PHASE l
Personal Money Management
MONEY IS A RESOURCE
Before we can begin managing our money, we need to have a better understanding of what money is. This requires discarding our emotional attachments or prejudices and looking at money objectively. Money is a resource, like our health or our time, nothing more or less. Since money is an inanimate resource and has no will of its own, it has to be managed. If we are not actively managing our own money, others are managing it by managing us, and we never realize it.
Since it is highly unlikely that anyone sitting through this course or reading this material is independently wealthy; it is fair to describe money as a limited and relatively scarce resource. Treating it like an endangered species is not a bad approach. Thoughtful and careful management will not only preserve it, but also allow it to multiply. On the other hand, pursue a course of careless disregard, and it’s gone forever.
The first step in managing any resource is to determine how much of it is available. The next step is assessing what the resource must accomplish relative to some time-frame. For purposes of this course, the time-frame will be a month, the resource will be monthly earnings, and what the resource must accomplish will be to satisfy monthly financial obligations and long term financial goals. Managing any resource usually entails the use of one or more tools that allow us to perform our duties as resource managers with greater ease and efficiency. The tools at our disposal for managing our money include: pencil and paper, calculators, computers with relatively sophisticated financial software, and bank accounts. If anyone listening to, or reading, this material requires any explanations or instruction in the use of pencil and paper or a hand-held calculator, it is respectfully recommended that you solve the problem of money management by delegating the chore to someone that you trust. With respect to computers, if you can turn it on and load the software, you can undoubtedly follow the accompanying illustrations. Therefore, we will only elaborate on the last tool mentioned, bank accounts.
BANK ACCOUNTS
The two types of accounts that are available for this purpose are checking and savings. While using a savings account to manage our money monthly is better than not using any bank account; checking accounts are far more useful. Checking accounts provide a way to warehouse, safeguard, and distribute our resources as needed. For a small fee, banks, credit unions, and other depository institutions will not only store and protect our money; they will also provide us with a monthly report that among other things tells us how well we’re doing at our job as managers.
Checking accounts, like any other tool, must be used properly or serious consequences may occur. Many long time users of checking accounts feel that they can shortcut procedures. It is often not the new employee working with potentially dangerous equipment that gets injured, but rather it is often the veteran who has become overly confident or downright lazy and shortcuts safety procedures that ends up only being able to count to nineteen on his fingers and toes. Money is a very important resource, manage it carefully.
While checking accounts provide the easiest way to manage our money on a monthly basis, they can become a nightmare if not used properly. Individuals who cannot perform simple mathematical calculations (2+2) or cannot take thirty minutes out of their busy week should be cautioned against opening a checking account. It only requires a small amount of effort and a little discipline to prevent problems with a checking account. First, use your check register (the little white book that comes with the checks) and keep it up-to-date. Update your balance the same day that checks are written or deposits are made. DO NOT WAIT until the end of the week and try to keep track mentally in the meantime. We recommend using checks that make carbon copies as they are written. That way, if you get busy and don’t record a check, there is no way to forget how much and to whom each check was for. Don’t use the automated bank telephone line for your balance information! They are notoriously inaccurate since they only report items that have cleared . . . not checks still outstanding.
We encourage everyone to abstain
from the use of automated teller machines (ATMs). You should avoid ATMs like the plague (or some
disease that you might actually get). We’ll
share a little known secret with you. Banks coat ATM money with a mysterious and invisible
substance that causes it to vanish into thin air the minute you put it into
your wallet or purse. We’ve all witnessed
this occurrence and now you know the cause. It’s a good idea to write checks for purchases
NEVER, NEVER, NEVER write a check before the funds have been deposited. Electronic funds transfer capabilities have put an end to the time when you could beat your check to your bank by making a deposit a few days after writing the check. Once a check is returned for non-sufficient funds, it starts an expensive chain of events. Due to the added fees, other checks start “bouncing” and before long the situation can get out of hand. Not only do bad checks have a civil and criminal liability; it takes five years to get another checking account if the bank closes one for that reason. Five years is a long time to have to pay bills with money orders or cash. Using checking accounts is an effective way to manager our money and as long as simple rules are followed; there is no reason to expect problems.
BUDGETING
Now that we have our resource in a safe place where we can access it easily, we are ready to start managing its use. This brings us to the dreaded budget. It is the most important and yet most under-used weapon in our financial arsenal. The word conjures up images of burning the midnight oil, painfully pouring over numbers, only to discover what you already know – too much month, too little paycheck.
