Yesterday we talked about how the buffer of living one month behind your income virtually eradicates the budgeting problems with variable income. We also addressed the intensity necessary to get you to that point, and the other more subtle, indirect advantages of no longer living paycheck to paycheck. Now we’ll discuss the actual mechanics of doing a budget.
Money is like breathing:
With fancy marketing and pushy salesman, many times more money goes out than comes in. As a matter of fact, according to a recent report in the Associated Press (January 2006), Americans’ saving rate has fallen below zero, the likes of which hasn’t happened since the Great Depression.
When you’re operating on a budget, the pattern changes just slightly:
We’ll talk about each aspect of a budget, why it’s there, and what you need to do to make it work.
Inflows: Typically, when you think of money coming into your pocket, you think of your employment (or self-employment). Whether it is social security, child support, or welfare, the first type of inflow can be thought of as your Primary Income. Your paycheck most likely comes to mind. Some people are paid twice per month; others are paid every two weeks. Some are paid just once a month. None of that really matters when you’re living one month behind your income. You could be paid on the last day of the month each and every month and it wouldn’t make any difference at all.
Primary Income is only one area of Inflows though. What about when someone gives you a gift? What about when you find five dollars lying on the sidewalk? Did you sell some stuff on eBay? All of those supplemental inflows must be accounted for as well. We’ll get to the reasoning in a second.
You want to make sure you record every single inflow. NO dollar should escape accountability.
Outflows: Outflows are really pretty basic. Any time money flows out of your pocket (or you charge something on a credit card – meaning you incur the obligation to pay money out of your pocket), it is an outflow.
How big does an outflow have to be for it to really “count” as an outflow? It need not be very big at all. Perhaps an example would suffice. Did you stick a penny in the gumball machine at the oil & lube station while you were waiting for your car to be serviced? Congratulations, you just created an outflow! (How’d that gumball taste, by the way?)
While the one-penny charge is a bit of an exaggeration, I do it to illustrate a point. Too often we talk ourselves into little purchases that we think won’t really add up. One penny plus one penny is two pennies. Five dollars plus five dollars is ten dollars. Thirty dollars plus thirty dollars is sixty dollars.
Personally, my wife and I have decided to record every single outflow. I encourage you to do the same.
I should probably mention that people place WAY too much weight on the notion of having to record everything you spend. Remember the other day when I said that my wife and I had been clocked at doing the ENTIRE budgeting process in 38 minutes? That included recording every single outflow for the month – manually. If it’s a big receipt that needs to go to lots of different categories, save the receipt. If you make most of your purchases on a debit card, the bank already “wrote it down” for you. You just need to login to your bank, look at the register, and record what you’ve spent. We usually enter our outflows once a week. It takes five minutes – tops.
Also, there is a psychological advantage in writing things down. It keeps you closer to your money. This is a good thing. As you begin writing down EVERYTHING you spend, you’ll notice your spending decline. It’s an instant raise!
Begin recording every single purchase you make–and stop whining!
There you have it: the ins and outs of inflows and outflows. Pretty basic stuff huh? I think so too. For Day Five we’ll talk about the Second Rule of Cash Flow, that crucial – essential, extremely important – middle step of the budgeting process. We’ll see you tomorrow!
