Budgeting questions & answers (Part One)

I recently sent out a request to my newsletter subscribers for questions about budgeting. The response was overwhelming, and although I was able to ask Jesse Mecham (of YNAB fame)
some of these questions, there are still many that we didn't have time to discuss. So, in this several-part article series, I'll be answering the remaining budgeting questions.

Here's the first question:

I would like to understand the cash flow process, we always seem to run out of the green stuff when we budget what are we doing wrong. Why is it always necessary to have to go back to the hole in the wall, I am not a person who spends frivously.

– Melissa

Dear Melissa,

Without knowing exactly how you spend your money, I'd be hard-pressed to give you a specific answer. I can, however, give you an answer that almost surely addresses the "big picture" of your problem:

You're either making too little money or spending too much, or you have a "timing problem". Here's how to tell which of these is the case:

The "too-little-income/too-much-spending problem" is characterized by a gradually rising debt level. If you increased your overall debt by $10,000 in the last year, without taking on a mortgage or similar secured debt, then you are spending $10,000 more than you make (or, earning $10,000 less than you spend).

The "timing problem" is characterized by relatively level amounts of debt. Although total debt levels may fluctuate from month to month, they don't really go up over time. You might find yourself with leftover money in some months, while in other months you have a shortfall. In this case, your problem of having to "go back to the hole in the wall" (for more money) is caused by not having money saved for occasional or unexpected expenses.

Let's talk about the "too-little-income/too-much-spending problem" first. I'll be blunt - if you're spending more than you make, then you are spending frivolously. Let's see if we can identify possible ways you could be spending frivolously. Do you:

• have cable television?
• eat out at restaurants?
• make car loan payments
• pay others to do work you could do yourself (such as house cleaning or lawn service)?
• buy new when used would do just fine?
• buy name brands just for the "image" they portray?

There are many more examples of frivolous spending. The best way to determine whether you're spending frivolously is to sit down with someone you consider "frugal" (or less flattering: "cheapskate") and have them review your spending. Take their suggestions to heart, and consider whether it's more important to buy what you want or to be able to live within your means.

Since you've said that you aren't a frivolous spender (and I'll take you at your word), you more likely suffer from a "timing problem". This means that you are constantly "surprised" when a big bill comes due, or when an "unexpected" or "emergency" expense pops up. Here are some examples of these types of bills/expenses:

• Car insurance bill (due every six months)
• Property tax bill (due every year)
• Car repairs (generally unexpected)
• Medical bills (mostly unexpected)
• Christmas gifts (once a year)

Again, there are many more examples than I've listed here. Use your imagination, and you'll come up with plenty of examples from your own life.

The reason this problem is called a "timing problem" is that the timing of the expenses causes you a problem. The easy way to solve this problem is to save a little bit of money each month for the bill/expense in question. If your car insurance bill is due every six months, save 1/6th of the semiannual bill each month. So, if your bill is $600 every six months, save $100 a month and you'll have the money when the bill comes due.

"But what about unexpected expenses, like car repairs or medical expenses?" You'll have to take a bit of initiative here, and decide how likely, how often, and how much these bills will be.

If you have a brand-new car that's still under warranty, then you likely only need to save for new tires and oil changes. Maybe saving $50 a month would suffice in your case. If, however, you drive an AMC Gremlin with 195,000 miles on it, and it guzzles motor oil almost as fast as you can refill it, you'll likely need to save much more for repairs.

If you're in perfect health, haven't ever had a cavity, and don't engage in full-contact sports or high-risk activities, you're less likely to have large medical bills. So, you'll put aside less each month for medical/dental bills than a person who eats candy all the time while regularly going for swims with man-eating sharks while juggling chainsaws. Absurd, but you get the picture.

Also, most of these expenses are far less unexpected than you have convinced yourself. For example, you know that your car is going to break down eventually, or that you'll have to pay the deductible when some fool crashes into you in the Wal-Mart parking lot. You just don't know when it's going to happen. If you think about this proactively, you'll be far better prepared when the inevitable happens.

For my recommendations of which budgeting systems can help you to spend less than you make and avoid timing problems, go to the Budgeting page. It's chock-full of budgeting wisdom, tips, and tricks. You'll want to listen to the interviews as well.