Friday, February 26, 2010

Financial Peace University: Week 3: Cash Flow Planning

This week in our Financial Peace University class, we learned about "Cash Flow Planning", or in other words, the big B word..... BUDGET!!  It is so true, if we don't tell our money where to go, and what to do, it disappears. Money that has a name, and a purpose, on paper, goes farther.  I was surprised how many of our class have never kept a budget.  The problem with not keeping a budget, is that debt slowly creeps in.  Money is not accounted for, and problems begin.  With a budget, every dollar is accounted for, assigned a category, and planned how it will be spent before it ever even comes in.

Some key points from this week’s lesson:
  1. Spend all money on paper before the month begins. You don’t want money not being allocated, and then “disappearing”.
  2. Use the Envelope System for successful cash management for food, clothing, entertainment and other categories that are easily overspent.
  3. Give your budget 90 days to really start working.
  4. Plan on a fight as you do your first budget.  However, if married, each partner has a vote!!
Budget Committee Meetings:
Last week we talked about "budget committee meetings" and how each partner is responsible for the budget.  Nothing is spent that is not in the budget without an emergency budget committee meeting.  Dave said the first month you will have a whole lot of emergency budget committee meetings, but as the months progress, and we get better at our budgets, those meetings will be fewer and farther between.

Zero Based Budget
The type of budget that Dave recommends is called a zero based budget.  If you are new to zero based budgeting, click here for a detailed post how to do this. Basically, you spend EVERY dollar on paper before the month begins.

The envelope system:
After setting up your zero based budget, the next step is to setup your envelope system of budgeting for certain spending categories. If you have never used an envelope system before, basically it boils down to this:  At the first of the month, you put the budgeted amount of CASH into envelopes marked with certain categories that are easy to overspend.  For us, the envelopes we use are food, clothing, entertainment and blow money.  Simply get an envelope, take a sharpie marker, mark what category it is, and fund it with cash.  When the money is gone, it is GONE.  Overspending is virtually eliminated.  If you do need more money for that category, the money must be taken from another envelope, or another spending category. There is no free money, it has to come from somewhere!

Here is an excel spreadsheet to walk you through the zero based budget.  The fields highlighted yellow are good ones for cash envelopes.  My husband and I have done zero based budgeting for years. I love it!! It seems that money is found, and can be applied to whatever baby step in the plan you are on.  I can't imagine not living on a budget.
Click here to download excel version.

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