Monday, July 27, 2009

Frugal Mister's foray into Cash Flow Planning

We finished up the Cash Flow Planning/Budget lesson this weekend. A wealth of information to be had, without a doubt. The final lesson included some questions for the journal (blog) that I wanted to address here:

  • What’s the difference between a “monthly cash flow plan” and an “allocated spending plan”? Which one is best suited for you?

  • List the bills in your budget that are due irregularly (bi-monthly, bi-annually, etc.) How have you traditionally prepared for them? Is there a better way?

  • How difficult was it for you to prepare your initial budget? Do you think it will get easier as you move forward?

  • I was a little put off initially by the allocated spending plan. It seemed cumbersome and not really necessary after completing the monthly cash flow plan (budget). I couldn't have been more incorrect. The CFP is, in my estimation, more of an overview of how much you are budgeting (e.g. $400 for food, $556 for car payment, $2500 for mortgage, etc.). The ASP is where the rubber really meets the road.

    The way the ASP works is you start with your income (we get paid bi-monthly) and you allocate what bills get paid when and how much. For example, our mortgage is due early in the month, but our car payment is due at the end. We pay the mortgage with our first paycheck and our car payment with our second. The amazing thing is that DR utilizes a zero-sum budget. That is to say, at the end of your ASP, your total should be zero. With each item, the money budgeted is subtracted from the money earned. Say I earn $1000 in the first pay period and our mortgage was $150. The entry after $150 would now be $850. That $850 is all I have left to allocate my funds to. Every dollar in the budget has a name, an identity, a destination....including BLOW money.

    What is BLOW money, you ask? That's $$ you know darn well you're going to waste. DR says if you budget for it, you can still do it. It gives us a sense of freedom. A sense that our money is working for us, not independent of us.

    We will continue to use both the CFP and the ASP on a monthly basis!

    The bills we see irregularly are things like garbage, water, and property tax. Used to be we'd get the bills and just adjust our weak excuse for a budget. "Honey, let's watch our spending this week!" That was my financial advice to the Missus. It least well enough to get everything paid on time. Where it failed us is we never saw any kind of light at the end of the tunnel.

    Now? We divide those bills into equal parts over the course of a quarter or the year. Water is usually about $90 every three months. Instead of trying to scrape together $90 in a month, we now allocate $30 into a "sinking fund" (savings). So, when the bill comes due, BAM, we've already got it saved for.

    Initially preparing the budget wasn't as difficult for us because I've religiously used Quicken for years. I update and balance my accounts numerous times within the month. I always knew how much we had. The difference now is I know exactly where it's all going.

    Like I've said in previous posts, the Missus and I have always been great communicators with each other. Having the CFP and the ASP in action and physically writing them down was a pleasure because it only served to show us we can do it. I whole-heartedly believe it will only get easier from here on out!

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