Financial Planning Blog

While biking over to the trailheads at Military Reserve we pass by an old home that we marvel at. Several years ago this building was an eyesore--more likely to house a meth lab than a family. About five years ago somebody with ambition and vision took possession of the house. At first progress appeared slow, with more dismantling being done than construction. However after the first couple of years you saw some tremendous leaps forward as new siding and windows were installed and a second story went up over the garage. The next year there were new decks, fences, and sod was laid. The place now looks great, and we almost always comment on as we ride by.

I don't know who these people are, but they definitely had a plan and stuck with it. They did a lot of hard work as they could commit their time and money. I'm sure they got discouraged at times, and probably made a number changes along the way. But, wow, look where they are today.

You know where I'm going with this. With vision, planning, along with some hard work and sacrifice, these folks transformed a house no one could live in to one they can be exceedingly proud of. You can do the same with your financial house. Even if it is in as tough of shape as that old house, you can turn things around. Are you ready to get started?

Creating and documenting the plan

"He who fails to plan, plans to fail." -- Winston Churchill

"If you don't know where you are going, you might wind up someplace else." -- Yogi Berra

Many people say they have a budget, but it is in their heads, not on paper. Maybe your life is simple enough that this approach works for you, but for most of us it is not effective. If you are not making the progress toward your financial goals that you desire, it is difficult to imagine you are going to turn things around without a written spending plan. The fact is our financial lives are complex, and getting the numbers to add up right can take a while, especially in the beginning. Dave Ramsey, who has helped thousands get out of debt and make serious progress toward "financial peace" following his "baby steps", tells everyone to start each month with a written plan where every dollar has a name (i.e. purpose). This does take some work--but, then don't most things worth achieving?

Key considerations and behaviors:

• Set aside adequate time: Recognize that creating your spending plan is going to take some time and effort--more so to start, but also on an on-going basis. Like cleaning the bathroom or weeding the garden, this may not sound like fun. Hopefully, as you gain experience and control of your finances, it will become less of a burden. You will likely find it useful to break the task of creating the plan into two components--the budget decision meeting and documenting the detailed plan--and setting aside a dedicated time every month for each.
  • The budget decision meeting is where you work through hard task of deciding what you are and aren't going to spend your money on. If you are a couple, you both must show up and be engaged in this effort. Both of your interests and concerns must be heard, and no one should run roughshod over the other. It is critical you are both bought into the plan and are accountable. You both have to own it.
  • Documenting the detailed plan is where the numbers are put on paper (or on the screen) in a format you both can understand. However, one of you may better equipped or more inclined for this kind of analytical, detailed work. If fact, you may only get frustrated trying to do this together. The format isn't all that critical, but things need to add up correctly and make sense to both of you. (See below for some helpful tools for getting started.) Your goal is to create a working document you can use in the decision meeting to lay out the choices and decisions you are going to have to make. After you make the required trade-offs, they are then documented in the detailed plan. The end result is a written plan where both of you are know how exactly much money you intend to spend, and on what.
• Getting started: You should have a pretty good idea of what you currently spend your money on by looking at your checkbook or debit card transactions and credit card statements. Although a few months will capture most of your recurring expenses, it is helpful to look back over an entire year so you can capture those intermittent expenses that you will also need to be planning for. Remember, the goal here is not just figuring out what you have been spending your money on--it is deciding where you are going to spend your money in the future.
  • If you have difficulty accounting for a significant amount of your cash expenditures, you may find it helpful to track your cash (and possibly your credit and debit card expenditures) for a month or two. Keep a note card with you to write down everything you spend as you go through the week.
  • You want to break down your expenses into several key categories. How many is up to you--but, not too many, not too few. If you want help with this, check out some of the tools and forms below to get you started.
• Get help if you need it. If you are having trouble getting started, don't be afraid to seek out someone you feel is capable and trustworthy to give you a hand. Or, you might get assistance through community organizations, your church (or Crown Financial Ministries), or through Dave Ramsey's Financial Peace University.
• Plan for irregular income and expenses: If every month looked the same, budgeting would be much easier. For many, the income side of things is pretty stable, but for those on commission or self-employed it can be a roller coaster. Adapting can get a bit complex, but there are different strategies for dealing with this issue. For example, you may create a budget around a base level of income, and then prioritize how you will spend or save any additional income. Creating a savings bucket that enables you to smooth out the available funds each month is another strategy. Planning for irregular expenses (such as insurance payments, vacations, or back-to-school clothes) is a bit easier, but still takes foresight and planning. You basically want to smooth things out by purposely saving ahead of time, or you may be able to arrange for a vendor (e.g. utilities or insurance companies) to bill you a consistent, monthly amount.
• Forget the perfect plan: It will be remarkable if you get this plan perfect to start. You are going to miss things, and you are going to change your mind as you go along. Anyway, the goal isn't a perfect plan--the goal is to be in control of your spending. Forgive yourself, each other, and move forward. This is an on-going process where you seek to remain in agreement over time.
• Plan for some fun: Sure, if want to achieve your goals, you will likely have to sacrifice. However, this doesn't mean you can't enjoy life--you just want to be in control. Usually this is a combination of leaving some money in the budget for recreation and entertainment, plus identifying creative ways to have fun for free (or on a dime).
• Prioritize savings in your plan: Whether it is short term savings to account for irregular income and expenses, building an emergency fund, or longer term savings for college or retirement, savings has to be top-of-mind. Of course, you may have to get expenses under control and/or pay down significant debt first, but the objective is to become a consistent saver. Savings goals must have a prominent place in your documented plan, even if they are on-hold for a while.

Tools and links:

• Dave Ramsey's budget forms and Total Money Makeover
• Developing a Spending Plan and Schedule of Non-Monthly Family Living Expenses, from Montana State University Extension
• Elizabeth Warren's 50/30/20 budget, plus on-line tool
• National Foundation for Credit Counseling on-line budget worksheet
• You Need a Budget, 2011 About.com Readers' Choice for "Best Windows Personal Finance Software" with free trial

In case you missed them, you may wish to check out the initial article in this series, along with Budgeting Fundamental #1--Prioritizing Needs and Wants. Next in this series will cover the final two fundamental elements of budgeting--executing the plan, plus and tracking your performance. Then, I promise to move on to a topic that is less tedious and guilt-ridden. Maybe something on the Black-Scholes options pricing formula.