Tuesday, May 20, 2008

Tightwad Tuesday 2: Knowledge is Power*

Thanks for all the great comments on last week's post. Finances are a subject near and, well, painful, to my heart and I am glad to have the opportunity to think out loud and bounce ideas off such great friends and readers as you. Your comments touched on many things I hope to explore in the coming weeks: creative work arrangements, CSAs/Freecycle/co-ops and other community approaches to stretching resources, arts & museum memberships, and of course, libraries. :D Need I say more about libraries?

I do want to start by saying that I am NOT a financial expert. I'm a nerd with a lot of anxiety and issues around money, and up until this point in my life, my financial approach has been a cross between Aesop's ant and an ostrich: generally working hard and doing the right thing about money, but burying my head in the sand instead of really coming to grips with my money situation. But an ostrich can only live so long with its head in the ground, and our impending Year of Living Impecuniously means that it is time for me to face the facts. Yes, I am talking about a Budget with a capital B. True confession: I've never had a budget to date, and I'd probably be a lot better off right now if I ever had. But that's water under the bridge....

One of the things that kept me from making a budget for so many years was my tendency to perfectionism. I tried several times to sit down with financial software and keep track of EVERY PENNY. My grandparents did it (my grandmother still does - receipts for single candy bars! books of stamps! a bottle of water!), by hand, in a green ledger... and they have more money than anyone else I know personally. But each time I tried it, it was too overwhelming and soon got pushed aside. I always had enough to live on, health insurance, and something in savings (though sometimes a very small something). These last few years, with health challenges and the costs of medically assisted conception, we've been living closer to the wire than I found comfortable, but I still couldn't make the time to sit down and wrestle the numbers.

There's something about knowing that your household income is going to diminish significantly in the near future, while your expenses are NOT, that gives you the impetus to face the budgeting demon head on. In doing so, I learned something very valuable. I don't have to have a PERFECT budget. I don't have to know every expense to the last penny per kilowatt - and in fact, it's nearly impossible to do so. But even working with estimates and loose numbers has given me a much better understanding of our financial picture, for better or for (gulp) worse.

The weekend we made the first draft of our budget, we just looked at what we are spending now and our present income, compared with our anticipated income in the fall. There were no great revelations - we knew our biggest expenses and challenges would be housing, insurance, and our car - but we did get a pretty good idea of how big a gap we'd be looking at in the fall. It was simultaneously reassuring and terrifying. It actually helped my financial anxiety to have real numbers to work with ("Worst case scenario, we would amass X thousand in debt at the end of this year"), rather than the looming vague nightmares -- homelessness, repossession, living in my parents' basement -- I am so good at summoning. At the same time, it gave me a tangible lump in my throat: how are we going to trim that much money from a budget that is already so tight? Or, how will we make up the difference in income?

I think the best thing our budgeting exercise did was make us more conscious of our financial situation on a daily basis, while giving us motivation to start tackling the problem. We need to take it several steps further, getting more specific and monitoring what we are spending (if perhaps not quite as meticulously as my grandmother), but it's a start, and it's more than I've ever done. As the saying goes, a journey of a thousand miles begins with a single step....

Your turn: Do you have a budget? If not, why not? If you do, what system do you use? What do you like or hate about keeping a budget?

*Are you singing the Schoolhouse Rock song now? I am....

24 Comments:

  • For a while, I was really good at making budgets, and trying to get us to stick to them. Lately, though, stress and comfort have taken over, and though I do general "money plans" as I think of them (I say to J, "I'll do moneys this afternoon") but they're very general, a, and we're not so good at sticking to them b. :-/

    By Blogger N, at 8:46 PM  

  • we've gone round and round with it - but we've written down our "income and our outgo," and trimmed the outgo where we could.

    And we stick to it as best we can.

    Cat is REALLY good at this - I hope she reads it, and comments.

