Nickeled and Dimed

 If this is your first time visiting Centsability to Wealth you may want to see what we are about , read about me, or read our introductory post.

The last few days we have talked about budgets.  First I shared ten thoughts on budgets from CNN Money, and then I laid out how my own personal budget worked.  In a continuation of the budget theme, I want to talk about the “adult allowance“.

The adult allowance is the concept of taking a certain amount of money out of your account at the beginning of each month and designating the money to go towards your “wants” each month.  The idea behind it is that by setting yourself a certain amount of money each month to spend on whatever you want, you can stay within your budget while still having some fun without feeling guilty about it.  As an example, I could give myself a $200 adult allowance each month.  Any time I bought fast food, or a new book, or went out for drinks, the payment would come out of this fund.

Let’s take a look at what, in my opinion, are the pros and cons of the adult allowance:

Pros of the adult allowance

• It allows you to spend money on things you want guilt free- By giving yourself a designated amount of money each month to spend on whatever you want, you are more likely to stick to your budget.  If you constantly have to be worried about ever penny you are spending, your budget will eventually be more stressful than it’s worth.  The adult allowance cures that by giving you a set amount of money to spend on your wants.
• Taking the cash out at the beginning of each month allows you to always know exactly how much you have spent and how much you have left to spend- If you normally keep your discretionary spending money in the same account as all your other spending money, it can be difficult to know how much money you have to spend at any given time.  By implementing a cash system for this portion of your budget, you can make sure you always know exactly how much you can spend.
• It improves your budgeting skills- The adult allowance is basically a budget within a budget.  And like all budgets, it is all about prioritizing.  Want to buy $75 tickets to the Kenny Chesney concert in two weeks?  Check how much is left in your monthly allowance and decide want you want to sacrifice to buy those tickets.  By properly handling your adult allowance every month, you will improve your overall budgeting skills and in turn eventually improve your finances.

Cons of the adult allowance

• Difficult to track spending- As you know by now, I’m in favor of an all plastic finance system due to the ease of tracking your spending.  By switching to the cash system for your adult allowance, you are forced to either use a pen and paper to track your spending, or simply give a generic label to that portion of your money and not worry about where each penny within the allowance went.  I like seeing exactly where my money went, so this part is hard for me.
• Could encourage careless spending- In the wrong hands, the adult allowance could encourage people to be careless with their spending.  If you went from being awful with finances to improving them with a budget, the adult allowance runs the risk of getting you back into your free spending ways.  It should only be used by the financially responsible who won’t get caught up in the limited free spending and will continue to be strict with the rest of their budget.

As you can probably tell by my list of pros and cons, I’m becoming a fan of the adult allowance.  Though I haven’t yet tried it myself, it seems like a good way to allow yourself some guilt free spending every month (something I struggle with at times), while also keeping a strict budget and potentially improving your budgeting skills.

One thing I would like to do is figure out a way to keep this in my plastic system.  Perhaps I could open an online account that offers a debit card and simply transfer my monthly allowance to it at the beginning of each month?  That way I still get all the benefits of the adult allowance, while not having to use cash.  I may have to give that one a try.

As for the important question, how much should your monthly adult allowance be, that is something you will have to figure out yourself.  Sit down with three months worth of your spending and budgets.  How much do you typically spend each month on your wants?  More importantly, how much can you afford to spend on them each month?  Be honest with yourself.  Obviously giving yourself too much discretionary spending each month will ruin your budget, but so can not giving yourself enough.  Make sure it is an amount that you can reasonably afford and that will reasonably last you through the month.

What about you guys?  Do you use an adult allowance or something similar?  Do you like it?

Please continue sending any personal finance related questions, suggestions and story tips to centsabilitytowealth@gmail.com.

 If this is your first time visiting Centsability to Wealth you may want to see what we are about , read about me, or read our introductory post.

As I mentioned in yesterdays post about budgets, many of you have been very interested in the topic.  A few of you have wanted to know what I use for my personal budget.  So today I am going to walk you through exactly how my budget works.

First let me say that the budget I use is not anything special.  It’s actually pretty plain and boring.  But it works for me and that is the biggest key to a budget or any other personal finance concept.  It has to work for you.  Warren Buffet himself could come to your house and build you a budget in front of your face, but if it is not something you will follow, it’s worthless.  So as you read about my budget, keep in mind it is not necessarily the budget I recommend for you.

