Put your attention on your weekly money

What you want to do now is physically separate your money into different buckets.  Here’s what you do next:

1. Set up multiple accounts at your bank.  Most of the bigger institutions will let you set up multiple accounts for free if you automatically transfer money into them each month (which you will).  Nickname these accounts.
    
2. The first account is your “static account” (call it whatever you want).  All income is deposited here.  Leave money there to meet static expenses.  The rest gets transferred to your “discretionary” accounts and your “savings” accounts.
    
3. Only money for the week gets transferred from the static account into the discretionary account.  Make an agreement with your financial partners (if you have them) as to who is going to get how much.  Each person should get a debit card.  Each person spends that money through the debit card. No credit cards.  Pay your static expenses with a credit card if you want the miles. Use the static account to pay off the credit card, but ONLY for those expenses.
    
4. IMPORTANT POINT:  Get enough money only for the week.  Not the month.  If you spend all your money by day 5 of the week, you can limp along for two days without money.  But if you run out of money on day 15 of the month, two weeks is too long to go without money.  Putting your attention in weeks also helps you focus on what you’re doing.  You will be more present.
    
5. Transfer money automatically each month into your “vacation”, “kitchen remodel”, etc. accounts at a set amount (nickname the accounts as such).  For instance, $50 into the vacation, $200 into the kitchen remodel, etc.
    
6. Watch what happens.  

Here’s what I hear from people who have actually done this:  People start to turn it into a game.  They start to see where they could reduce their static expenses.  They start to contemplate whether they really want that new grill (or purse or pair of shoes) or if they’d rather add that money to their “kitchen remodel” account.  They watch their static expenses shrink, they get more present with their decision-making around the discretionary money, and they love to watch their “kitchen remodel” accounts grow.  It’s a game. It’s fun.  It requires little accounting, as most of it’s done automatically.  You don’t have to watch every penny.  You don’t have to know how to use Quickbooks.  Brilliant.  If you have success, I would love to hear your stories.

For many, this strategy isn’t working, either right now or ever.  Those folks need to watch where their money is going.  I’ve long believed the trick to getting started, leave alone getting it right, is to make it easy and fun.  I think I might have found it.  Now, I stick to my inclination not to work with folks on budgeting, bail-outs and bad attitudes, but I’m always willing to share strategies that work.

Think of your money in three buckets—static, discretionary, and future

I will start with an admission:  I don’t actually budget the way I’m about to describe.  I’m stealing this idea from a Financial Planning Association conference I just attended (my whole life is continuing education).  I’m one of those freaky people that keeps track of just about every expenditure, tracks it in Quickbooks with help of my assistant, and analyzes where money is being spent, where it can be saved, etc.  Most people won’t do this, so I rarely, if ever, recommend it. 

What I like about this idea is that it’s easy and fun.  This step should take no more than an hour.  Here’s what you do:

1. Get out the last six months’ worth of statements that contain your expenses (checking, credit cards, etc.).  Six months is required for homeowners, in particular, so it catches semi-annual expenses.  You might want to add other annual expenses.
    
2. Add up all the expenditures and withdraws (ATM withdraws included). Divide by 6.  This is what you’re spending per month.
    
3. Now, go through those statements and identify all your “static” expenses – that is, those that happen every month as a result of passed decisions you have made.  Those expenses include the mortgage(s), property taxes, insurances, car payments, utilities, other loan payments (including credit card interest), childcare expenses (not random babysitting), etc.  Add them up.
    
4. Everything else is discretionary.  Subtract “static” from total expenses.  Remember to keep your timeframe to monthly numbers.  That’s your discretionary budget.  Divide by 4.5 (or so).  That’s your weekly discretionary budget.
    
5. Now sit down and decide what you want or need to save for.  These things could be a kitchen remodel or new clothes or a vacation.  Some folks will add to this quarterly tax payments or annual payments like life insurance premiums.

Here’s what you’ve done.  You’ve gotten a clear picture of how much money you are spending as a result of passed decisions.  That’s your static bucket.  You’ve gotten a clearer picture of what you’re spending week-to-week on food, clothes, household goods, extra babysitting, pet expenses, etc.  You’ve gotten clear about what you want to do with your money. This may take some tweaking along the way, but you’re on your way.  See next week’s post on what to do next.

Ask yourself these questions

* Do you want your children to go to college?  Why?  Some people say, “Because I want them out of the house.”  Well, if they’re out on their own, making money and paying rent, does that count as “out of the house”?  If so, then maybe going to college isn’t that important to you.  There’s no shame in a vocational degree.  We need welders and plumbers.  Some of them make very good money.

*  Do you think it’s important for your children to go to college?  I usually get a resounding “yes” on this one, mostly because it leads to better jobs and better pay.  In the Bay Area, where I live and work, most of my clients’ kids are going to have to get advanced degrees to live and work nearby (and/or work themselves to death at several start-ups until one of them goes public).  After all, we want the grandchildren to be close-by.  This is why I often look at a Bachelor’s degree as a second “preschool” experience.  It’s a chance for kids to mature, build networking skills, learn a little, gain more independent living skills, and figure out what they want to do in life.  Most of us don’t have that figured out by 18 years of age.  An “Ivy league” education will achieve that.  So will a private, smaller, lesser-known liberal arts school.

*  Do you want to pay for college?  This is where it gets fuzzy.  Most people will say yes because they believe that they have to, or that it’s the only way a kid can go to college, or that they don’t want their kid to come out of school in debt, or that they don’t know what else to say.  But there’s a difference between wanting your kid to go to college and wanting to pay for it.  So then, I ask….

*  If you could find a way for your kid to go to college and get someone else to pay for it and not have to pay that person back, would that be okay with you?   To which I almost always get the answer, “Of course!  That would be great!”  Then, stop putting money in your child’s name, stop saving money in brokerage accounts for this purposes, and stop funding 529 plans.  The leaner you can look on the Free Application for Federal Student Aid (FAFSA), the standard form for applying for college financing, the better.  The baby boomer generation is going to transfer an enormous amount of money to higher education institutions in the next 20 years.  That money, which will likely end up in endowments, may be available to you and your kid for college and it often does not need to be paid back.  You’ve got to fill out that FAFSA form to start that process.  Save for retirement first, and if you have to access those funds to pay for school, then do so.

*  Are you attached to being able to go to a cocktail party and talk about how much it’s costing you to send your kid to college?   Some people are committed to paying for college because they believe it’s part of parenthood.  No shame in that, either.  Just expensive.  Start saving.