    By Blogger Shelli, at 8:56 PM  

  • We do a prospective budget kind of like Shelli- that is, we figure out how much money we make per month, what our monthly expenses are, how much we want to/have to put in savings, etc, set realistic trimming for teh expenses, and then pray that we don't go over it. Keeping track of every penny is damn near impossible (and time consuming) for us, but I think what we will start doing once I go back to work is using cash for our non-fixed expenses- taking out a certain amount each week to cover groceries, eating out, and misc, then when it's gone, it's gone. Other stuff, like mortgage, car, etc, is not going to change, so that we can keep doing like we're doing. It'll be like having an allowance, is how I picture it, because we've tried the spreadsheets and the MS Money and it doesnt work for us.

    We do some other things to "budget" that probably don't fit in with your financial situation that goes along with your choices/needs these days, but I'll mention them b/c they might help others or you in the future- for example, we put the max 5000 per person into our dependent care accounts each year. So it gets taken out of our paycheck in small increments, and then that money comes back to us at the end of the year, and we put 2000 per child (the maximum allowed tax free) into a 529 plan. We get to keep the 1000 extra for savings, travel. It's like forced savings for college, and we don't miss it as much b/c its automatically taken out of our paycheck. On top of that, we get the tax benefit of not paying taxes on the 5000 (in my tax bracket, that saves me about 1500 at least), and having an additional 2000 of our income not subject to state tax...

    By Blogger Moms and Two Boys, at 10:13 PM  

  • I am actually pretty good at making budgets. And I tracked our expenses to the penny for a couple of years in Quickbooks. Then Julia came and that all went to shit.

    For the last year we were budgetless. And then I got that job offer at about half my current salary and I accepted it because it was that or killing myself (uh, not much of an exaggeration) and so we had to do a budget again.

    Like you, we did a quick one with soft numbers and it really helped out in one way -- we realized we were only $500 short each month IF we took control of our impulse spending and "entitlement" spending (meaning: I work a crap job and am miserable so I'm ENTITLED to buy this book here because I may was well ENJOY my money if I have to work this job -- totally a circular and pointless mode of thought, but so common in our society, I think). Knowing that we were only $500 short was both good (because like you I was imagining homelessness and bankruptcy) but also frustrating because WHERE were we supposed to come up with $500?

    For us, the answer presented itself: daycare is exactly$500 a month. Looking at our budget we realized that if I took a second part time job I'd be doing it ONLY to pay daycare, and that seemed pretty ridiculous. So since I'm only working part time now, we're shifting schedules around and found a daycare swap and that's what we're going to do to make our budget balance out.

    Now to cut some more fat so that our margin of error is not razor thin on our budget...

    By OpenID anaccidentofhope, at 12:21 AM  

  • We have a budget. Before Hannah came along it was more carefully planned and we were actively reducing consumer debt. Now we have a budget again and we have a plan to get rid of debt over the next 5 years. I am doing monthly statements for Beth on how well we did in each area. It helps us both because there is some wiggle room - she has $180 to spend in her two food/pet stores per month and if she goes over/under she has to make it up. And the same in my two. Our biggest issue is unplanned expenses that come up and deciding if we want to accrue debt or reduce savings - usually we accrue debt knowing it is easier for us to pay it off than to see that drop in savings that we would want to pay our mortgage if the worst things happened.

    By OpenID insaneanimals, at 1:17 AM  

  • So, wait, Mindy - you can use the dependent care $ for college savings? I thought it was only for current childcare expenses. It doesn't fit with this year but maybe in the future?

    Chicory, I hear you on the entitlement spending... mine tends to be lunch out or dinner out. We've curtailed that some in the past month and will have to put the brakes on entirely next year. It's a hard habit to break.

    Ugh, Cathy. Savings. Another topic I should tackle. We're just not gonna have much for emergencies this year. We'd have to go to the National Bank of Grandparents if the worst happened, I guess. >:?

    By Blogger Jen, at 6:35 AM  

  • Sorry- let me clarify. We put in 5000 from our paychecks into our dependent care savings account before taxes. We then pay for our childcare with "regular" after-tax money and at the end of the year we submit receipts from childcare, and get the 5000 back (never paying taxes on that 5000). So at the end of the year we end up with 5000 in cash each.

