In the first installment of this series we chatted about why it’s important to have a budget. Last time we started the process of actually building a budget for next month. Now we’re going to plan how to implement the budget by planning how the money will flow in and out during the month – making a Cash Flow Plan.
Please allow me to remind you that I’ll give examples as we go along. Some will be real and some will be pulled from the air. If you start comparing the numbers in my examples to your particular situation then you’ll very likely be basing your comparison on a fantasy, so please don’t do it. Try to grab the concept without getting stuck in the numbers and please leave a comment if you have questions or suggestions.
I also need to state once again that I am not a certified financial planner, accountant, or investing professional. I am a mother who learned personal finance from the “School of Hard Knocks” and is willing to share what she’s learned in the spirit of chatting with a friend over coffee. If you require professional advice, please seek it from someone with the appropriate certification.
Why Use a Calendar?
Did you do the homework from “How to Budget: How – Part 1” and record your expected income and expenses on a calendar? If not, please stop now, go reread the post, and do the homework. The next steps will be so much easier and make tons more sense if you have your calendar ready to go.
Now, as an exercise, we’re going to keep a running tally of how much money we’ll have in our account day-to-day if our income and expenses come and go according to a fictitious calendar. We’ll look at the calendar one day at a time and record the income or expenses as they appear. We’ll look at the balance after we add or subtract each day’s amounts and see where we stand. I’ll use a November, 2015 calendar as an example because it happens to be the next month after this post and because the 1st is a Sunday, which keeps the weeks tidy.
The numbers I’m using might seem unrealistic for you, but they are loosely based upon my work helping others figure out their budgets and they do represent reality for some people. Please look for the concepts and don’t get too stuck on the numbers involved.
We are just starting out so we have no money in the bank. Let’s suppose our $550 rent payment is due November 1, a common date for housing payments. If we’re starting from zero then right away we’ll go negative in our account. If we don’t get paid until Friday the 6th then we’ll have to hope we have enough food in the pantry and gasoline in the car to get us through until we get that paycheck. Even without the rent being due, with no money in our account we can’t spend anything unless we want to accumulate more debt. We don’t.
Then suppose we get paid $500 on Friday the 6th. We tithe $50 and had planned to set aside $50 for food and $5 in a little savings account, but we still haven’t paid the rent! Even if we skip tithing, which you know I don’t do, we’re still short $50 on the rent and we have no money for additional food or for gasoline to get to work. If we tithe and rely on the pantry and remaining gas, we’re short $100 in our account.
Then on the 10th our credit card bill is due. If we make the minimum payment we’ll only have to send $30, but we don’t have that because of the overdue rent. We decide to send it late once we get paid again, which happens on Friday the 13th (yikes!). We get another $500, tithe $50, pay the credit card minimum of $30, finally go grocery shopping with $100 (two weeks’ worth of budget since we missed a couple of weeks and we’re running low on everything), and catch up on savings for $10 (two weeks’ worth). For the first time this month we have money left in our account! Let’s celebrate!
But wait! Not so fast! We have a $425 car payment due on the 15th, which is Sunday, which means we need to pay it now or be late on another payment. So much for having money left. We’re behind $215.
We could continue this exercise but I think you get the point. It’s important to know when the money is coming or going because it helps keep you from spending money you’re going to need before the next paycheck or shortly after.
Back to Reality…
If you think I set you up in the example by having the rent due on the first and not getting a paycheck until the 6th, then I should tell you about people who pay bills that are due when they get paid and then assume they’ll have no other bills or surprise expenditures until the next paycheck. Assuming a zero bank balance two days after getting paid isn’t that far-fetched. Even if we’d saved our entire $500 paycheck from October 30 we would still have been short for the November 1 rent payment because in our example the rent payment was more than a single paycheck. During each pay period in our example (and in reality) we needed to take out some money for food and gasoline (or bus fare or whatever) to get to work, meaning we’d have even less to put toward the rent. We’d have to have saved $275 from each of the last two pay periods of the prior month in order to have $550 to pay the rent on the first.
But enough of the example. Try it with your calendar. Go ahead and start with your current bank balance, then step through the month day by day, adding the income and subtracting the expenditures and coming up with a daily bank balance. Write the daily balance on each date, preferably using a different color than you used for income and expenses. Does the daily balance ever go negative? What would happen if you were hit with an unexpected expense like a car repair or doctor visit?
