Cash Spending Plan
I had some questions about our cash spending budget and I know it's been a while since I discussed how we budget and how we do a 'no spend' month. So what better time than now. We are jumping back in to the process in October so I'll give you the low down on what we do and how we're doing. And then I'll check back in from time to time to update you.
The Background:
So we do a combo of a couple different methods. First, we (and by we, I really mean me. The Mister just goes along with it) adhere to the Dave Ramsey cash spending method. I really like him and what he has to say. You can catch his podcast online or sometimes I can actually listen to him on the radio when I'm in an area that has a station that he's on. Anyway, he believes "Cash is King" and to not use credit for anything. Literally. Pay cash for a car. Buy used. Don't take out loans. And that it is possible to purchase things with zero credit. As in you don't have a credit score because you use cash.
His method also gives you 'baby steps'. You start with looking at your finances, setting up a budget, and saving $1,000 in an emergency fund. Then you start paying off your debt with the debt snowball method. You line up your debts (not including your mortgage. That's a different step) starting with the smallest to the largest. You pay all the minimum payments on all the debts except the smallest. With the smallest you pay extra (all the extra money you have). Then after that debt is paid in full, you roll all that money over to the next debt, including the minimum payment for that debt. So for example, you have a doctor bill for $500 and the minimum payment is $50. You have an extra $100 per month to pay on bills so you pay $150. Then you pay that bill off. Your next bill is a credit card with a $5,000 balance on it and a minimum payment of $150. So you pay $300 each month until it's paid off. So on and so forth.
So you do this until all your debts are paid. Then you start saving for 3-6 months worth of expenses. So if your total monthly expenses are $2,000, you save anywhere from $6,000-$12,000 in a savings account. Then you start investing 15% of your household income into retirement. The next step is to fund your kid's college fund(s). And then you start paying off your mortgage. Finally you start building wealth and giving money. Some people do all these steps within months. Other people take years. You should listen to one of his shows where he interviews people who are worth over a million dollars. And I'm not talking the stockbrokers. I'm talking the shop owners and working class people who have worked and saved and invested wisely. It's amazing. One of the questions he asks is 'what is the most you've ever spent on a pair of jeans'. I haven't listened to the show enough to find an average of what they're answers are, but I'm pretty confident in saying that they only spend $20-$50 on jeans. And $50 would be a splurge!
Okay. So that's Dave Ramsey in a nutshell. You can check out his website for more information. And check to see if there's a local-to-you class. We also adhere to the No Spend method as well. The No Spend method was developed by Anna Newell Jones. She was heavily in debt and decided that she needed to not spend money at all in order to curb her spending. So she outlines how to do just this thing in her book The Spender's Guide to Debt Free Living. She explains how to set yourself up to not spend money unnecessarily for a month (or longer if you so desire).
Here are the basic principles from her plan (as taken from Amazon.com):
1. Create a personalized Debt-Free Life Pledge.
2. Understand where your money is going when you’re in debt, and where it will come from to pay it off.
3. Learn why putting money into a savings account before (or while) paying off debt may not be the best idea for you.
4. Find additional income sources and generating side gigs.
5. Re-integrate spending into your life once you’re out of debt, so that you stay out of debt.
So you can see that there are some similarities between the two methods, but also some major differences. I'll outline what we do and how it works for us. Then hopefully you can take all this information and find a system that works for you!
Our Method:
At one time we had a dual income and would spend money like it was going out of style. And then we realized that that was foolish. We needed a savings account. So I set up three accounts: a checking, an emergency fund, and then a savings that I couldn't touch without going into the bank. We keep $1,000 in the emergency fund and also $1,000 in checking. Our monthly bills are right around $700 (not including car insurance which I pay in full once per year). So I keep a cushion in checking in case something comes up that I need to use my debit card or write a check for. Reasonably I could wait to pay something until I've gone to the bank to transfer money but this gives us a little cushion. So each month I go to the bank and I transfer all the money over $1,000 to our savings account that we can't touch. It's funny how the bank tellers will get to know you and ask you what magic you're working on today! No joke. I walk into the bank and I have one teller in particular that I always work with. She gets it and is so patient. And then when she looks at that savings account, her eyes get wide! The last time I was in there I was less than $100 away from the next thousand and it took everything I had to not transfer money to make it a nice even number. I'll look forward to that sometime this month though!
