Cash Flow/Budgeting


Have you heard about the “52 Week Money Challenge?” If you spend any time on the internet lately, you’ve probably seen it. The concept is the save in dollars the week of the year you are currently in. So, in week 1 of the year, you would save $1, in week 40, you would save $40, etc. By the end of the year, you will have accumulated $1,378.

This idea is not new; we’ve seen it around for many years, usually starting to circulate the internet late each year as a possible New Year’s Resolution for people. This year in particular, we noticed it “shared” a lot among friends on Facebook as something to try for the New Year.

While we love the idea of people saving more throughout the year, we have our reservations about this plan. People get excited over the simplicity of it, thinking about how easy saving almost $1,400 in one year can be. But it’s not that simple.

Trent Hamm, over at The Simple Dollar did a post on this topic that made some great points: “Thoughts on the ’52 Week Money Challenge’.” (Please view the post for a sample “52 Week Money Challenge” chart). While Hamm is a supporter of the concept in theory, he makes some good points on the validity of it:

  • “[…]the catch is that the later weeks are far more challenging than the earlier ones. If you start this in January, December’s weeks are going to require you to put away $49, $50, $51, and $52, respectively. This plan is asking people to put aside more than $200 during the one month of the year when money is often the tightest.”
  • “If you just follow the chart as-is, you’re going to eventually run into a week where it’s not easy to make that goal. If you fail for a week, it’s going to feel pretty tough to get back on the routine.”

Both of these points are the main problems we have with the challenge. As with any New Year’s resolution, people will start off strong, especially since the early weeks are so easy to complete. But then things are going to start getting tighter the more money you have to save. Once you get to the point where you can’t save the required amount, people will start to flounder. What happens next? Do you just skip that week? Save what you can and move on? Suddenly your $1,378 starts decreasing and you start to get disheartened. Maybe you should try to add this week’s savings to next? Can you afford that?

Hamm has an interesting variation of this challenge that does makes sense to us. Instead of following the chart as laid out:

“Each week, make it your goal to save as much as you can. Can you save $20 this week? How about $40? How about $52? The higher you can make that number, the better. You can bump that number up through little choices during the week.

At the end of the week, just cross off the line on the “money challenge” table that matches how much you were able to save. If you were only able to sock away $15 this week, cross off the $15 line. If you saved $52 this week, cross off the $52 line.”

This variation to the plan will still allow you to save the $1,378 in one year, but without the added stress of raising the amount each week. However, we still take some issue with this plan.

  • Manual Savings – Part of the reason plans like 401(K)s are so easy to maintain is that the savings are automatically invested. With a plan like the “52 Week Money Challenge,” automatic savings is not an option as laid out. You will have to manually set aside this money every week. Do you work on your finances weekly? If so, that’s great. Unfortunately many people’s answer to this question would be no. If that is the case, it’s unlikely you are going to be able to keep up with putting this savings aside weekly.
  • Supplemental/Emergency Savings – To us, a challenge like this should be used only as supplemental or emergency fund savings. Do you save at least 10% of your income for retirement? Are you debt free outside of your mortgage? If the answer to either of these questions are no, then the money from this challenge would probably be put to better use elsewhere. If the answers are yes, then this can be a great way to boost supplemental savings, maybe for a project or vacation. Or, if you have no emergency fund currently, this can be a great way for you to start one, whether you are saving for retirement or paying down debt currently or not.
  • Normalize It – To make this plan simpler and easier to handle, why not normalize it? As in, average out the $1,378 over the 52 weeks, allowing you to save up automatically, without the added stress of the higher savings weeks. Not only will this still give you the savings you want, but saving $26.50 a week will be much easier to handle than saving $202 in December alone.

We can see why this would not be as appealing to people looking for easy savings tactics (those drawn in by only having to set aside $10 in January). But in the long run, over the course of the year, we believe someone saving a set amount each week will be much more likely to end up with the $1,378 in their bank account by the end of the year than those following the “52 Week Money Challenge” as is.

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

This week, over at U.S. News – Money, there was a post by Sabah Karimi that we’d like to talk about today: “6 Worst Money Mistakes You Can Make In Your 20s.”

Your twenties are a very important time in your life. It’s the time where many people are finishing up their schooling and starting their careers. Some may be settling down, getting married, and starting a family.

Unfortunately, we often see people in their twenties neglecting their finances, to the detriment of both their current account balances, and their future retirement. Maybe it’s because they were never taught how to handle money responsibly. Maybe they just have the “I’ll deal with it later” mentality. Whatever the reason, there are plenty of mistakes people in the twenties make with their money.

