If you have ever tried to set a budget, you know that the first few months are somewhat like a 3 year old trying to color within the lines. And if your income varies month by month, then it’s even more frustrating to successfully plan and follow an accurate budget.

Regardless of your circumstances, getting started budgeting can be hard, frustrating, and down right maddening.

A common statistic thrown around these days states that money is the number one reason for divorce. I would bet at least half of these divorces could be eliminated if only budgeting weren’t so difficult. How many times have you sat down with your spouse and ended up getting into a fight before you were halfway through creating your budget?

May I suggest a solution?
 

Get Naked

My guess is that you’ll be much quicker to compromise, forgive, and forget … and you’ll probably stop arguing about the extra $20.00 your spouse wants thrown into his/her “entertainment” fund. Think about it, if you and your significant other are sitting there in your birthday suits, are you really going to get into an argument about the where the extra $20 each month goes, or are you more likely to figure out how to work together?

Oh, and like I mentioned above, budgeting is hard. But you don’t need me to tell you that. Once you reviewed last months strengths and weaknesses and planned accordingly for the new month, why not give each other a pat on the back (side.) You know what I mean.

The merits for establishing an emergency fund are solid. If your furnace quits working in the middle of winter or you lose your job, you’ll eventually need quick money to cover life’s potholes.  The recommended amounts often vary from $1,000 to a full year of expenses.  Personally, we have an emergency fund that would keep us afloat for 3-4 months if both my wife and I lost our jobs at the same time.

But what if you’ve already established your primary emergency fund?

There are plenty of places to send your money.  Retirement, college, vacations, home down payments and an infinite number of competing goals are fighting for each dollar.  However, before allocating all of your extra cash to your Tahiti vacation fund, I suggest saving monthly for life’s “guaranteed surprises,”  outside of your primary emergency fund. To me, an emergency fund is for the unforeseen worst case scenario, not for life’s guaranteed expenses (even if you don’t know exactly when they will occur.)

What are Guaranteed Surprises

If you drive you car long enough, repairs are guaranteed.  It’s still a surprise since you won’t know exactly when your car will sputter or how much it will cost you.  The same goes for home repairs.  Some experts recommend saving at least 1% of the homes value each year for this guaranteed surprise.  We use separate sinking accounts for what we currently think fits this category:

• Car Repair Fund ($50 per month)
• Car Replacement Fund ($350 per month)
• Home Repair Fund – for repairs only, not upgrades ($100 per month) – will start funding next month

Of course there are other guaranteed surprise expenses, but these three are the only things that currently come to mind.  I’m aware that my unexpected surprises may vary greatly from yours.  For example, if you have health problems, are an active runner/athlete prone to injury, or work around children all day, then you might consider your medical expenses to be a guaranteed surprise worth saving for outside of your normal emergency fund.  If your earn your living on your computer and it’s only a matter of time before it completely dies, then it might be one of your life’s guaranteed surprises worth saving for.

On a Side Note – Sinking Funds With Guaranteed Due Dates and Amounts

Notice the “Guaranteed Surprise” sinking accounts are different than these with specific due dates and amounts.  I know exactly how much money I need to save in each account at the beginning of each month to cover the amount due when the due date arrives:

• auto insurance bills due every 6 months
• life insurance bill due once every 12 months
• gift fund for Christmas

Obviously we love our sinking accounts.  They are a great way to save for both the known intermittent expenses as well as life’s guaranteed surprises.

Do you have similar “guaranteed surprise” funds?  If so, what are they?  If not, would you consider creating them outside of your normal emergency fund?  Why or why not?

We Were Bloated, Are You?

We’ve neglected our budget for a few months. My wife has been teaching additional classes resulting in extra income each month, so we haven’t felt squeezed. I suppose the extra money explains why we’ve been so lax. Regardless, when I sat down to try and get ourselves back on track, it struck me at how bloated our budget had become. We’ve been paying for several things on a monthly basis, all of which we thought were a good idea when signing up. But over time, we began using these services less and less. Here are three things that I’ve recently canceled, and won’t miss for a second:

Trimming The Fat

• Netflix – $20
• Equifax Score Watch – $8
• ESPN Insider – $7
• **Checking Account Service Fee – $12

**I also called my bank (Wells Fargo) to find out why I was being charged a $12.00 monthly service fee for my checking account. I knew that I hadn’t always paid this fee. After visiting with the Customer Service Representative, it turned out that I needed a monthly automatic transfer of $75.00 from my checking to savings account to have this fee waived. I quickly reestablished this automatic transfer on the 1st of each month, and set up another automatic transfer for the 2nd. The transfer on the 2nd will move the $75.00 from my savings account back to my checking account. Don’t worry, I asked the CSR if this was ok. He explained this happens all the time and is perfectly legitimate.

Total Saved Each Month – $47.00

What about you? Have you ever been surprised at how many unused services you’ve paid for each month?

Would you like to drive free cars for the rest of your life?  And what if I told you that you could become a millionaire while doing so?  According to a plan entitled, "Drive Free, Retire Rich" on Dave Ramsey's website, you can do just that.  Interested?  If you are like me, then I bet you are.  Who wouldn't want to drive a different car every 5 to 6 years without ever making another payment?