Now get a blank sheet of paper and mark off a section for each pay period in the month. Label the top of each section with the date and the amount you will receive. Then list the expenses (or investments or whatever) that will come out of that pay period. Remember your daily balance! If you come upon a pay period when you’ll go negative then you need to figure out how to save money from a previous pay period to cover the shortfall so you can make the payment on time.
In the photo I kept going with the numbers we used in the example but since I’ve been budgeting for years I allowed myself to assume there was rent money in the bank to start the month. Since there are four weekly pay periods on the four Fridays in November, 2015, I set up four sections on the page, labeled with the date and the amount coming in. Then I used the calendar to plan what will be paid when.
Do you see how the rent and car payment are divided across pay periods so that the funds will be there when they are needed? My husband and I did that after we became a single-income family in order to pay for our housing. I’d show the money coming out of the checkbook register as an “artificial withdrawal” so we wouldn’t accidentally spend it and then add it back in time to make the payment. You could also take the money out in cash and keep it someplace safe until it is needed.
When my husband and I were first married he was paid weekly and I was paid once a month. Because he was in ministry and I was working for a Fortune 500 company, my paycheck represented a substantially larger part of our budget. We used my paycheck to cover the mortgage, utilities, and other monthly expenses. We used his paycheck to cover weekly expenses like groceries, gasoline, clothing, and incidentals.
Now my husband’s salary is the only salary and he is paid every other week. Twice a year we have a “magic month” where he gets an extra paycheck. The rest of the time we work from a two-column budget/cash flow plan that we tweak each month depending upon the needs of that time.
One Month at a Time…
Planning your budget and cash flow one month at a time will allow you to refine your categories as you go along. You’ll start to realize where you can cut back so you can reallocate money to areas where you need to spend more. Plus each month will have its own particular expenses. Here in the US we celebrate Thanksgiving in November. The festivities traditionally involve a huge meal, which means grocery budgets may need to expand to accommodate the holiday extras. Christmas is such a big item for many families that it is wise to set aside a sum each month throughout the year to cover the cost of gifts, parties, and celebratory food and drink. Consider the unique financial aspects of each month as you plan its budget.
Did you remember to include some spending money for yourself (and your spouse, if you’re married)? Do you have an emergency fund for those times when “oops” happens? Are you saving for important future priorities?
As a final check, compare your budget to that list of priorities and goals you worked on during the “Why?” post. Are you spending your money toward the things that really matter? If not, go ahead and tweak the numbers so you’re headed toward your goals. If you’re satisfied, then you are done!
You did it!
If you’ve worked through these first three posts with me you should have in front of you an actual budget for next month! You know when the money is coming in and how you’re planning to use each and every dollar. You have a plan to save when necessary to cover larger expenditures later in the month. Hopefully you’ve allocated some giving, if not as a tithe then as a contribution to the charity of your choice.
By now you’ve heard me say way too often that the hardest part of a budget is living on it. Promise yourself and your accountability partner (read the first post here if you don’t know what that means) or spouse that you are going to live up to your budget. You will not spend extra money on things outside the plan, no matter how tempting the invitation to go on a road trip, no matter how cute the outfit, no matter how much you need the tool, no matter what! If you do run into a situation like a car repair or medical bill that changes your priorities, sit down with your spouse or accountability partner and rework the budget. You may have to cut some expenses elsewhere to cover the unexpected item.
There is still a lot to cover, like irregular income, emergency funds, and getting out of debt. We’ll chat about those topics soon. In the meantime, please leave me a comment if you have questions that I or someone else reading this post might be able to answer. I’ll be adding material to Facebook and Twitter if you’d like to follow me there. And please use the blue button at the bottom of the post to join A Chat Over Coffee and follow the “How to Budget” series here on the blog.
What do you think will be the hardest thing about living with your budget?
The “How to Budget” series posts are:
- How to Budget: Why?
- How to Budget: How – Part 1
- How to Budget: How – Part 2
- How to Budget: Irregular Income
- How to Budget: Emergency Fund
- How to Budget: Getting Out of Debt
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