Financial Peace University Lesson 3 – Cash Flow Planning
The Nuts and Bolts of Budgeting
You have to be proactive
Just in case you didn’t already know, Dave Ramsey is big on budgets (very, very big on them). He earnestly preaches the need for a budget. Why? Because money is active – so you need to tell your money what to do instead of sitting around at the end of the month wondering what your money did. You might remember that I just reviewed a book, The Automatic Millionaire by David Bach, in which the author gives the opposite advice – don’t do a budget as they never work and are not necessary. I found it interesting that Ramsey actually said on the DVD that those people who tell you never to do a budget are just trying to sell books.
So Dave wants each of us to do a budget and not only that, but he wants us to do a new budget every month. Why, you ask? (What are you, my two-year old?) Well, because every month is different so don’t build a single “One-size-fits-none” budget that does not reflect reality. You will have different expenses each month, so you need to do a slightly different budget each month.
Why do most people hate the word “budget?”
Ramsey offers some reasons why people hate budgets starting with a budget having a “straight-jacket” feel to it. Couple that with the fact that most people have never had a realistic budget that actually worked and this explains a lot of the angst surrounding budgets.
In fact, budgets (or “cash-flow plans” if you want to remove the B-word from your lexicon), do not work when you leave things out or over-complicate them. That’s where I struggle actually. I do not want a budget with 413 individual categories where I have to spend 45 minutes after each trip to Wal-Mart divvying up the purchases into the appropriate categories. There must be a middle ground where we can find a workable plan that does take most of the month to actually work!
Finding that plan is worth the effort
During the lesson, Dave listed a number of reasons why we all should do a cash-flow plan. Some of the highlights are that a written cash flow plans (if agreed and actually lived on):
- Removes money fights from your marriage
- Removes guilt, shame, and fear that may be a part of purchases (“do I have enough money in my checking account to buy these groceries?”)
- Will show areas of overspending
- Will cause your money to go farther (“managed money goes farther”)
Create a zero-based plan and use the envelope system
So what exactly is this zero-based cash-flow plan that Ramsey recommends? It is simply a plan where you spend every single dollar that you earn on paper before the month begins. In other words, you sit down before the month begins (or stand up, I don’t think that matters, I’d probably “lounge” if I had the choice) and write down where all your money will go that month taking into account bills, payments, and all the things on which you need to spend money for that particular month. It is a zero-based budget because when you add up all the planned expenditures you just wrote down and subtract your income, you get zero (get it?).
To implement this, Ramsey recommends using the envelope system where you put the cash you are going to spend that month in an envelope and then…wait for it…spend it. But, here’s the rub, when there is no more money in the envelope, you have to stop buying stuff. Seems simple enough. Personally, I have not completely committed to this system yet. I’ve toyed with it a bit and I want to roll it out in a more formalized approach next month (with our first actual zero-based cash flow plan!) to a few categories and see how it works for us. Keep in mind that Dave is not recommending this for everything – he doesn’t suggest you walk into the bank with your wad of cash to pay your mortgage each month (“hold on, lemme find my pennies…”) but there are some spending categories that work well with this system (for instance, the ones you are prone to overspend).
Ramsey also cautions that you are not going to be very good at budgeting the first few months – he claims it takes about 3 months to get most of the kinks worked out. So, create the first monthly cash flow plan and when things come up, have an emergency budget meeting with your spouse or mentor or whatever, and change the plan. Repeat as needed while striving to reduce the number of emergency budget meetings in future months.
This is where the rubber meets the road
You should have heard the sighs (I’m pretty sure I heard a gasp or two) as Ramsey introduced all the forms that needed to be filled out for homework this week. I do admit that there were quite a bit to do (and I also must admit I didn’t do them all). The most important form, obviously, is the actual Monthly Cash Flow Plan. You can download this form from Dave’s website here or just use a spreadsheet or whatever. Two other important forms were the Lump Sum Payment Planning form where you keep track of all the large, non-monthly expenses (think insurance, taxes, pool membership, etc) and the Irregular Income Planning form for those who do not get the same check every 2 weeks or whatever.
All in the all, Ramsey wants us to fill out the following forms:
- Consumer Equity Sheet (Net worth)
- Income Sources
- Lump Sum Payment Planning
- Monthly Cash Flow Plan (3 pages)
- Allocated Spending Plan (basically the cash flow plan broken out week by week)
- Irregular Income Planning
- Breakdown of Savings
- Financial Snapshot
If that sounds like a lot…that’s because it is.
So, we’re working on our budget and I’m kinda excited to do it for a few reasons. Certainly I want to get a better handle on where our money is going on a monthly basis. I also think that having a budget will reduce my stress surrounding purchases. I tend to not want to spend money on, well, pretty much anything. So I like the idea that I can look at the budget and it says $X in category Y, so it’s ok for me to spend that money…so less stress.
This was quite a session with a lot of forms and homework – I’m telling myself that not all lessons will be like this so no need to worry about it (I don’t know if that’s true or not but it seems to work for me).
Check out the previous FPU posts: