Archive for the 'Kids and Money' Category

Below Your Means Basics: 3 Principles for Budgeting & Tracking, Pt 2

Yesterday we discussed our 3 Principles for Budgeting and Tracking.  To recap:

Principle 1: The purpose of tracking and budgeting is to help you understand if your spending is in line with your goals and values.  Only then can you tell if a purchase is worth the money.
Principle 2: Organize your categories based on how easily they are controlled.
Principle 3: Your budget is a living thing that you will revisit on a regular basis, so don’t stress about making it perfect

Today we’d like to touch on a handful of special circumstances that warrant some additional attention.  Tomorrow we’ll start moving more into the mechanics of building a budget.

Special Circumstances

DetourBudgeting with a Spouse

Remember Principle 1?  That tracking and budgeting are all about measuring your values against your resources?  Here’s why money can be a huge source of friction for couples.  You’re not talking about your spending, either individually or as a family.  You are talking about your values, as individuals and as a family.  That’s difficult.  So go easy on yourselves.  People’s sense of self-worth, upbringing, status, personal reward systems and more are all bound up in discussions about what spending is reasonable.  Take the time to understand the why behind the decisions.

There are as many ways to divide up financial resources and financial responsibilities as there are couples, but one thing that generally correlates with happiness is to have three major budget buckets: your money, my money and our money.  Everybody needs a space to do what they want, even if it’s a small space.  Give yourselves room to breathe and, especially, to not have to agree on everything — even if it’s just $20 a week or a month.

Note that the yours/mine/ours buckets do NOT need to directly match up with income.  How big you decide to make the pots depends on your attitude about money as a couple, and you should tread lightly and carefully while discussing this subject.  More on this subject when we discuss the mechanics.

Budgeting with Kids

We can’t say it enough: include your kids in this process.  Especially if there haven’t been any real spending controls in your household, your kids are going to know something’s afoot.  Either you are going to have to say “no” more, or you’re going to be talking money with your spouse.  There’s a good chance they’ll notice you paying attention and want to know more.  So include them!  Some ideas:

  • Give them a fixed spending amount for a family vacation.
  • Pay them an allowance (either based on completion of chores or just time-based) and, except for birthdays and other holidays, don’t buy them toys
  • Have them help cut coupons or comparison shop at the grocery store with you
  • Have them save up for a more expensive toy and go through a budgeting process themselves.

Budgeting for the Self-Employed

If you’re self employed you have two major issues:

  • You can sometimes wind up with a ‘big check’ that makes everything seem different
  • You can sometimes go without income, especially if a customer doesn’t pay

In other words, your income stream will be highly variable, which creates a difference between your income (how much money you make over time) and your cash flow (when the money actually shows up).  Your mortgage company will not want to hear that you just closed a big deal and you’ll be able to pay them in 45 days.  They will still charge you late fees and hit you with other penalties.

The first thing you need to do is get a decent, realistic projection of your income.  If you’ve been in business for at least a year, you can do this by averaging the past 12 months.  But pay close attention to trends — ask yourself if your income rising or dropping compared to last month, or the same month last year?  If you don’t have that kind of history, you’ll need to make a very conservative estimate.  Remember you can always adjust upwards in the future if you want to, but if you overspend now it will likely turn into long term credit card debt at very high interest rates.

Once you have a realistic projection of your income, start “paying yourself” that amount once per month.  If you have an LLC in place this should be easy, since you probably set up a company bank account for the business.  If you don’t have a separate checking account, now is a good time to set one up (and to set up a budget for the business, too).  Transfer your monthly pay from your business account to your personal account every month, like a paycheck.

Budgeting for Higher Income and Net Worth

If you’ve already achieved the magic income level, or net worth level, where you thought you would effortlessly breeze through your financial life, then you’ve probably realized that it just doesn’t happen that way.  With luck you haven’t been spending too much money keeping up with other people’s lifestyles, but there’s a good chance you’ve found yourself in a car or house that is more than you really want to spend.  You may be spending your money as fast as you are earning it, leaving yourself vulnerable to emergencies and changes in fortune, and unable to seize new opportunities you uncover.  If that’s the case, the same principles apply to you, but you’ll have more flexibility and more challenges.

For one, it will be easier for you to implement your/my/our money if you have a bit more disposable income.  The risk is that you overdo it, but be grateful that you have the chance.  Second, housing and auto payments may not really make sense in terms of your budget.  This is because past a certain income or net worth, you don’t need to finance larger purchases as much as you did in the past.  So the idea that a mortgage or a car payment shouldn’t exceed X% of your income doesn’t make sense – especially if you don’t want the cost of your house or car to rise proportionally to your earnings.  Also, you may find that your earnings are highly variable due to business conditions, and so budgeting based on your monthly take-home pay don’t apply to you.

In these cases it’s important to have a clear idea of what your current goals are, so you can allocate your resources wisely.  We’ve noted in the past that a high income doesn’t necessarily lead to happiness.  Get a good handle on what you think is reasonable to spend, and build your budget from there.

Next week, the mechanics of building a budget.

Helpful Links

Don’t Spend Any Money… Establishing a baseline for spending | Super Frugalette | interesting take on the difference between what you have to spend, and what your budget is

Honey, We Need to Talk … About Money | MintLife | On the value of discussing money in a relationship, with some conversation starters.

Five Budgeting Myths | FiveCentNickel | Budgeting excuses removed

My Self-Employed Monthly Paycheck | BudgetsAre$exy | Dealing with the ups and downs of self-employment

 

Thumbnail Photo: Blocks 1 by Crissy Alright

Story Photo: Detour by F Delventhal

Principle 1: The purpose of tracking and budgeting is to help you understand if your spending is in line with your goals and values.  Only then can you tell if a purchase is worth the money.

 

 

 

 

 

 

 

 

Principle 2: Organize your categories based on how easily they are controlled.

Principle 3: Your budget is a living thing that you will revisit on a regular basis, so don’t stress about making it perfec

Below Your Means Basics: 3 Principles for Tracking & Budgeting

 

Everything should be as simple as possible, but not simpler - Albert EinsteinUnless your means are very large and your tastes are very modest, it will be difficult to live below your means without tracking your spending and creating a budget.  You may entertain a fantasy that, if you just hit some income goal, everything would fall in to place.  You’ll have to let that go.  As your income grows, the possibilities of what you can and can’t buy change.  Before you know it, you’re spending more on everything – food, eating out, clothing, travel, your car, your home, whatever.  The best way to handle your finances is to handle them with purpose, and in order to know what you’re doing you’re going to have to, well, know what you’re doing.  And that means tracking it. Once you’re tracking your spending, you’ll need to know where your limits are in order to avoid exceed them.  And that means budgeting.  Don’t worry – while this task can be tedious, it doesn’t have to be, and you also don’t need to overdo it.

Like Einstein said, you need a system that will be as simple as possible, but not simpler. In this post we’re going to talk about the overall process of tracking your finances and building a budget, and point you to as many sources for ideas as we can.  As we are fond of repeating, money is a tool that you can use to advance your goals, and the best way to manage it is knowing what those goals are.  This article should help you put the whole process of tracking and budgeting into perspective.

Note: If you are in a credit crisis and facing bankruptcy, repossession, wage-garnishment, or other major financial consequences, then as much as we wish we could help, we’re not really the right place for you to get the information you need.  While we will be addressing debt reduction strategies in this series of posts, you may be in need of legal assistance that we are not able to provide.  Our favorite online legal resource is Nolo.com.  Nolo’s Bankruptcy Center has plenty of good, free information and they also offer a variety of for-fee products to help those with serious credit and debt problems. 

3 Principles for Tracking & Budgeting

When you start tracking your spending (especially if you have joint finances with a spouse) you can drive yourself crazy in a hurry.  You gave your kid 50 cents to buy a toy from a vending machine at the mall.  Where should that go?  Your partner buys lunch at work and you make yours from the grocery budget.  Should you pay for the groceries that really go to your lunches?  You took out money from the ATM but you can’t remember what you spent it on.  You went to Target, Wal-Mart, or Amazon and bought groceries, medicine, toiletries and clothes on the same order.  Should you break them up?

These kinds of questions can get out of control in a hurry.  Tracking everything really isn’t the point though.  Remember that the point is to understand if your spending is in line with your values.  Which leads us to…

Principle 1: The purpose of tracking and budgeting is to help you understand if your spending is in line with your goals and values.  Only then can you tell if a purchase is worth the money.

As an example, consider two single men with incomes of $50,000 per year.  The first is very extroverted and finds much fulfillment in spending time with friends and meeting new people.  Three to four nights a week you can find him in a restaurant or a bar, where he typically spends somewhere around $40 on food and drinks.  He also spends $30/month on a gym membership where he works out and plays basketball with an informal group that is constantly adding and losing members.  Our second man is fairly introverted and has a small group of close friends.  He loves to cook, and a few nights a week he has his friends over for dinner.  He doesn’t belong to a gym, but has a cleaning service that keeps his condo looking good for $100/month.

Our extrovert would find our introvert’s grocery bills silly, and he has no problem cleaning his apartment once a month himself (give or take a few weeks).  Our introvert would find our extrovert’s restaurant and bar expenses shockingly high, and is happy to work out alone in his building’s small gym.  But, they both are enjoying spending time with friends and are exercising.

The obvious corollary to Principle 1 is that you need to have some idea of what your goals are and what things are important to you.

Principle 2: Organize your categories based on how easily they are controlled.

The whole reason you’re tracking your spending is so you can control it better.  So, it makes sense to group items in terms of your level of control.  When businesses do this, they refer to fixed costs and variable costs – meaning the things they have to spend every month regardless of what they do, and the things that vary depending on what they do.  For example, your rent/mortgage and current car payments will take serious work to change; you can’t just decide tomorrow to live in a cheaper apartment and have your rent change.  A second group are things that still take work to lower, but aren’t going to change overnight.  For example, your grocery bill, toiletries, regular medicines, insurance, etc. are probably places where you could save money but that won’t go away entirely.  Entertainment, eating out, etc are pretty much discretionary and, if you really wanted to, you could stop them within days.

Once you have these groupings in place, you can use them to help you understand the level of detail you should use in your tracking system.  I have found that it doesn’t really matter very much for me to track all the details of my entertainment spending.  I just know that I have a fixed amount of discretionary spending each month, and I need to stay within that.  If I spend it on movies, or drinks, or dinner, or taking my kids out to lunch, it’s all the same – discretionary spending.  No real value to budgeting it.  For my mortgage, mortgage interest, car payments, and other large fixed expenses, tracking them individually is pretty simple to do and helps me understand if I’m spending too much in those areas (or could afford more if it’s important to me).  The rest – groceries & toiletries, clothing for the kids, clothing for myself, repairs on the house, professional services like haircuts and dry cleaning – are all in a grey area, and for me, are a great place to focus.

Also, don’t forget your savings goals.  You can take a number of different approaches to this, but they boil down to ‘spending as little as possible and saving the rest’ or ‘setting a savings goal and then spending the rest’.  Which you choose has everything to do with your appetite for living frugally, your desire to increase your earning potential, and when you want to retire.

Principle 3: Your budget is a living thing that you will revisit on a regular basis, so don’t stress about making it perfect

This principle speaks for itself.  As you achieve your goals and new opportunities present themselves, you’ll want to re-arrange your savings and spending habits.  The activity of tracking and analyzing your spending will, in and of itself, lead to changes.  So don’t stress, and don’t fear.  Whatever reasons you have for procrastinating aren’t valid.  Whether you are earning a six figure salary and want to make the most of your income, or you are stuck on a credit-card treadmill and trying to figure out how to get off, the first step is getting the information in one place.

Tomorrow we will discuss some special circumstances, including dealing with spouses and families.

Helpful Links

Track Your Spending.  Or Not. |  Wisebread  |  An interesting take on value-based tracking and budgeting

How to Budget if You Hate Budgeting | FiveCentNickel | A great broad-brush way to budget for those who hate getting into the details

 

Thumbnail Photo: Blocks 1 by Crissy Alright

Story Photo: Simple 2 by Kristian Bjornar

 

 

 

Youth Savings Accounts, a good deal you probably aren’t taking advantage of

Recently, my wife and I celebrated the birth of our son.  Many of our friends have also recently had kids and, through casual conversation, I learned nobody really had good plans in place for saving for their children’s future.  I am not talking about 529 Plans or other college savings plans; I am talking about putting away some money that can be used for anything in the future; be it their first car, their first house, braces or maybe even their first business.

Since we live in Washington State, we are taking advantage of at least two deals for young savers:

  • BECU offers an APY of 6.17% on up to $500
  • Watermark Credit Union offers an APY of 3% on up to $500

Using this method, my son will earn an average interest rate of approximately 4.6% per year on $1000 of very liquid money and, because his total unearned income is below $950, he won’t pay income taxes on the $46 or dollars of interest.  Because it’s my son’s money, he will have $16 dollars more than I would have, even if I was able to match the interest rates, which is unlikely.  This makes for a pretty good, albeit small, tax shelter for the average family.

Note: While the interest rate on the first $500 or so is usually good, the interest after that is typically pretty low.  This means the compounding of interest earned on the $500 will be at a lower interest rate.

The deals I am taking advantage of are relatively small, but depending on what you are eligible for, there are other credit unions and banks offer the higher rate on larger sums of money.  For example, if you work for Chevron or meet other membership criteria, the Chevron Credit Union offers:

  • $25 initial deposit for newborns
  • 7% on up the first $1000 in a MySavings account
  • CFCU Youth Rewards, contests and more…

There are plenty of other youth account / kid’s accounts / early saver account deals out there.  This site provides an excellent search tool.  Some banks offer better than normal rates, and others offer other perks like sign up bonuses, reward programs and more, which (depending on the deal) could still make it worth it the effort.

Custodial Account – Advantages:

  • You are putting money away for the child – Unlike 529 or other such savings methods, savings accounts have 100% flexibility and can be used for any purpose.
  • It’s tax-free up to $950 in earnings – The money grows and earns interest federal tax free and you don’t even need to file a return for your child, so long as:
    • The total unearned income (interest / dividends) is less than $950
    • The child remains unmarried
    • The child is under 19 or a full-time student under 24

      Note: This assumes we are only talked about unearned income from Youth Savings Accounts, etc.  If your child is earning income, there are other rules that dictate whether they need to file.

      Important: Be sure to consult your tax adviser and the IRS to determine your individual tax advantages of this strategy.

  • Between $950 and $1900 of earnings it’s only taxed at 10% – For returns above $950 the child is probably in a lower tax bracket than you (usually 10%) and thus the unearned income is still taxed at favorable rates.
  • The child earns above market returns – Depending on the deal you find, the child can earn as much as 6, 7 or even 10% on between $500 and $1500 in various youth or early saver accounts.
  • The money is safe – So long as you are taking advantage of a savings account at an FDIC or NCUA insured institution, the likelihood of you losing this money is exceptional low.
  • You’re still in control (but) – Parents still have full control the money and the account until the child is 18 or 21 depending on the state.  As long as you use the money “for the benefit of the child” you are in the clear.
  • These accounts are usually free and include other goodies! – These accounts are usually free, have very low or no minimum balances, and sometimes include other goodies such as stickers, toys and bonuses designed to making “saving fun”.

    Note: If the deal you find is not free, or has too many strings attached, it is probably not worth it.  Be sure to read the fine print.

Custodial Account – Disadvantages:

  • This takes time to set up and manage – Although the time is generally pretty minimal, for our $500 Early Saver account, the process took about 20 minutes (including drive time) and we expect it to ideally take no additional effort for the next 18 years.  Because the account is for a minor, you may be required to show up in person.  BECU for example does not let you create accounts online for persons under the age of 13.
  • You are gifting the money – To take advantage of this plan, you are gifting the money to your kid.  While you still have control, legally the monies must be spent only for the benefit of the child.  In addition, there are possible tax implications, such as the $13k a year gift tax exemption that is reduced from your individual $1M life time exemption.
  • Eventual Loss of Control:    When your child no longer qualifies for the benefit, they also get full control of the money.  Young adults might not make the best decisions with the money you have saved up for them.
  • You may need to file a tax return for your child – Depending on how much you are gifting, and/or how much interest the child earns from that money, it may be necessary to file a tax return.  The following IRS site has more details on rules for filing requirements for children with unearned income such as we have discussed above.  Be sure to consult your own tax advisor.
  • Beware of the “kiddie tax” – This tax is really designed to prevent the very wealthy from moving large amounts of assets to their children to avoid taxes.  Unearned income that is earned by your child over $1,900 a year will fall under the kiddie tax and have to be carried over to your tax return and thus taxed at your tax rate.  This basically means the “shelter effect” of this tax strategy is limited.  You can read about a few gotchas of the kiddie tax here.

Regardless of the disadvantages, children’s accounts are still something to consider. Assuming you have the extra cash and the advantages outweigh the disadvantages, it is possible to scale this up.  The following table shows the benefits of the above strategy assuming a gift of $26,000 put into a 2-year CD at 1.5% on January 1st, 2011:

In this example, the strategy saves $277.04 in federal income taxes.  Assuming interest rates increase, you get a better CD deal, or you increase the amount gifted and took maximum advantage of this approach the results are even better:

This results in a theoretical maximum $570 in federal income taxes.

http://www.sxc.hu/photo/1339614

Vacation Tips: Creating spending budgets for your kids

Summer time is fast approaching, and along with it the mainstay of American family life – the summer vacation.  Whether you’re traveling or having a ‘staycation’, it’s easy to blow your budget with little extras.  You’re on vacation and you deserve it, right?  Well, at BYM we think the best vacation is one where one month later you’re not cringing when your credit card bill comes, and we’ll be posting tips throughout the next few months on making the most out of your dollar when traveling.

http://www.sxc.hu/photo/1339614Our first tip involves money and kids.  One of the best parts about a family vacation is seeing those little faces light up at all the great things that are happening.  But that can easily add hundreds of dollars on your total vacation expense, especially if you’re in a tourist spot like a theme park or a popular beach.  Keep control of your spending by setting a total budget for each kid on the vacation.  Be realistic here – if last year you charged up $20-$40 per day per child on candy, snacks, games, toys and souvenirs, don’t think you’re going to stick to $20 for the whole trip.  Set something reasonable that you can afford.

Once you’ve set a realistic budget, involve your kids in the spending decision.  The way we handle it in our family is to say “You have $40 for the weekend.  You can spend it on whatever you want, but when it’s gone, it’s gone and there will not be any more.  Have fun!”  You’ll love the peacefulness that comes from not having to grant or deny 50 requests every day from the “can I have this?” crew.  And you’ll be amazed at how much fun the kids have with the very grown up experience of making decisions.  You’ll also be surprised at how quickly the kids learn to be judicious with their money – much more judicious than they were when they were spending YOUR money!

If you have younger children, you should probably divide up the spending for them by giving them a daily limit, or even a before-lunch and after-lunch limit, otherwise they will blow all their money on the first day.  Younger kids don’t have a firm enough understanding of time, or of delayed gratification.  So break that $40 for the weekend into $20 on Saturday and $20 on Sunday.  It will be much easier for a young one to save up for a more expensive item by stashing some cash on Saturday then it will be for them to go all Sunday hearing “Sorry, you’ve already spent your money.”  (and it will be much more fun for you too).

If your kids have never had to make these kinds of financial decisions before, start before vacation so you’re not combining the excitement of the trip with trying to learn a new skill.  Take the kids to the mall, or a summer festival, and give them each a small amount of cash to buy whatever they want.  They’ll get the hang of it pretty quickly, and you’ll partner with them in their decision-making process instead of being the authority figure that decides whether they can have something or not.

If You Are New to Living Below Your Means: It will help your kids to see you going through the process of making tradeoffs yourself.  So let them see your own budgeting process, and set your own realistic limits on your spending for dining out, hotel, car rental, etc.  It will help keep you honest when you know you’ve spent enough for the day, but your credit card is right there tempting you to go over-budget.  It’s much harder to lie to yourself and say it’s OK to go over your budget ‘just this one last time’ when you know your kids are watching, and learning, from your actions.