Just pretend this organizational challenge is an elevator, there is no 13th floor. Last week was Easter and it felt, to me, a bit inappropriate to mail out a challenge.
So here we are in April, if you’re in the US it is tax season. It’a good a time as any to sit down and take stock of your budget. Now that we’re no longer chasing down our keys every week, we may have a little more mental space to deal with more challenging things like budgets.
This week’s challenge: Take Stock of Your Finances and Make a Plan
If someone else in your household handles all of the finances, your challenge is to sit down with said person and go over the state of things. (This should happen regularly, it’s not micro-managing, it’s not being nosy, it’s communicating)
If you need a starting point for getting your household expenditures organized, keep reading, otherwise, see you next week.
The last few years have been a bit tumultuous on the financial side of things. I have a good job, so I’ve been able to keep my head above water, but divorce (lawyer fees, even for the most amicable, we worked out everything before coming to you, process are shockingly high), the self-employment tax (I was a contract employee that first year), buying a fixer-upper, fixing up the fixer-upper, and then combining households has been an interesting ride. If it weren’t for some discipline, I could have been in serious trouble.
I like Dave Ramsey’s concept of first creating the mini-emergency fund -which has saved my butt- and then paying down debt smallest to largest. I don’t necessarily agree with his entire philosophy, but I see him as a solid place to start.
I don’t exactly do the envelope system so many people rave about. I do the hey, we’re in the 21st century and online banking makes moving money between multiple accounts super-easy method. (I should probably work on a better name for the process).
The goal is, if you are living paycheck to paycheck to slowly dig yourself out of that situation. If you are just disorganized the “payoff” will be an almost immediate reduction in stress. Next week, we’ll work on setting up a system to remember to pay each bill.
How it works.
You’ll need at minimum three accounts, two checking and one saving. If your bank doesn’t let you have two free checking accounts and one savings account, it’s time to find a new bank.
Gather all of your bills and financial obligations, yes, all of them.
On a sheet of paper or spreadsheet total your bills and multiply them to figure our the annual total. Inconsistent bills like utilities should be based on the highest month, not the average. Don’t forget your less regular bills like house and car insurance or property taxes. It’s probably a shockingly high number, breathe.
Take the annual total and divide it based on how often you are paid. (I’m paid weekly, so I divide by 52. If you’re paid on the 1st and 15th, you’d divide by 24, every other week 26, or monthly 12). This number is your bill total.
If this total is higher than your income, this is a much bigger problem than organization can solve, I’m sorry.
Each pay period, you’re going to sit down and perform the following math problem:
Income – bill total = savings and discretionary income
Decide how much of the remainder is savings at the beginning of the pay period. When your paycheck lands your account, move the money into:
- Your savings / emergency fund – this one should be able to be accessed in an emergency. As your savings grow, you’ll want to move the money over your minimum emergency fund into a less accessible place.
- The bill checking account
- Discretionary income
The key to making this work is to force yourself to live out of only your discretionary income for food, gas, entertainment, clothing etc. Do not rob Peter to pay Paul, the money in the bill account has already been spent and is only for bills. The savings / emergency fund is for emergencies, no exceptions.
The wiggle room created by using the highest variable bill total should not be added back to your discretionary income. This money is your “buffer money” and you’ll use it to insulate yourself. It’s a good idea to not let your bill account hit zero each month, buffer money helps with this. In a few months, you can use some, but not all, of the buffer money to pay down debt.
You may find yourself playing Iron Chef: Scrounge the Pantry Edition on the last couple of days of a pay period. Try to keep a -this is a challenge, I want to meet my goals – mindset rather than focusing on a feeling of deprivation. It is hardest in the beginning or after an emergency occurs and you have to rebuild your savings.
It’s going to be okay and it’s going to be worth it.