    We then take that 5000 in cash, and instead of spending it, we put it directly into the kid's 529 accounts. The budgeting benefit (other than the benefit of getting 5000 knocked off of taxable income and 2000 each off state taxable income), is that we don't "miss" the money as much because it comes out of the paycheck, so writing a check for 4000 each at the end of the year doesn't hurt as badly.

    Overall, here's how it breaks down (approximately):

    - subtract 5000 from gross income over the year; this really "costs" about than 3500, because of taxes, so minus 3500
    - pay for childcare of 5000 - minus 5000 (running total, minus 8500)
    - get 5000 reimbursed from account- plus 5000 (running total minus 3500)
    - put 4000 in 529, which lowers state taxes by about 280, for a net cost of minus 3720 (running total minus 7220)

    So for that 7720, we have paid for 5000 in childcare PLUS put 4000 into the kids 529 accounts,... of course it only works if you have 7720 to spend in the first place, but it can also work on a smaller scale.

    As an FYI, the dependent care FSA can be used for any pre-k preschool fees, not just full-time daycare or nanny.

    By Blogger Moms and Two Boys, at 8:43 AM  

  • "As an FYI, the dependent care FSA can be used for any pre-k preschool fees"

    Crap. I wish I'd realized that in December.... For anyone else who doesn't know all the ins and outs of FSAs, you can use the childcare account for any babysitter if they are providing childcare while you are working or in school (NOT for date night, alas). This includes family members, as long as you file the appropriate tax forms (you do a W2 for the sitter, they claim the income). We did this in '06.

    By Blogger Jen, at 8:56 AM  

  • I'm like your Grandparents. I keep track of every penny in Quickbooks. Even quarters I put in the quartercup in the car for parking.

    I've been tracking everything for years now and I can just run reports to see how much money it takes to keep out house running, how much we can save, etc.

    I just calculate all that then have money for bills automatically taken out of our paychecks and put in the "house account" where I pay all our bills electronically.

    I also have money taken out for savings & retirement accounts. Then the rest we can do whatever with.

    I don't like the word "budget" it's like "diet." Like you can't ever buy anything fun for yourself. I guess I look at it more like a "plan." I have a plan in place to take care of our bills and savings, so even if I blow what's left in my paycheck on something frivolous it's ok because the bills are paid and we're saving money.

    Oh and we try to never use our credit cards and if we do we pay it off when it's due.

    I would highly suggest Suze Orman's book "9 Steps to Financial Freedom." And then after that David Bach's book "Automatic Millionaire" which is about saving for retirement.

    I love this stuff!

    By Blogger Lil Jimmi, at 10:13 AM  

  • but if your sitter or nanny makes over something like 1400 a year, you have to not only give them a w2 but also pay FICA taxes for them with your own tax return...

    By Blogger Moms and Two Boys, at 10:35 AM  

  • southwesterngemini from ff and ivp
    I was an absolute mess financially before I was in my current relationship. My partner is the budget queen, she loves her budget (the actual document). We just use an Excel chart with line items for each expense. And we are able to project out as far as we would like, which really helps with planning. And she/we balance the checkbook at least every few days. There are some set expenses each month (mortgage, car payment, car insurance, sewer, water, HOAs, etc.) and things also get adjusted depending on the season (utilities, auto gas, etc.). We don't count every penny, we just make an educated guess for the projected budget until we actually get the actual dollar amount on the bill, usually we try to overestimate. Every payday, the first thing we do is pay the bills online or account for the money in our checkbook as a holdover (for things we write checks for). I think the key with budgets is to be realistic with the reality of your expenses ... if you spend $100 a month on manicures and that is something that is not negotiable, make a line item for that every month in your budget. We have line items for everything like cat food/litter, auto gas, groceries, etc. Our biggest challenge, like Cathy's, are those unexpected expenses. Those get us into trouble. They suck.

    By Anonymous Anonymous, at 11:35 AM  

  • We are "track every penny" people, though we're a little more sloppy (particularly with tracking cash) with a kid in the picture. It is an ongoing joke in our relationship that other couples fight about what to do with money, but we fight about what order the columns should be in our spreadsheet.