Karimi gives her list of top mistakes:

  • “Fueling an overspending habit. Breaking an overspending habit during your 20s can prevent serious money problems later in life. Become a mindful spender and keep track of all your purchases.” – Overspending can be a dangerous habit at any age, and a habit you’ll likely carry over into your later years unless you break yourself of it when you are young.
  • “Living without a budget. Knowing how much it costs to live your lifestyle and what expenses you are responsible for every month can help you make better financial decisions throughout your 20s. Update your budget at least once a month, and track your weekly expenditures within the budget so you have a clear picture of where your money is going every month. Review your budget regularly to cut out extra expenses and contribute more toward your savings account when possible.” – If you have been following us for any length of time, you know we are firm believers in budgeting. Not only is it helpful for expense tracking, it can help you spot areas you may be able to save money in that you never would have seen before.
  • “Neglecting student loan repayment and forgiveness programs. About 1.6 million people are eligible to cap their monthly student loan payment at 10 percent of their income by enrolling in appropriate income-based repayment programs. In addition to income-based programs, there are several loan deferment and forgiveness programs designed to make your student loan payments as manageable as possible.” – It’s unfortunate that so many young adults have to start their careers (often with lower than ideal wages) saddled with so much debt. Making those student loan payments when you’re just starting out and not even sure where the money to pay for your rent is going to come from can be daunting. Be sure to look into what your options may be.
  • “Relying on credit cards to fill income gaps. If you’re counting on credit cards to pay for bills or take care of expenses you forgot to budget for, you will be setting yourself up for huge debt problems. Learn to live within your means by taking a close look at your finances with a realistic budget.” – Accurate budgeting can become important for this very reason. There will likely be times when using a credit card is unavoidable (i.e. for emergencies while you work on building up an emergency fund), but relying on them every month for your regular expenses (or to fuel an overspending habit), can cost you thousands of extra dollars in interest and years to repay. It’s just not worth the hassle.
  • “Living without health insurance. Medical bills are one of the biggest causes of bankruptcy in America. No matter how healthy you are, you must be prepared financially for a medical emergency.” – Obviously, health insurance is a major hot topic in the U.S. right now. Regardless of the upheaval, if you are lucky enough to find a job where health insurance is offered as part of your benefits, consider taking advantage. Not everyone has the opportunity, and even if it’s expensive, it can be a good opportunity.
  • “Trying to keep up with the Joneses. […] It’s easy to feel financially insecure in today’s social media landscape, where every major purchase is announced on Facebook and photos from expensive vacations are shared on Instagram. Don’t get lured into that spending frenzy. Your real friends will not care about what kind of cars you drive or whether you have the latest gadget. Figure out your priorities, and don’t let other people dictate your financial future.” – This is another problem that affects people of all ages. Feeling inadequate can cause people to make mistakes that don’t seem like such at the time. It can often fuel an overspending habit, and can cause you to make purchases that you could regret later.

Your twenties can be a time of new beginnings. It can be exciting and stressful at the same time. Don’t compound your stress by making these financial mistakes that could affect the rest of your life.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

There will be no post next week because we will be going on our family vacation. We usually take one every year, even though this year is not to Disney World! We thought we would share our previous post about taking family vacations with a larger group.

From 5/2/11:

As you know, we just went on a family vacation to Disney World. We traveled as a group of 8 people, 6 adults and 2 kids. And we thought we’d use our experience to give you some tips on how best to travel as a family.

  • Plan ahead – We know some people are planners while vacationing, and others would rather take it as it comes. It shouldn’t be a surprise that we’re planners. However, even if you aren’t, the more people you are traveling with, the more important planning becomes. Make sure everyone has an input on what they’d like to do and see. This will help eliminate wasted time and money while vacationing because you will already know what everyone wants to do ahead of time.
  • Save ahead – Estimate any potential expense you will have for your family vacation, plus extra, especially if you’re traveling with a larger group. Then, once you decide on your potential budget, save everything up before you go, or even before you book anything if you want to be completely safe. It’s too easy to plan and book a big vacation using credit to cover any short fall. Even if your intention is to pay if off right away, it can be dangerous territory. Also, if you go on the trip knowing that you still owe on it, your vacation won’t be as enjoyable.
  • Pay ahead – If possible, prepay for what you can (transportation, hotels, etc). Prepayment gives your vacation budget a better chance at being followed because it reduces some of the risk of unexpected expenses. Also, since food is such a major expense, if you happen to be going on a vacation to a place that allows you to prepay for food (like Disney or a cruise), look into taking advantage of the option.
  • Be flexible – We know we just told you to plan ahead, but that doesn’t preclude being flexible. When traveling with a group, there will be things that someone else wants to do that you won’t (especially when kids are involved). Just go along with it. You may not want to do it, but your overall vacation will be much more enjoyable because you won’t be at odds with other family members. There is probably something you want to do that the others don’t, so hopefully they will be flexible as well!

