Money Matters

As I prepare to teach a personal finance class at church in the fall, I'm forced to think a bit about my personal approach to finances. One of the key pieces in anyone's financial puzzle is a thing called a budget. At its most basic level, it provides a framework or a plan for personal expenses, spending and saving. In a crisis situation, such as long term unemployment or a campaign to pay off debt, it can be a fairly restrictive structure.

There's an old method of budgeting called the envelope method, where money from each paycheck is actually placed in separate envelopes, labeled with spending categories, such as rent, groceries, clothing, utilities, etc. As money is spent on each of these things, it is pulled out of the envelope and used only for that purpose. If the envelope for a category becomes empty, in theory, one can't spend any more money on that category. In practice, one can raid another envelope - if it's a variable or discretionary category - for a bit more money to get through the pay period. There are other ways of implementing the envelope system that are a bit more modern, using online services or computer software, and one could probably even implement it in MS Money or Quicken. With the widespread use of direct deposit and automatic bill payment, the physical envelope system has mostly gone out of style, but a virtual envelope system still works quite well.

For a good number of years now, I've used MS Money to track my expenses. The first step in establishing a budget is keeping a record of what you spend your money on. If you don't have this information, getting your finances under control is simply impossible. I actually ran a triple-check system for a year or two, where I entered my transactions in my check register, in MS Money, and in an Excel spreadsheet of my own design.

Seems like overkill, right?

Well, each of those methods provided me with something that the others didn't. The checkbook register was a hard copy, not dependent on electricity, just like getting paper statements from banks and retirement accounts. I realize it's not trendy, but I do like to have a backup in case of power failure or natural disaster. MS Money provided me the opportunity to track multiple accounts and to get a great deal of granularity in how I categorize expenses, plus all the bells and whistles like charts and graphs and year end reports. The Excel spreadsheet gave me a bit more portability with my basic expenses and planning, and Excel has some great financial functions available for calculating ROI and future value, etc. I keep the spreadsheet on my thumb drive these days, so I can look at it when I come up with budget and planning questions. It's more of a brainstorming tool than anything else at this point.

Once you know what you're actually spending your money on over time, you can begin to control your money. The longer the baseline, the better off you're going to be, especially with respect to irregular recurring expenses, like car insurance premiums that show up every six months, annual dues in a homeowner's association, or Christmas presents. I've got records going back ten years or so, but I usually archive stuff after a couple of years, so as not to totally bog down my old computer.

BTW, this is a pretty old version of MS Money (98? or did I upgrade it in 04? (actually the 2K version)) I'm running, that I got free with some other software. Newer versions probably have more bells and whistles, but I've grown accustomed to its face, and I like it.

Whenever I enter a payment in Money, it shows a little "status bar" that tells me how much money I've allocated in my budget envelope for that category, and my current level of spending for the month. If you're under budget, it's green, and when you go over, it's red. Simple, yet effective. Money does have some budgeting features that allow you to move money around between virtual envelopes, though I don't mess with them much.

So, when all is said and done, I don't have a hard, fast budget with fixed amounts allowed for spending in each category - exceed at your own risk! What I do have is a strong historical average picture of my monthly spending for each category. When I exceed that average significantly, I'm alerted to it, and I can spend some time figuring out why the change has taken place. If it's a short term issue, such as spending more money on fuel because I've taken some driving vacations, or more on food because one or more of my kids has come to visit, then I can safely ignore it and move on. If it's a long term issue, with some sort of increasing trend, then I need to take steps to either fix it, or account for it by changing my expectations and plans to match. For example, if I spend $100 in a particular month on books, when my budget calls for $50, then I just need to stay away from the bookstore the following month, and after the jitters go away, everything will be all right. A recent example was getting a huge power bill for the month of July. I took some steps to reduce our power consumption, and I'll know at the end of this month whether they were effective or not. If those steps didn't actually help, then I'll have to adjust some of my other spending plans to account for a plain old increase in utility costs that ain't gonna go away.

What I try to avoid is the "perfect storm" scenario in my finances. M and I have a weakness for good food and beverages. Every so often, we get tired of cooking at home and go out somewhere nice. If we do that several times in a given month, and if, in that same month, I find several new hardback novels I just have to buy, and I have to do some emergency maintenance on a vehicle, and I spend several hundred dollars on some carpet for the basement...then it can really throw things out of whack when all the bills come due at once.

So, I try to plan things out, expense-wise, so that the overall experience is a bit more smooth. For example, right now, because of buying a new dryer, I have run my credit card right up to the amount I usually budget for an entire month's payment, and I've still got a week to go before the billing cycle ends. So, though the truck needs a tank of diesel, and my racquet needs restringing, and the banister I broke needs replacing, and I really want a 1T external drive...I've got a self-imposed moratorium on new spending until the cycle turns. But what if I absolutely have to spend some money?