Here is a look at my budget, followed by my keys to following it:

- Monthly income (After 401 (k) and benefits deductions): $2,300

- Fixed monthly expenses: $1,300

     - Rent (including cable, internet, electric, water etc.): $250

     - Car: $300

     - Student loans: $250

     - Debt repayment (was my credit card, now it is a personal loan being repaid): $500

Fixed amount of money going towards monthly savings: $500

     - Emergency fund savings: $300

     - Moving expenses savings (what we are saving for our upcoming move): $200

Monthly discretionary money: $500

   - Discretionary money is the money that can be used on anything I choose.  It should be noted that some necessary expenses are paid for out of the discretionary money, such as groceries and gas.  But basically I have $500 to do with what I please each month.  If I spend too much on going out to eat or going to the movies, etc, I won’t be able to buy groceries.

How do I make sure I stick with this budget?

1. Automate it as much as possible.

Wherever I can automate an expense or savings amount, I do.  My student loan payments are automated.  My savings account contributions are automated.  When I was paying off my credit card that was automated.

By keeping these things automated I ensure that they are both getting paid on time and are getting priority over discretionary spending.  That money is being taken out of my account whether I want it to be or not, so I better make sure I have enough in there.

2. It allows me guilt free spending.

When I first started getting control of my finances, I would freak out about every penny I spent.  Did I really need that one dollar candy bar?  It was driving me crazy.

Now that I have a set amount of money devoted to my discretionary spending, I can spend on the things I want guilt free.  You still have to set priorities, as the fund is certainly not limitless, but I no longer have to sweat the little stuff I want to buy.

3. It’s not too strict.

Some people need and thrive with an extremely strict budget that decides where every penny will go every month.  I am not one of those people.  Having a little bit of freedom with my money, while also sticking to a general schedule with it, is what works best for me.

4. I constantly adjust it as needed.

A lot of my expenses and savings goals are changing frequently.  When I recently paid off my credit card, I had to decide what to do with the $500 a month that was going towards that debt.  I decided to use it to pay off my personal loan.  In a few months that will be paid off and I will again have to decide where to put that money.

Keeping it updated like this not only keeps it realistic, but also keeps it interesting for me.  Deciding where to put $500 extra is exciting.  And when you make it fun, it is much easier to follow your budget.

There is a quick look at my monthly budget.  It is what works best for me (at least at this point in time), but as I have said many times already, it may not be what works for you.  You may very well want a more organized budget that sets a certain amount of money for gas and groceries each month.  You may want less structure or less automation.  It is completely up to you and my best advice would be to experiment with different approaches and see for yourself which style you like best.

Budgets are an excellent (and probably necessary) tool for improving your finances.  Whether you want to give my style a try or go with a completely different approach, the important thing is that you get started.

Please continue sending any questions, suggestions and story tips to centsabilitytowealth@gmail.com.

 If this is your first time visiting Centsability to Wealth you may want to see what we are about , read about me, or read our introductory post.

In the past week I have gotten four different questions on budgets.  Budgets are a very important tool for improving your finances.  There are several different types of budgets out there, ranging from super strict budgets that control your spending to the penny, to more loose budgets that divide your spending into more broad categories.  Which one works best for you depends entirely on your situation.

With all the recent interest in them, we will spend the next few days discussing budgets.  Today we will highlight an article from CNN Money on the top ten things to know about budgeting.  The ten points are theirs, the recaps underneath are mine.

1. Budgets are a necessary evil.

In order to get control of your finances and spending, you need to make some form of budget.

2. Creating a budget generally requires three steps.

- Identify your current spending.

- Make goals to determine your future spending.

- Track your spending to make sure you are following through on your plans.

3. Use software to save grief.

Use software like Quicken, Microsoft Money, or even free internet software like Mint to track your spending and build budgets electronically.  This can actually make budgeting fun.  At least for dorks like me.

4. Don’t drive yourself nuts.

Don’t monitor your spending so closely that you are beating yourself up over every penny spent.  Make you budget, decide where to cut your expenses, but don’t forget to allow yourself a little bit of money for “free” spending.

5. Watch out for cash leakage.

This one rings particularly true for me.  On the rare occasions I carry cash, I am much more likely to spend it loosely.  I figure it is already out of my account, and therefore already money spent.

Treat the cash you carry around the same way you would treat money in your account.  Constant trips to the ATM are the fastest way to kill your budget.

6. Spending beyond your limits is dangerous.

If after tracking your expenses you realize you are bringing home less money than you spend most months, big changes need to be made.  I have said it countless times and will say it countless more times in the future, the biggest concept to master in order to build any form of wealth is spending less than you earn.  The wider the gap between your earnings and your spending, the better.

7. Beware of luxuries dressed up as necessities.

A lot of the things we try to tell ourselves are necessities are actually luxuries.  Do you really need more than basic cable?  Do you really need those three magazine subscriptions?  Be honest with yourself and determine what you can’t live without.

8. Tithe yourself.

Build your budget around 90 percent of your income.  You can use the other 10 percent as charity to yourself that can be used to buy your luxury items.