If you’re currently planning a family vacation or thinking about it, hopefully these ideas will give you a head start!

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

The envelope system is a very easy, simplistic way to budget. It not be very sophisticated, but it can be very effective, especially when it comes to spending money.

For those who may not know, the envelope system is just as it sounds. You take the money that has been budgeted for various categories out of your checking account and put the cash in different envelopes, each earmarked for spending on the designated category. Again, maybe not very sophisticated, but simple and easy to use.

There could be a number of different reasons you may not like this system of budgeting. It can be inconvenient. Paying with cash can lead to awkward counting out of bills at busy checkout counters, or carrying around a pound of change in your pocket or purse. Also, it can mean an extra trip to the bank or ATM to pull cash out, especially with so many people able to direct deposit their paychecks. Maybe you would see it as embarrassing. After all, who pays with cash anymore, so when all your friends pull out their Visa’s, you are shuffling singles around trying to count out how much to leave for a tip.

Even with all the possible reasons you may dislike the envelopes system, it can be a very effective way of budgeting. Even for the most financially secure, keeping control of spending cash can be a challenge, especially when the credit card gets pulled out left and right to cover things.

Say you have a weekly entertainment budget of $100. You go out on Tuesday night with friends, armed with your credit card and the plan of spending no more than $50, since you know you’ll be going out again on Saturday. You go out to dinner, then a movie (with a drink and popcorn thrown in). Then it’s out for coffee after. You pull your credit card out each time, not really thinking. By the time you get home, you realize that you’ve spent $60, $10 more than you planned. No big deal, you’ll just spend $10 less on Saturday. But you don’t. You spend $60 again without really realizing it, making you $20 over budget for the week. Maybe not the end of the world, but that was $20 that you were going to spend on something else that you no longer can.

Now let’s take this example using the envelope system. You take $50 cash with you on Tuesday, leaving $50 in the envelope for Saturday. You skip the appetizer at dinner to make sure that you have enough cash for the coffee you were planning on getting after the movie. At the movies, you opt for the smaller drink and decide to split a popcorn with your friend to save a few dollars there. Then at the coffee shop, you decide to skip the pastry so that you have a few extra dollars to add back to the envelope for Saturday.

Both of these scenarios lead to a great night out. Using a credit card, you went over budget without planning to. Using the envelope system, you didn’t go hungry from being too frugal, and you still treated yourself to dinner and a movie with friends. Plus you still have your budgeted amount for your next evening out with a few extra dollars to add to it as well.

It can be very easy to lose track of spending when you are using credit cards. They’re too easy to use, and unless you sit there and count up all your receipts as the night progresses (which you most likely won’t), you won’t know that you’re going over budget until it’s too late.

This post was inspired by a post over at Get Rich Slowly by Kristin Wong: “Adventures in returning to the envelope system.” After leaving the envelope system behind because she felt “financially independent” and that she could do without it, Wong returned to using the system after deciding she had lost control of her spending, especially in the area of dining out.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

Happy New Year! Now that it’s 2013, we’d thought we’d do a quick review of a post we first did in January 2012 (updated for 2013). We think everyone should take some time to review your finances at the beginning of every year.

Throughout the year, it’s easy to get distracted from your finances. Other things in life take up your time and energy, often leaving your finances in the background. As 2013 gets underway, consider setting some time aside to make sure your finances are in order. Working on the following now can help you avoid problems throughout the year when time gets away from you.

