Every week I ask Mrs. HoF if she has any ideas for a post and she’s told me a few times to post about our budget process. Well, I figured, since she is so passionate about it I would go ahead and let her write her own post. So, guess what, here’s Mrs. HoF with her first post!
I’ve mentioned posting about our budgeting process a few times. Mr. HoF always shoots the idea down and rolls his eyes.”Everybody posts about budgeting. Blah Blah…”
Did he just say“LET her write her own post”??? Please. I finally decided it wasn’t getting written unless I wrote it myself… so here is it.
The Cash Flow Budget
Our budget, or possibly lack of budget, I like to call the Cash Flow Budget. The Cash Flow Budget looks at all the expenses we can’t change first, emphasizes our financial goal (debt pay down, investment, etc.) second, and does not account for a line item for each expense category. So far this year we’ve used this process to pay down $16,500 towards the new car and bolster our emergency fund an additional $5,000.
How it Works
We pick a point in time (usually we do this twice a month, the weeks we get paid). We open a good ‘ole Excel sheet and start our trusty Cash Flow Budget. We start with the current bank balance and then we start adding in the expenses and income. First are the “unchangeables,” daycare, mortgage, utilities. Unchangebales are the things you truly can’t live without and generally require a cash payment.
Do we put cable and internet here? We certainly do not. Mortgage, utilities, daycare, prescription medicine…whatever expenses you have that truly can’t change. Yes, I know I’m forgetting food, but we put that on the credit card now and it is a very changeable number.
So, starting balance, followed by the unchangeables, then, since we moved most all expenditures to a credit card, the credit card payment (do I hear ominous music playing, “you use a credit card?!” explained further below). Lastly, we add in our paychecks (woohoo!!). We now have a somewhat predictable rolling cash balance and we forecast this out usually for 2-4 weeks, at least until the next pay period.
This whole process takes maybe 30 minutes.
Last year when we were aggressively paying off our last student loan using a line item budget this would take hours. HOURS!
Sweet Dee, what do you think about that?
What this does for us:
We see our low points. We have an agreed upon minimum balance in our checking account. This enables us to forecast any issues and adjust discretional spending without compromising our progress towards our financial goal.
We see any unnecessarily high balances quickly and point that money to a better place rather than sitting in our checking account accruing exactly zero returns.
Allows us to figure out how much money we can afford in this pay period to pay down the car loan, or the student loans, as was the case last year. This is the cash flow part.
Why I like this method:
We let the money do the talking. What do I mean by this? Our budget is really a cash flow. We budget based on actual cash in and out. Monthly budgets are great to pinpoint expenses, but you need a cash flow to actually see when, where and how much. The money shows us when and how much we can afford. Maybe we make can 2 car payments this month because I can afford $1,000 this week and $2,000 more in the next pay period. If so, then we actually make 2 payments. Much better than holding onto that money in a checking account until I can make one big payment. That is a sure way to spend it on something else.
It’s simple and quick
It helps avoid a mid-month raid of the emergency fund due to insufficient cash flow which may not be apparent in a monthly budget
The major benefit to this method is that the money tells us what to do. We have dictated our unchangeables, our minimum balance and the rest is easy…we pay off the car loan!! In the very near future, we will use this process to invest!
How this is different from traditional budget:
I don’t pinpoint an amount I want to pay down, we have a minimum goal in mind, but the sky is the limit. I think when people monthly budget they unknowingly pay less because they have a set amount they are going to pay and don’t let their budget show them they have more. Yes, you can afford that $300 car payment the loan company gave you, but have you really looked to see if you can afford $1,000 or $2,000?
Now that we have switched to a credit card as the primary payment method we don’t budget by line item!!! My favorite part.
Most budgets are monthly, but we don’t get paid monthly so I don’t think it makes sense to do it that way. Our budget is based around our pay schedule.
Why this works for us and maybe not for you:
After a year of hardcore, penny pinching budgets we have squeezed most of the extra spending out already (Quick note from Mr. HoF: We’ve made a ton of progress, but there are still some more opportunities out there.) Do we splurge when we shouldn’t, of course, but the amount of progress we’ve made in the last 18 months:
After a year of those line-item budgets we really know where our money Is going. But in all honesty, after a year of budgets and being so frustrated at the end of every budget session I needed a break from that type of budgeting style.
If you still buy Starbucks every day, have your lawn mowed by a service, buy lunch out every day and most importantly are still in debt, you need a hardcore, penny pinching budget, this is not the time to be lazy.
What we still need to work on:
We not long ago switched to a credit card for almost all our primary spending. Not having the immediate pain of the money leaving the checking account is something we will are still adjusting to. And I think I want to switch to a biweekly payoff instead of monthly. But this has been AWESOME for budgeting. One line for credit card instead of 25 lines of gas, grocery and whatever else, I’ll take it!! Not to mention, the “free” money from the rewards is paying off handsomely.
But again, if you haven’t gone through your budget with a fine-tooth comb, and lived that way for a while, then you probably aren’t ready for a credit card to be your primary source of payment. I think they can really be a slippery slope to incremental frivolous spending. We will maintain a watchful eye on that cash flow item… when your budget only takes 30 minutes you have plenty of time to do so!
Thanks for reading!