My Current Budgeting Technique: The Hybrid Check-Point and Cash Plan
Yesterday I discussed a few different ideas for following-through on your beautiful budget spending plan . We have personally tried most of them (except for the all cash method) and have not been completely satisfied with anything yet. Not to be deterred, I’ve continued optimizing the plan. Today, I’m going to present our current technique.
The key for us is to automate as much as possible
I use billpay from my checking account to do as many bills as possible. I transfer money to my mother-in-law and even used billpay to send a check to my sister-in-law once. I have automated transfers from one account to another to take care of savings; money is deducted from our paychecks to fund our 401ks and employee stock purchase plan. I have learned that the more I automate, and the easier I make things, the more that gets done. So I do it as much as possible. That is all well and good but the budget is busted by the non-scheduled expenses, as I mentioned yesterday.
The basis of our current plan is the Check-Point technique
The latest approach we have been trying is the check-point technique. I pick a certain date and, on that date each month, I take a look at our checking account balance. I compare the current balance to the reference point to see how well we have done the previous month. If we are above the reference balance, that’s a good thing. If we are significantly below, that is not a good thing. Personally, I take the check-point as the day that our mortgage payment is deducted from our checking account each month.
We have moved the "non-essential" expenses to cash
Our latest variation, hence the "hybrid" moniker, is that we have started to use cash for some purchases. We continue to use our credit cards for normal expenses like groceries, gas, and other "necessary" things. We now use cash , however, for the "non-essentials" like dining out, buying toys, entertainment, etc. (you have to define your own categories)
To implement this, I withdraw some cash from our checking account at the beginning of each month. We do have a certain amount budgeted for non-essentials each month though I do not take all of it out at once. About half way through the month, I take out the rest of the allotted amount in cash. That way, if the essentials go over budget, we just take out less for non-essentials at our second withdrawal. In this manner, the technique is dynamic in that essentials take priority over non-essentials and we still buy groceries and such but maybe don’t each out as much, if necessary.
Don’t forget the "fun money!"
We also use cash for our "fun money" but this is a strictly separate category. My wife and I each get a certain amount of cash (it’s not much, but I haven’t spent it all in a month yet). There is no accountability with this money - we are free to do with it whatever we wish (that’s what I use for hosting this blog). I feel that the fun money is really important - especially for someone who feels overly restricted by the idea of sticking to a budget (especially when that magical trick of calling it a "spending plan" instead doesn’t work!) I would definitely recommend that you incorporate some "fun money" into your plan.
We are still in the process of checking this latest technique out
So far it has worked fairly well. The credit card bills were lower last month even with taking a vacation. And I love not having to write everything down. It is certainly not a strict plan that will force us to "give a name to every dollar" like Dave Ramsey would tell us to - but sometimes theory has to meet reality. As I mentioned yesterday, I’m still looking for the perfect plan. We’re ever-so-slowly inching towards a cash based method, but we haven’t taken the plunge yet. So, if you have any suggestions for modifications or other techniques entirely, I am all ears. (or eyes as it were, since I’ll be reading your comments on my computer monitor)
Four Techniques for Executing a Spending Plan
I am sure that none of you have ever experienced this, but it turns out that It has been very hard for me and my family to stay on a strict budget. Luckily, with an emergency fund in place, we have not suffered any major financial consequences to date.
Creating budgets is not-so-hard, sticking to them seems to be much more so
I have tried a number of times to create a budget. They all look so pretty in my spreadsheet application (some even have different colors!). In my current spending plan spreadsheet, I have exactly nine different budgets. The problem is not in creating the budget but in sticking to it (again, I’m sure I’m all alone on an island here, but I’m just trying to be honest). In this post, I’ll explain some of the budgeting techniques I’ve tried and hopefully one or more will resonate with you and enable you to execute (as in follow-through on) your spending plan instead of getting frustrating and executing (as in, well, executing) your spending plan!
Those non-scheduled expenses always destroy the budget
Even when I create and actually start using a budget, it is typically busted by the non-scheduled expenses (even the budgets with the fancy colors!). It is easy to account for the monthly bills (especially when you use the equal payment plans). We have never been good, however, at forecasting how much will be spent each month in categories like groceries and restaurants and other miscellaneous expenses. These are the expenses we typically put on our credit cards each month for convenience. Of course, this sometimes leads to bills that are quite large at the end of the month. Over the years we have tried a few different techniques to keep these under control or to at least monitor them and avoid surprises.
I used to write every purchase down
At one point I had a piece of paper on the refrigerator to write down every expense. Believe it or not, some of my friends made fun of me, though I think one actually implemented the exact same technique. Earlier this year I just wrote down every expense on a piece of paper and added all the categories up periodically. This worked fairly well but was annoying and I didn’t like the idea that I would have to write down every expense every month for the rest of my life!
I tried to get in the habit to checking the credit card statements periodically
After getting bored with writing down every expense, I told myself that I would just periodically check our credit card balances to achieve the same goal. The thing is, this didn’t really work for me either. I’m not sure why, it seems like a reasonable technique.
I then created the "Check-Point" budget
Drifting further to the side of convenience, I then created what I call the "check-point" budget (I’m going to call it CP because it is annoying to type). I’m sure I didn’t really invent it as it seems to be common sense, but I had never heard of it before.
The CP works on the theory that if your income is fairly stable and you have done a good job of planning for all your expenses and savings, your checking account balance should be about the same at a certain point each month. For us, I check the value immediately after our mortgage payment is deducted. If the value is at or higher than the "CP" value (the value it was the previous month), then our spending was not out of control the previous month. If the amount of money in the account is significantly lower than expected, then it is time to tighten the reins and get more proactive about our budgeting and spending. I also instituted a sub-CP at the middle of the month to try to catch any deviations earlier in the cycle.
Of course, there is the old standby: Cash
I think the CP technique is pretty good (especially from a convenience standpoint) but I am still looking for the ultimate blend of convenience and effectiveness. The CP is still a bit reactive instead of proactive as you could get yourself in a lot of trouble by the time you check it the next month. As a result, I keep coming back and evaluating the use of cash instead of all these other (and sometimes annoying) techniques.
This doesn’t say much about me, but I had an "aha" moment about using a cash a few months ago: the best thing about using cash is that there is no more writing stuff down! You look in your wallet, if you have money, then you can spend some. If you don’t have any money, then you don’t spend it. Easy. Unfortunately, this doesn’t integrate well with the way my family lives. Yes, I admit that is a cop-out. Of course, If we really wanted to, we could use this system. (Ergo, I guess we don’t really want to)
We’ve tried all of the above except …
So, we’ve tried a number of things. Some have worked fairly well, some are annoying, some are both. The one thing we have not tried is the full cash system (sometimes called the envelopes method). I haven’t decided that we should make the jump to this method and, frankly, I think I would have a hard time convincing the rest of my family to try it. What about you? Do you have any other good budgeting ideas that seem to work? Have you tried all cash?
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