  • Review your budget – Take the time to review your budget, checking for any obvious changes that may need to be made. Research lower cost alternatives to expenses that seem to have crept up over time. Reallocate dollars that went unspent to expenses that had a shortfall. And if you don’t have a budget yet, create one!
  • Review and update your financial goals – Review the progress you made in the past year on your financial goals and add any new goals you may have. Take time to consider what your next step might be in advancing those goals. If your goals are no longer relevant in your life, think about what you want to do with any funds you may have collected for that goal.
  • Review your credit report – Help ensure that your identity is safe and that your credit report reflects accurate information. (www.annualcreditreport.com)
  • Prepare for tax filing – Even if you know you will be filing an extension, start collecting all the relevant tax information and documents as they start coming in. Ensure everything is ready and in order before you sit down to do your taxes or send the information to your tax preparer to avoid delays and mistakes. Also, if you find that you are getting a large refund or owe a large amount, take the time to review and adjust your withholding to put more money in your pocket throughout the year or ease the pain of a large tax bill next year.
  • Set up automatic bill pay – If you have not done so already, and it’s a service your bank offers, you should look into automatic bill pay. This will give you some relief during the year by paying your bills for you, so you won’t have to worry about setting aside time monthly to do so.

Obviously, doing the above will not make working on your finances during the year optional. You will still need to spend time on your finances, even if it’s just to make sure you’re avoiding mistakes and problems. But, the above steps will help set up your 2013 finances right.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

 

Yesterday, over at Get Rich Slowly, there was a post by Sarah Gilbert entitled “One Lesson From a Financial Whiz Kid.” The post is really about a book by Zac Bissonnette, Be Richer, Smarter, and Better-Looking Than You Parents. While we haven’t had a chance to read this book ourselves, the post has some great highlights.

 

Zac is a 20-something writer who is targeting his age group, but the lesson he gives can apply to everyone, no matter their age. The lesson he teaches is simple: “Don’t spend money.” Obviously, not spending any money isn’t an option, but not spending money on something that is unnecessary or that will get you into debt is.

 

Sounds simple, but as we all know, this type of discipline can be very difficult to maintain. But it’s such an important part of handling your finances. As Zac writes, “Managing your financial life is not about spreadsheets and compound interest. It’s about your life. The financial decisions you make can give you freedom or make you a slave.” You can spend as much time as you want on dealing with your finances, but if you can’t learn and live by this simple rule, you’ll likely never get ahead.

 

Another important point Zac makes is that many people will buy something not because they really need or even want it, but because they want the status that may come with it. He writes “A house you can’t afford can be a prop. Or a car. Or a watch. When you think about it, we spend a lot of money on props — stuff that makes us look like something we’re not.”

 

Again, the idea is simple, but it’s a great lesson to learn. And it’ll be much easier on you if you learn it before you run up your debt and have to dig your way out.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

Next week, I (Dawn) will be on a family vacation to Disney World. Because of this, there will be no post next Friday.

This week, I wanted to share a post from about a year ago that was for a different family vacation to Disney World (yes, I love Disney!).

From 5/2/11:

As you know, we just went on a family vacation to Disney World. We traveled as a group of 8 people, 6 adults and 2 kids. And we thought we’d use our experience to give you some tips on how best to travel as a family.

  • Plan ahead – We know some people are planners while vacationing, and others would rather take it as it comes. It shouldn’t be a surprise that we’re planners. However, even if you aren’t, the more people you are traveling with, the more important planning becomes. Make sure everyone has an input on what they’d like to do and see. This will help eliminate wasted time and money while vacationing because you will already know what everyone wants to do ahead of time.
  • Save ahead – Estimate any potential expense you will have for your family vacation, plus extra, especially if you’re traveling with a larger group. Then, once you decide on your potential budget, save everything up before you go, or even before you book anything if you want to be completely safe. It’s too easy to plan and book a big vacation using credit to cover any short fall. Even if your intention is to pay if off right away, it can be dangerous territory. Also, if you go on the trip knowing that you still owe on it, your vacation won’t be as enjoyable.
  • Pay ahead – If possible, prepay for what you can (transportation, hotels, etc). Prepayment gives your vacation budget a better chance at being followed because it reduces some of the risk of unexpected expenses. Also, since food is such a major expense, if you happen to be going on a vacation to a place that allows you to prepay for food (like Disney or a cruise), look into taking advantage of the option.
  • Be flexible – We know we just told you to plan ahead, but that doesn’t preclude being flexible. When traveling with a group, there will be things that someone else wants to do that you won’t (especially when kids are involved). Just go along with it. You may not want to do it, but your overall vacation will be much more enjoyable because you won’t be at odds with other family members. There is probably something you want to do that the others don’t, so hopefully they will be flexible as well!

If you’re currently planning a family vacation or thinking about it, hopefully these ideas will give you a head start!

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

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