Now, before you say 'your expenses are only $700?!?!', let me explain some things. We live rent free. We don't have any utility costs as well. We live where my husband works--at the fishing lodge. And part of that deal is free living space. Before you think it's all romantic (well, it is pretty romantic) let me also tell you that we live in the house with other people from April-September. A few people will filter in and out before and after those months, but pretty much expect a full house during those months. We also have motel units right behind the house. They're open from April-October. So you can expect other people milling about during those months too. So yeah, living rent free but with some drawbacks. Not bad though.
I also need to explain that our income was cut drastically (by about 2/3) a couple of years ago. And we ended up moving to the fishing lodge because of that. Before that we rented a house down river from where we are now. It was a great house, a great layout, and a great location. But things change. Life throws you curve-balls and you figure out how to adjust. For a few long months I wondered how we would survive with the Mister's seasonal income. But we made it work. And then I started Chicken Librarian as a business. And I put some money into that. And I was working very part time at about four different jobs (you can read about that in previous posts from this past summer). And then I started stressing about finances, as one does. And I looked into our account and was very surprised at how much money we'd saved. I don't know how we did it (there wasn't a concerted effort. It just happened). And the Mister's seasonal job is starting to wind down until next March and I thought now would be a really good time to think about cash spending and go on a 'no spend winter'.
So we've been able to save about 1/3 of our income. Another 1/3 goes towards our bills. And the last 1/3 is spent between my business and our other 'needs'. I put needs in quotes because I think we still have some frivolous spending. Which is why I want to do cash spending and no spending. The no spending is what we use to keep from spending money on needless things. The cash spending is spent on things like groceries, pet food/supplies (vet bills would come out of our savings account), gas (car repairs will come out of savings), and other supplies (toiletries, etc). So as of today we have well over the 6 months of expenses saved. Our outstanding bills include a credit card and my student loans. In the spring we'll pay the credit card off and start the savings all over again until we have enough in the bank to pay off the student loans. We'll need a newer car sooner rather than later and we can use some of this money to buy a new-to-us car. But I won't do that until I absolutely have to.
Our budget:
I'll give you a run down of what our budget looks like. Actually, we didn't really break it down like we normally do. We just decided that we would just get $400 out of our checking account each month and see how it goes. So the $400 is roughly broken down as follows:
1. $200 food (eating out and groceries)
2. $100 gas
3. $100 animals
We'll see how we do. I totally blew it thus far. I took out $400 at the end of September and just went crazy. But I'll take out another $400 and start all over. It's all about finding your balance and getting back on the wagon. You'll eventually figure out what works and what doesn't work.
I will also say that before I start doing any sort of major no spend I will make sure I'm stocked up on things that I need so that helps with not spending needlessly. So I went to the thrift store yesterday and bought $35 worth of clothes and some dishes (for $3!!). I also went to the dreaded Wal-Mart. A place I never shop at any more but I needed a 2 gallon glass container for our laundry soap that I make (they're $25 on Amazon and only $13 at Wal-Mart). While I was there I stocked up on toiletries, grabbed some groceries, and other items that's been on my to-do list for a while. So some of that $400 that I already took out went to some of the above. I also purchased most, if not all, the supplies I need for my upcoming Chicken Librarian classes. I do have a business account for those things but sometimes I still need to use personal money to pay for expenses.
One last detail to note. I'm working a very part time job this winter (only 1!!!) and that will be enough to cover our monthly budget--cash spending and bills-- without having to dip into that savings account unless a big ticket item pops up. That's our goal. Keep with the necessities until next Spring, reevaluate, and then pay off a debt. That's why I say we loosely follow the two methods above.
Okay. I think that's enough. After reading all this and digesting it, let me know what questions you have. Do you have a budget that works for you? I'd love to hear your success stories and what hasn't worked for you.