The first time I viewed this video I was so excited and inspired that I made my wife watch the video with me.  I sent the link to my family, and I even posted the link on my personal finance class discussion board for my classmates to view.  The video assumes that by making a car payment to yourself every month for 6 years and investing it in a mutual fund earning 12% each year, you will be able to purchase new cars off the interest earned in the fund.  It assumes that after the first 6 years of payments, you will never again have to touch your principal investment, or have to make another payment and still purchase an $18,000 vehicle every 6 years.

I first viewed this video during the summer of 2008, almost one year ago to the date.  Things sure have changed since then.

Although it appears we have rebounded from the market's bottom, the majority of investors watched their portfolios lose 50% of their values during the past 6 months to a year.  What if you had begun paying yourself that car payment, let's say $500, every month beginning in January, 2003?  You would have invested $36,000 by January, 2009.  Now if your investment had actually grown 12% for 5 1/2 years, then your total investment would have grown to $46,423!  Awesome.  But we all know what happened during the fall of 2008.  For the sake of simplicity, let's assume like many, your portfolio was roughly sliced in half by January 2009, the time when you are supposedly able to make your last car payment and drive free cars for the rest of your life.  Your balance would have fallen somewhere in the $20,000 to $25,000 range.  Now this would enable you to purchase your next car, and you will never have paid a dime in interest to the bank.  However, you would have been sorely dissapointed once you realized that you would have to continue to make car payments to purchase your next vehicle, even if the payment is to yourself. (Assuming your purchase price is near $20,000 as illustrated in the video.)

I do think this is a great idea, and one that my wife and I are working to implement.  But you must keep in mind that if something sounds too good to be true, it probably is.  This video totally ignores the risk involved when investing in stock mutual funds.  Many financial experts recommend keeping any money you will need in 5 years out of the market, because of the risk involved.  This is something to keep in mind when considering if this plan is right for you and your family.

What are your thoughts on this idea?  I would love to hear what others think regarding this one!  You can view the video here.

It’s always nice when the opportunity to earn some extra cash presents itself.  This could be anything from the opportunity to work overtime at your steady job to earning money from something you consider a hobby.  For example, I am spending this weekend performing with the local symphony. I have a music performance degree and while I don’t even come close to earning my entire income from performing, the few hundred dollars that this kind of gig pays does provide a nice supplement from time to time. 

In addition to my extra income, my wife picked up additional work last month and will receive her payment just in time for Christmas.  She is a college professor and was paid a few hundred dollars to review a publisher’s new textbook.  I’m not sure if she enjoyed reviewing that textbook as much as I did playing, but if she did, I’m not sure I’ll ever understand!

So how should you handle unexpected income? This will depend on the current state of your finances and your future goals, which may be very complex.   Ross Perot once stated, “I’ve never ever tried to give people financial advice through the newspapers — I’m afraid they’ll listen to me.” He continued saying, ”I’d need to look at each and every person or business situation under a microscope.”  With that in mind, here are three simple options that we considered:

Apply It To Your Outstanding Debt

If you are carrying several thousands of dollars in high interest debt, it makes sense to pay this debt off as quickly as possible.  It doesn’t make much sense to stash your money in a savings account earning 2% when you are being charged 13% (or higher) on your credit card balance.  (Even if you have no credit card or other high interest debt, you might consider paying off those old student loans that are still hanging around. Over the long run you might be able to earn a higher rate of return in the market, but the peace of mind gained by being free of debt can be priceless.)

Save or Invest

If you are debt free, or at least “high interest” debt free, you could save for a rainy day by funding 3 to 6 months of expenses.  You could also save for a future big item purchase such as a down payment for a home, or invest for your future by placing your money in real estate or the stock market.  After all, if this extra $500 were to earn an average 10% return in the stock market over the next 40 years, it would be worth over $26,000.

Spend The Money (Afterall, you earned it!)

If your financial life is in good shape, then enjoy what you’ve earned! I’ll eventually post what I consider financially fit, but for now, let’s assume you have no high interest debt, live on a budget that works, and consistently spend less than you earn.  Just make sure you avoid the temptation to buy that $1500 plasma TV if your unexpected income only totaled $1000.

Again, these are only three options that you might consider.  Personally, we decided to throw our extra income at my student loans in an effort to accomplish our current goal of becoming debt free.

My wife and I started putting a few hundred dollars per month away for Christmas back in October.  We stashed the money in an ING savings account where it has earned about 2.75%.  Now it’s December, and whether I like it or not, it’s time to do a little shopping.  I’ve never been a big fan of malls, but I must admit that I find Christmas shopping more bearable than a normal outing.  The buzz and cheerfulness is often contagious, if you can get past the long waits in line.  Plus, like most people, I find great pleasure when finding that perfect gift for a loved one or friend.

So now that it’s time to spend this money, we have decided to use the envelope system to help keep ourselves honest when buying gifts.  We have never tried this because we don’t find it to be very practical in our “cashless” society.  Nonetheless, it is a tool that can be used to help enforce your monthly budget. I’m not quite sure how we’ll handle on-line purchases yet.  My first thought is to pull the dollar amount spent on-line from the appropriate envelope, and then place it into another envelope entitled “to be deposited in checking account.”

We’ll see how this works and I’ll post my thoughts after the Holiday Season.