.

Home Remedies for Budget Avoidance Syndrome

Unfortunately, the only known cure for B.A.S. is to simply fight through your anxieties dive headfirst into your finances. Try to set aside some time in the next 24 hours to completely immerse yourself in your financial picture. Gather up paper statements, online passwords, etc. and update all outstanding balances on deposit accounts and any outstanding debts. Then begin to look ahead to determine which bills are coming due soon, and make sure you have enough cash on hand to cover them.

Sometimes life just gets in the way of managing our money, and when we recognize that happening it is unwise to simply continue to ignore finances.  If you feel yourself heading down the same slippery slope I was, I encourage you to make the time today to get caught up.  Turn off the television tonight a couple hours earlier than usual. Ask to leave work a couple hours early if your boss allows.  If you are married, involve your spouse in the process so you are both on the same page.  As painful as it might be, trust me, you will feel better knowing where you stand.

Post by Frugal Dad

One of the knocks of an envelope system is that it is not portable, or that it is difficult to manage when on the go.  Often times I needed to stop by the store on the way home from work, but the “Grocery” envelope was sitting on our desk at home, or still in my wife’s purse from our last shopping trip.  Another complaint is that takes too much to manage.  For instance, a trip to Wal-mart for groceries, shampoo and a new basketball for the kids may require the use of three envelopes representing three separate spending categories.  Below are a few strategies that worked for us when we had to take our envelope budget system on the road.

• When funding your envelopes, ask for small bills.  This step may require you to go inside the bank to withdraw money from checking, but it is worth the hassle you’ll save later when managing your envelope system. Smaller bills make it easier to move money around envelopes in a pinch, or to settle up from a shopping trip that crossed multiple spending categories.  If the only thing in your envelope is twenty-dollar bills it makes it difficult to incrementally shift things around.

• Separate shopping carts.  One of the biggest conflicts we had within our envelope system was “Food” and “Household,” because the two categories often overlapped, and because we often picked up items from both lists during the same shopping trip.  When my wife and I shop together we each grab a shopping cart and only place food in one or our carts.  All other non-food household items go in my cart.  If shopping alone you can get a shopping cart, and place one of those hand-held shopping baskets inside the cart to separate items.  I toss things like shampoo, razor cartridges, over-the-counter medicines, etc. in the hand-held basket, while freeing up the shopping cart for food items.

• Review receipts when you get home.  Depending on the crowd at the checkout line we may run each shopping cart through as a separate transaction.  However, if there is a long line, or we’ve selected a cranky grocery clerk, we’ll often ask the cashier to subtotal the items on the receipt for us after running through each spending category.  We pay for the entire balance by grabbing enough cash from one or all of the envelopes and settle up when we get home.

• Leave grocery envelope in your car’s glove box.  After the initial grocery shopping trip of the month (or pay period), consider stashing your “Grocery” envelope in your car’s glove box.  For added security, you may want to lock the glove box, unless you need access to something while driving.  This way, if you are out and about and see a sign for a great deal on boneless chicken breasts you don’t have to go all the way home  just to get your food envelope.

• Create a sub-envelope, or two.  Another way to take the envelope system on the road is to save those envelopes you get back from the teller when making cash withdrawals and use them to fund smaller envelopes that stay in your wallet or purse.  For a while, my wife and I did this with our “Household” budget envelopes.  Our household budget was $150 a pay period and included things like diapers, baby supplies, cleaning supplies, etc.  My wife kept $50 of the envelope money in her wallet inside a teller envelope labeled “Household.”  If she saw a great deal on diapers somewhere she could pick them up without having to return home, or carry the entire envelope system with her.  We simply replenished her sub-envelope from the one kept at home.  Note, this method does take some discipline–just because you have money in your wallet doesn’t mean you have to spend it!

The envelope system is a great budgeting tool, particularly if you are new to budgeting, or are having trouble sticking to a budget, as we were.  The visual reinforcement of peering into a nearly-empty “Entertainment” envelope when considering a day at the movies forces you to find a frugal alternative.  As you get more disciplined it might make sense to move to a debit card for added convenience, or even run everything through a credit card and pay it off each month (this takes maximum discipline and I do not recommend this method for non-essential spending categories).  However, most people who give the envelope system a try find it to be a great budgeting tool.  By implelementing the ideas above you can improve the system even more by improving its portability.

For additional portable envelope budget system ideas, visit NeoBudget.com.

Post by Frugal Dad

1. A plan for spending (a budget)
2. A system of self-control

The problem in our families today, in our government, and in too many businesses is that we have lost sight of these basic elements — planning and self-control. We believe we are so sophisticated that the basic principles of budgeting and self-control are no longer necessary or even relevant in our daily lives. Deficit spending, at every level, has eroded the plan because financing is always available to go beyond what we planned to spend. Problems only surface when all sources of credit have dried up and a life-style of cookie consumption has been established that’s far beyond our ability to repay.

Credit allows us to live in the short term, as if the cookie jar were bottomless.

When credit is gone, the only available options are so devastating that many people face personal bankruptcy, severely strained marriages, wrecked retirements, and ruined financial lives. Assets must be liquidated, children removed from private schools, houses and cars must be sold, and life-styles must undergo dramatic and difficult adjustments.

What’s the solution? Remember to follow the basics of Grandma’s cookie jar. Never allow your outgo to exceed your income, and plan your cookie eating so that you can stretch the enjoyment over a longer period.

The world is bent on telling you that you can have everything NOW. It’s your job to resist through proper long range planning and a steady focus on your long term plans for financial independence.

This was a guest post from Ron at The Wisdom Journal. He blogs about personal finance, business ideas, and life in general. You can subscribe to his feed here.

Post by Frugal Dad