Thursday, January 27, 2011

The Plan, Part II: Cents and Sensibility


Photo Courtesy of Fun Fragrance

It's time (and not of the Hammer variety).

It's time to talk about the "B" word - that obnoxiously critical little tool needed to gain financial stability. The tool that's been mocking me daily for four years.

That's right. The Budget.

I have been actively budgeting and tracking my income and actual expenses now since January 1, 2007. In some places, it's truly cringeworthy. However, in light of my current circumstances - what I am attempting to do through this blog and my newfound debt-reductionist attitude - I'm awfully glad I have it.

Why?

Because it is a historical record of the last four years of my financial life. It is the most accurate, longest-running representation of My Bad I could have ever hoped to produce and I don't have to do it from memory...a good thing as memory often fails us when it's softening up the details.

Those who cannot remember the past are condemned to repeat it. - George Santayana

So, rather than examining it as a confirmation of my failures as a responsible adult, I chose to review it with an objective eye, combing it for what I can easily improve, learning from my mistakes.

There was some surprisingly good news!

First of all, I discovered it wasn't that I lacked cash or didn't have enough to cover my required expenses. The biggest problem is that I hadn't adjusted my budget to reflect changes in spending on the necessities.

For example: I had been consistently budgeting $300 a month for groceries and $200 a month for my "mad money" - my phrase for extra stuff...auto maintenance, hair cuts, cocktails, entertainment - and then budgeting the rest toward paying more on my debt. Those amounts HAD NOT CHANGED in four years!

Now, initially, those amounts were appropriate. My living situation was quite different from what it is now and feeding one person, 4 years ago, was much more easily done on $300. Especially when my diet back then consisted mainly of cheese and crackers. I also didn't drink then. Ever. 18 months later however, my living situation would dramatically change as would both my grocery and mad money needs.

But the budget didn't change to reflect the change in my circumstances except to indicate a rise in rent.

In order to compensate for this, I found I was spending both the grocery and mad money on groceries and using the extra money (after I'd paid it to my credit card company) for mad money - often overspending there too.

What do you mean I'm overdrawn? I still have more checks! - Unknown

Brilliant, I am.

And for my next trick...

Additionally, it was also clear that there were certain annual expenses (such as car tag renewal and, until this year, additional income tax payments, among others) - expected, dreaded expenses - I willfully ignored until it was down to the wire to pay them.

What happens when I don't budget for something even though I know it's coming?

"Why, hello, Mr. Mastercard! How lovely to see you lazily lounging there in my Prada knockoff wallet. I've got a little job for you to do."

Ahem.

I never said I wouldn't embarrass myself thoroughly while airing my clearly dirty underwear for all of you to see.

Now, I would like to take a brief opportunity to point out two very important things I was doing exactly right. Things I'm quite proud of that have been and will continue to help me. 3 years ago, I began contributing to both my company's tax-deferred retirement plan and their flexible spending account plan.

I know I may never be able to officially retire. I don't really expect to. But I'm keeping myself out of a higher tax bracket now and building some savings. I also have the ability, in a truly catastrophic, dire emergency, to request a low-interest loan from that account, penalty free. I say dire because I can already feel the laser beams of disapproval emanating from the eyes of every financial advisor in the universe as if to say, "Have we taught you nothing?!"

Yes, financial advisor people, you totally have taught me. But I obviously haven't been listening. And I'll do what I have to do if it comes right down to it as a very last resort. I mean, the credit cards are a last resort so, you know, just before that. OK? Promise.

It's still savings, a nice little savings, and it's there. If I absolutely must. Which, right now, gives me some comfort.

As for the flexible spending account program, that's also pre-taxed money coming out of each paycheck and being set aside for me to use for medical/health-related expenses. Which means, for instance, if I have to have an emergency root canal and crown or have a health crisis and must be admitted to the hospital, my co-pays and deductible are funded.

So see? The lack of having any liquid savings of note isn't quite as scary as it first seemed. Right?

*crickets chirping*

Anyway! Back to my budget...

Perhaps the single most important aspect I uncovered during my budget review - and it took me some time to see it - is that, when I first designed it, I was quite clearly in the "painful purge" mindset. Meaning, I was in GET OUT OF DEBT FAST mode...no matter how much it hurt. So, it wasn't that the budget was exactly wrong, for some people it may have been just right, but, for me, it just wasn't reasonable or sustainable for any particular amount of time.

Anyway, after identifying my trouble spots or budgetary love handles, if you will, I gave a lot of thought about what I wanted to accomplish, tried to be completely honest with myself, and then I sat down earlier this month and did a complete overhaul of my budget.

My goals are three-fold:

1. Pay down my debt.
2. Save a little in a liquid account for minor emergencies.
3. Let myself enjoy my life and the process of being reasonable about my money.

Here are the major changes:

1. The grocery budget went up to $400. Additionally, Lex will contribute his own $400. This also covers consumable toiletries, paper products, laundry soap, laundry quarters, and the like. We are going to try to pare this down without sacrificing quality but, for now, it stands. I'd rather have extra at month end than not enough.

2. The mad money line item went up too. I have given myself a $100/week allowance to be used for just...whatever. However, wine has to come out of mad money and not the grocery budget.

3. While the incidental line item didn't change ($80/month), it will truly be used for incidentals - auto maintenance, haircuts - things that come up frequently enough to expect and plan for but things that only come up every once in awhile. That $80 will go into my "high-yield" savings account (high-yield, HA! If you call 1.1% high-yield, that is. When I opened the account, the interest rate was at 4.5%) until needed.

4. Whatever is left unaccounted for on the budget after paying bills and myself has then been applied to my outstanding debt above the minimum payment already budgeted. I subscribe to the Debt Snowball philosophy - whereby I am working toward paying down my lowest balances first and working my way up to the highest balance last.

5. At month end, anything left over - even if it's a lonely nickel and including the cash in my wallet - will be swept over to my savings account to build up some liquidity until the savings account balance is at $1,000. After that, sweep and incidental funds will convert to debt payments until such time as the savings account dips below $1,000 at which time the process will revert back to the standard.

Following this plan, barring any unforeseen major events such as a loss of employment or limb (loss of limb is preferred...death and dismemberment insurance benefit and all), I will be debt free by January 31, 2013.

Slow and steady wins this race.

This budget, as you can see, isn't about getting out of debt as fast as possible. This budget is what I can maintain long term without A) losing my sanity and B) falling off the wagon and going on a binge. It's structured, certainly, but not choking me to death or making me cry.

And it's working so far.

While I didn't get to make a huge extra payment to my lowest balance card this month, I paid cash for my car tag renewals, have birthday money to put into savings (I used a little to register this domain and to buy a new mascara), and even have a little mad money left over to go out with the BFF this weekend.

We are going out this weekend, yes BFF?

And I didn't use my cards. Not even once.

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