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Guest Post – The Best Definition of a Budget?

January 12, 2010 · Filed Under Budgeting · 3 Comments 
Today’s guest post was provided by Bryce Bartruff. Bryce is the COO of American Missionary Fellowship, the oldest national missions organization in the nation. Their vision is to enable called and committed followers of Christ to serve with purpose and passion within our nation’s borders.

Budg-et (bujit): noun Freedom

The question the speaker asked the group was simple, “What is the best definition of a budget?” Thinking the question was a bit academic and boring, I was not interested in hearing the definition until I heard his answer. Thoughtfully, he wrote the definition on the board in front of the class: the word “FREEDOM.”

You are out of your mind was my immediate reaction. A budget constrains spending. If I adhere to it, it will keep me from spending funds the way I want, when I want, and for what I want. How does it provide freedom?

The speaker went on to explain that if a person has a budget that functionally meets the goals his family decides are important, it will provide the freedom to be “worry free” when it comes to finances. People with budgets know at any given time if they are on track in reaching their financial objectives. They know if the balance between income and spending is healthy and know how much they have available to spend in various areas.

If, for example, a family decides they want to have a fabulous vacation next summer, they need to determine the amount of money they need for such. They can then structure the way they spend the rest of their money around this primary goal. When it comes to determining how much they spend on clothes, eating out, or the kind of cars they drive, their decision will be based on their knowledge of how much money they need to set aside for their vacation. The budget will provide the guidelines needed to make everyday purchasing decisions.

I thought for a second, How many times have I walked through a store and spied a jacket or home repair tool that I wanted to purchase? If I had known how much money was set aside for such purchases I would have known if I could have the item or not. Since I did not have a budget, my decision was based on a guess. A budget would have provided the freedom not to have to worry if the decision to buy one of these items would force me to scrimp elsewhere.

Most people worry about their finances. In fact, the stress associated with money is one of the major reasons most married couples argue. A realistic budget forces a family to establish priorities and allows them the freedom to spend their money in areas they have identified as most important to them. Identifying spending priorities allows the freedom to work together in support of mutual goals. Couples are no longer pulled away from one another because of finances but are instead working together in support of one another. Knowledge of family resources and priorities provides a foundation upon which to make wise financial decisions – decisions that build family relationships.

Of course, the process for crafting a budget can be somewhat complex, but once it is initially drafted, all that is needed is periodic fine-tuning. Yes, life changes, new needs evolve, and goals are altered. A well crafted budget will provide the flexibility to allow for these changes with each new version.

So the speaker was right. A great definition for a budget is “freedom.” A realistic budget provides the freedom to make wise financial decisions. With such, people can be free from worry about their present circumstances and future financial fitness. They know everything will work out if they simply concentrate on making purchases that support their budgets. Yes, a budget does indeed provide financial freedom.

American Missionary Fellowship offers a personal finance workshop, Fiscal Fitness. For more information about attending or hosting a workshop in your area, give me (Bryce Bartruff) a call at 610-527-4439, ext. 104 or email me at

November – Living our First Dave Ramsey Cash Flow Plan

November 4, 2009 · Filed Under Budgeting · 5 Comments 

Hopefully you’ve noticed that my wife and I have been attending Dave Ramsey’s Financial Peace University over the past few months.  One of the major tenets of his FPU plan is to create a workable budget and then actually live according to it.

Well, November marks the official start of our latest attempt at budgeting.  I have had a fairly detailed budget for the past few months but we were not proactively living according to it (what is the point of that?).  This month, however, spurred on by the FPU class, we are going to give this whole budget thing another try.  Let me say that I really want to live by a budget.  I want to feel like I am controlling my money and not just sitting around wondering what happened to it at the end of each month.  Just in setting up our latest budget, I’ve found some areas where money just seems to be disappearing.  That both encourages and frustrates me….but hopefully this will be the start of something good!

The way I see it, there are two overarching keys to being able to convert your budget from a purely academic exercise to a useful tool:

  1. It has to be realistic – You are not going to be able to go an entire month spending only $25 on groceries for your family of 5 (ok, maybe if you have a huge “victory garden” and a chicken, and maybe a cow).  If you set up a completely unrealistic budget, you will be completely frustrated by the 2nd week of the month and then be completely off your budget.  So, be accurate when you set it up, even if what you are seeing is ugly.  Get used to living a budget, then in following months you can actually live on your budget and tweak your spending to get it where it needs to be.
  2. It has to be easy to administer – Do you really think you will keep up with your 324 line spreadsheet past the 2nd week of the month?  Your plan must be simple to monitor and administer or else you will neither administer nor monitor it.  Again, the point is to reduce or eliminate all sources of frustration so that you can keep up and keep on your budget.  That is why the cash envelope system is so powerful – there’s basically no administration.  Look in envelope, if there is money, you can spend it; if not, then you can’t spend it.  No spreadsheets, no budgeting software, no piles of receipts to itemize each weekend (just writing about all of that is frustrating).

Our plan for November

We haven’t made any major changes to how we’re living.  After discussing it quite a bit, we have decided to keep using a credit card for our bigger purchases.  We will start using the cash-based system for some expenses – this month that will be our dining out category.  In order to take a more proactive attempt at tracking our spending during the month, we are going to simply collect all of our receipts and put those in various envelopes.  We’ll then periodically chart our spending to make sure we are on track and be mindful of how much more we can spend that month.  To be honest with you, I am a bit nervous about this plan since I feel it might violate key #2 I mentioned above – keeping receipts, tracking spending from multiple sources….yuck.

To alleviate that concern a bit, I’m in the process of searching for a simple budget tracking tool that will help us to monitor how we are doing throughout the month.  The one I am starting the month off with is SimpleD Budget.  It is very basic but very simple too – so we’ll see how that goes this month.

Not completely dropping the credit cards yet

As I mentioned, we’ve gone back and forth on the credit card thing.  I know Dave Ramsey is a huge proponent of cutting them up and never using them.  I’m somewhat up in the air on them while my wife does not think it is a good idea to use cash for everything.  She is open to trying to use our debit card, but I’m not sure I see a significant difference between using a debit card and a credit card that you pay off each month.  As such, it’s a work in progress, but this is what we’re trying this month.  I will keep you updated on our progress this month and any changes we make for next month’s plan.  Wish us luck!

Financial Peace University Lesson 3 – Cash Flow Planning

October 15, 2009 · Filed Under Financial Peace University · 2 Comments 

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:

My Current Budgeting Technique: The Hybrid Check-Point and Cash Plan

September 10, 2008 · Filed Under Budgeting, PF Basics · 1 Comment 

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

September 9, 2008 · Filed Under Budgeting, PF Basics · 4 Comments 

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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