The most time-consuming part of a budget is the initial setup. This requires having a pretty good idea of what is usually spent each month on certain living expenses, such as food, transportation, and a variety of miscellaneous expenditures which can be lumped together in a category called, (you guessed it), miscellaneous expenditures. It’s a good idea to start by being a little conservative on projected income and a little liberal on projected expenses. The best thing about preparing a budget and keeping it up-to-date throughout the month, is knowing where you stand. Budgeting allows you to know exactly what your financial situation is at any point in time and encourages more effective and constructive use of your resource. If you have a negative budget, it permits PRIORITIZATION. If you have a surplus, it allows you to target the extra money usefully in order to achieve your personal goals.
There are two keys to a successful and workable budget. The first is to be realistic, don’t kid yourself. The second is to always pay yourself first. Before any bills are paid, take enough money out for those categories mentioned before;
food, transportation, and miscellaneous. Set aside enough in each category to cover these expenses until your next pay period. It is critical that you don’t cave in to other pressures and try to pay bills from the grocery allowance. That might work once or twice, but in the long run, it spells disaster. When setting up a budget, be aware that there are some expenses that are fixed and some that can be controlled to a degree. Groceries, transportation, miscellaneous expenses, and utilities all lend themselves to some amount of control.
The method used to determine the average cost of transportation depends on the mode of transportation used. If public transportation, such as bus or subway, is being used, simply calculate the daily fare and multiply by the number of days needed each month. Bear in mind that it is usually cheaper to purchase tokens for a month, a discount from the daily rate is generally offered.
For those of us that use our personal vehicle for transportation, setting that budget figure is fairly simple. Determine the amount of miles that need to be driven between pay periods for all household drivers. Allow some for occasional recreational driving. Divide that number by the average miles per gallon of the vehicle being driven and multiply that figure by the price per gallon of gas. For instance, a husband and wife both drive separate cars to their jobs. They each get paid weekly. The husband drives 20 miles each way 5 days a week and the wife drives 15 miles each way the same number of workdays. 40 roundtrip miles x 5 days + 30 roundtrip miles x 5 days = 350 miles. Add 50 miles per week for shopping, etc. and you have 40 miles per week. If both vehicles get an average of 20 miles per gallon, this family needs to budget for 20 gallons per week. If they spend $2.15 per gallon, that equals $43.00 (round up to $45).
The weekly grocery budget can be
a little more time-consuming, but presents an opportunity to be creative. Shopping with coupons and watching for sales
are important, but be careful not to buy more expensive items or items that
you don’t normally use or need, simply because they are on sale or you have
a coupon. Also, don’t assume the store
brand is the best bargain, always compare.
Using the price per unit comparison is the only way to know for sure. If the store you shop at doesn’t show that figure
below each product, change stores. While
using coupons and sales are important, the most important strategy is to shop
for a planned menu. Sit down, before
heading out to your local supermarket and plan the meals for the upcoming
week or two, depending upon the frequency that you get paid. Once the menu is prepared for all meals for
the upcoming budget
As for the miscellaneous expenditures, that will depend on the number of people in the family and how extravagant or conservative you are or can afford to be. First assign an arbitrary value for each pay period and see how it works. For novice budgeters, or those folks that can’t include self-discipline in their list of strong personality traits, we recommend the every-reliable envelope system. Take three regular envelopes and label one for groceries or food, one for gas or transportation, and one for miscellaneous expenses. When depositing the resources (paycheck) into the checking account, get enough cash to put the budgeted amount into each of the three envelopes. It’s an excellent way to monitor your spending and keep on track. Limit your expenditures in each category to the amount in the envelopes. Don’t borrow from one envelope to put into another envelope. This way it’s easy to see if you’re sticking to your budget.
In addition, spending cash has a different psychological effect than writing checks. Cash seems harder to part with. Once you get into a budget “groove”, pitch the envelopes and go back to checks for everything. In the meantime, think of the envelopes as “training wheels” for your budget bicycle.
At AFCC we show our clients how to use a budget form that we call “The Monthly Budget Worksheet.” It allows people to set up monthly budgets at the beginning of the month and then use it weekly or bi-weekly to keep on track and make adjustments for unexpected changes. It allows for the inclusion of non-recurring expenses, is designed to prioritize obligations, and uses the important “pay me first” principle. Examples of this form with instructions are included in this handout.
There are some key points to remember with personal money management. First, know how much you have at any given time, don’t guess or keep track mentally. Next, get a short-range game plan put together; a monthly budget plan. If there is room for savings in the budget (and there needs to be, as soon as possible), formulate a long term plan targeting future goals. Budgeting is not difficult, but be prepared to spend a little time and exercise a little self-discipline. Remember, there are only two ways to balance a budget; decrease expenses and increase income. The results make the effort worthwhile.