9. Don’t count on windfalls.

Don’t count anything as income that you have not yet received.  Tax refunds, year-end bonuses and investment gains are common causes of this.  Until you receive that bonus, or cash out that investment, it is not part of your income.

Counting on a windfall of money that you don’t end up receiving is an easy way to massively destroy your budget.

10. Beware of spending creep.

Also known as lifestyle inflation.  People have a tendency to increase their spending at the same rate their pay increases.

When you receive a raise or promotion at work, use the extra income to fund your savings or retirement before increasing your spending.

If you are new to budgeting, these ten thoughts are a good starting point on what to expect.  It’s important to figure out which budget will work for you.  Experiment from month to month, making tweaks along the way, until you find the style that works best for you.  Tomorrow I will go over the budget that I use.

Please continue sending any questions, suggestions and story tips to centsabilitytowealth@gmail.com.

One of the most frequently used excuses I hear for people not getting their finances in order is that they “don’t know where to start”.  If only they knew what the first step was, they claim, they would get started right away.  If you fall under this category of people, allow me to give you your first step right now.  Assess your financial situation.

That’s it.  No magic debt formulas or savings goals.  Simply look at your finances and find out how much money you make every month and how much money you spend every month.  

Once you figure out how much you are spending, you can figure out where you are spending it.  There are a few different ways to do this.  You could go the old fashioned way, carrying a pen and notepad with you every where you go, writing down every purchase you make and how much it was for.  You could spend the $50 or so on computer software like Quicken.  Or you could try Mint, the free online software that allows you to enter your bank and credit card information and have your spending automatically tracked for you.

While I have been hearing about Mint for awhile, I never got around to trying it until this week.  I’ve been using Quicken the past few months, and while I like many of its features, I wasn’t fully satisfied with the spending tracking portion of it.  So this week I gave Mint a try. 

I love it.  I can’t believe I waited this long to use it.  It is incredibly easy to set up, the features are very user friendly and it is 100 percent free.  Here are some other features I like:

• Smart tracking- Once you change the category of an expense, it will automatically recognize that change in the future.  For example, after changing my payment to First Federal Bank to “Car Payment”, all future payments to that bank will automatically be placed in the car expense category.
• “Ways to save”-  I love this feature.  Or at least the idea of it.  Mint claims that “By analyzing your current spending, we can find you products and services that will save you money, most of the time a lot of money”.  It says that users often find $1,000 or more a year in potential savings.  They also look out for checking and savings accounts with higher interest rates and credit offers with lower interest rates.  It hasn’t had enough time to analyze my spending yet to give me any recommendations, but I’m pumped hear what they have to offer!
• Allows you to add your investment and loan accounts- On top of tracking your spending, Mint also allows you to enter any investment or loan accounts and will analyze those as well.  I already have my 401(k) on there for easier monitoring.
• Did I mention it’s free?- Seriously.  All this and you pay no money.  Talk about value!

What are the downsides?  It’s hard for me to list anything negative about a product this valuable offered for free, but here are a couple things that could make using it difficult for some:

• Not effective for people who use cash- Since it gets its information from your bank account, if you still use cash to pay for most things Mint may not be for you.  I strongly recommend using a debit card to pay for most or all of your purchases for tracking purposes, and will write a future article about automating your finances. But this isn’t for everyone, and if you are set on paying cash you may be stuck with the notebook method of tracking.
• You can’t change the amount of an expense (0r at least I can’t figure out how)- This is a problem for me because I pay the entire rent, cable and water bills myself and then my roommates pay me their share of the bills separately.  As a result, Mint figures the entire amount into my expenses.  This isn’t a huge deal as I can manually subtract the needed amount from the total paid, but it isn’t ideal.  It is no where near a deal breaker though.

In the week I’ve used it, those are the only problems I can find with Mint.  It seems to be a very good product in my brief experience.  Here’s how you can sign up for a Mint account:

1. Gather your user names and passwords for your online bank and credit card accounts (and investment and loan accounts as well, if you wish to add those).
2. Go to www.mint.com.
3. Click on “Sign up in under five minutes” button in the middle of the page.
4. Fill out the short information form.
5. Fill out your bank and credit card account information.
6. Go through your transactions and change the category of expenses if need be.

All told this should easily take you less than 30 minutes, and probably much less than that.

Tracking your spending and figuring out where your money goes is an absolutely vital part of turning around your finances.  When you know where your money is going, you can figure out areas you can save more of it.  If you are willing and able to make your purchases with a debit card (and/or credit card, as long as you pay the entire balance off each month), Mint is an excellent tool for helping you track every penny you spend.

Please continue to sending us any questions, suggestions and story tips to centsabilitytowealth@gmail.com