    I think Shelli recommended "The Tightwad Gazette" in the last money thread, and we love that book, as well as "Your Money or your Life," for getting us out of some impulse spending habits. Both books can come off as a little extreme, but they do have good ideas. The second of these has kind of a "non-budget" approach that you might like, but it still requires tracking purchases and does not address kid financial issues at all.

    On the debt vs. savings issue, we focused on savings until we'd saved up a reasonable emergency fund, and then focused on debt (mostly school loans, which are now blessedly gone).

    I'm enjoying hearing others' ideas on this!

    By Anonymous dlvc, at 12:09 PM  

  • I have a (paper) budget. Just a list of the expenses, and I put a check next to them when they are paid. Most of them are automatically taken out of my paycheck. Then at the end there is the leftover amount, and I subtract every penny from that during the month so I don't go over what I have available. I make a mark for cc purchases, so I can cross those off when the bill comes to double-check the billing. I don't have to write down every penny for cash transactions, since I substract the cash withdrawal from the budget amount, and then I just spend the cash.

    My wife and I have separate finances in terms of bank accounts, but we just divided up the bills that I would pay and that she would pay. She's been a student for a few years now, so she's taken care of food and car insurance and netflix out of her student loans and school money; I do the rest. I might put those things into the main budget when she gets a job, although getting her to remember to give me receipts/write down cash withdrawals could be a challenge, so who knows how it goes.

    I thought a single person could only put in $2500 for the taxfree daycare expenses? (We can't be married legally, and nor can my wife adopt our child, so I'm the only one who counts when it comes to non-taxable savings accounts).

    By Anonymous j, at 1:37 PM  

  • No, you can put in $5000 per child, but only one person can take that amount. I'm not sure if you could split that into two accounts for 2 parents. I believe the child needs to be claimed as a dependant. I do this for Sanna, so I will need to claim her as a dependant this coming year. I think.

    I think the book All Your Worth by Elizabeth Warren is supposed to be good. I read it a few years ago, but it didn't really help. I already knew that our expenses were too high compared to our income, but there wasn't much to do about it then.

    I would like to get ourselve out of cc debt (mainly several years worth of groceries, making progress!) and FIL debt (selling the house, also making progress) before this kid comes. Then the month "pay down the debt" money will all go to childcare and we'll be in about the same boat. We need to start saving for retirement more and for a downpayment, but first we need to pay off the debt (with the exception of my student load) and make sure we have enough for the 6 weeks I'll be paycheckless.

    We need to sit down and re-examine our budget now that we've moved and our rent/commuting costs have changed.

    By Blogger Brooke, at 3:11 PM  

  • Do you know about Mint.com? I just found it and it's really helpful--it's a free online thingy that, when you log in, logs in to whatever accounts you've given it and pulls up all of your transactions into something that looks like a ledger. And you can put in a budget and it tracks your spending against the budget.

    It's obviously not as precise as doing it yourself, and you have to keep an eye on the categories (it's relatively new, and sometimes it does weird things), but it's a lot simpler and faster than doing it all yourself.

    Anyway, it's been helpful for us lately!

    By Anonymous Pronoia, at 4:04 PM  

  • Excellent idea this "tightwad Tuesday" - I'm taking notes.

    We sit down around the 1st of every month and budget on paper. We live in a Canadian city where the oil boom has hit - and prices are skyrocketing on an almost daily basis ($5/gallon for gas; $6 for a box of cereal; our rent has gone up almost 40% over the past two years). So since we're not in the oil industry and making the obscene oil $$$, we're getting left behind and are actually saving to move to the other side of the country where owning a home is a possibility for non-oil people. The biggest part of our budget is getting the known, big costs out of the account and paid (thank God for online banking), which we do as we write out the budget - this leaves just food and gas to budget for over the remainder of the month. We guestimate what they'll be and put everything else into savings. Oh, and we agree on a certain amount of "entertainment money" (take out, movies, whatever) a week and take it out in cash every Friday afternoon. Once it's been spent for the week, no more fun-money 'till next Friday. That way we don't have a heart attack when we realize how much wasted money slipped by us on the debit card.
    Someone mentioned avoiding the credit card...probably good advice, but if you're disciplined about it, it can be a great source of free stuff. We researched credit cards online and found the card with the biggest reward program for no fees. We put everything on the card that we can (food, tuition, books) and as we get in from the store, go straight online and pay off that amount. We earn points for hotel stays and in the 4 months since getting the card, have earned enough for 2 nights at a 4 star chain....which will come in handy when we're exhausted from budgeting and want a few free nights of luxury.

    By Anonymous Kate, at 5:46 PM  

  • I really do love these posts - I just don't feel so alone now, I mean I always know we are not the only ones budgeting and wondering how we will afford gas if it continues to rise. !!

    While my husband was deployed this last year I was able to keep the expenses very low around our house, with just me and my now 1 year old, but since the soldier is back grocery bills have gone up and so forth. Not complaining at all would rather have him here of course than the latter.

    so, our budget is money for bills, food, gas and the occasional night out - we were able to save a lot with the husband's combat pay but with him going back to school and me looking to go back to work (I stayed at home last year) there is many unkowns and more budgeting ahead.

    I always look for places to trim the fat too - cell phones is a big one.....anyone use pay as you go?

    By Blogger MrsSSG, at 10:21 AM  

  • Oh, good to know about the $5K. Although, finding the cash flow to have that taken out monthly, and yet still pay the daycare monthly, and not get reimbursed for all of it until the end of the year (that is the way my employer's account works - you can't claim back money until it has actually been collected, which is bizarre given that they will reimburse health expenses up to the amount they plan/anticipate on collecting from you by the end of the year).

    My partner can't claim our daughter as a dependent, because then I'd lose head of household status. Which I think saves us much more money taxwise than her being able to put daycare money aside pre-tax.

    By Anonymous j, at 2:40 PM  

  • Hmm. I just had a look at the Dependent Care Savings Account brochure my employer provides. It says that the federal maximum is $5K, but individual employers can impose lower maximums. So that must be what is going on.

    I, for one, do not understand why the entire amount of daycare expenditures (maybe up to some limit, but it should be a reasonable limit based on the highest costs in the country) aren't tax deductible, without having to go through the rigamarole of setting aside money in these accounts, and then getting some reimbursed with pre-tax money, and other amounts discounted due to child care tax credits.

    Anyway, sorry to highjack the comments.

    By Anonymous j, at 2:53 PM  

  • Talking about dependant care (still): we are really lucky that they money comes back to us almost as soon as it goes out, so we don't have to budget being down $5K for a whole year.

    Of course, I won't have enough in my paycheck for benefits, retirement, two daycare bills, and two dependant care accounts to all be automatically withdrawn. I'd end up owing my employer money every other week, so we can't do that for both kids next year.

    By Blogger Brooke, at 5:35 PM  

  • I don't think the person taking the dependent care FSA has to be the one who claims the dependent (though the name does add credence to the idea!). I remember discussing this with our accountant(another thing we are dropping due to budget constraints) because I was concerned about the adoption credit and the dependent care credit both requiring us to claim the same child as a dependent. I'm pretty sure that she said you didn't have to. Obviously that's something to clarify before you do it. One hopes if you have an FSA you also have a knowledgeable HR person or department to help sort it out.

    By Blogger Jen, at 8:01 PM  

  • Thanks! I'll definitely ask about it. I know the definition for "dependent" was different for our health savings account than for federal taxes - I was able to pay my partner's health expenses out of the health FSA since she didn't have a job and I was supporting more than 50% of her expenses, even though she was not a legal/federal dependent of mine. So confusing, though.

    By Anonymous j, at 4:13 PM  

  • I really appreciate your writing style. Followed your link from FF :)

    You actually have me thinking... I believe I fall into the mentioned "perfectionist" category. I can't keep track of EVERYTHING so why even try?

    ....hmmmmm maybe this isn't a good idea?

    By Anonymous *Krysta*, at 5:48 PM  

  • totally off topic- but it is something I just discovered that is a wicked awesome "freebie".

    Have you heard of the free dover samples? You sign up and once a week you get e-mailed a link to all of these awesome things like pages to color or clip art and you can print them out or, um, use them in creating header art for people :)

    xo

    By Anonymous calliope, at 1:16 PM  

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