Debt-Free Forever (7 page)

When you spend cash, it is very easy for money to disappear without a trace. You break a $20 to buy milk, and in a feat of trickery, the pocket monster eats the change from the $20. You have forgotten about the cup of coffee you bought on the way to work, the newspaper, the sandwich at lunch, and the $5 bill you handed your kid as he headed out the door for soccer. Never mind the toonie you threw into the catch-all in your
car for your next cuppa. That’s the big problem with spending cash: money seems to disappear without a trace.

The only way to use cash and keep track is to

1.
Get receipts for everything you buy (or write yourself one).

2.
Write everything down.

Getting receipts is particularly important when you have more than one person using the jars since it helps everyone involved see where the money went.

When I work with couples, I give them a small three-ring binder with loose page79 which I call the Handy-Dandy Budget Binder. The first page is a summary and has the budget amount that goes in each of the jars. Each of the subsequent pages is labelled for one of the jars. So there’s a separate page for Groceries and Personal Care, Transportation, Clothing & Gifts, Entertainment, and Other.

Once you’ve labelled each page80n your binder or notebook, write in the first week’s amount. If you have $100 a week for food, here’s what your groceries page might look like at the end of the week.

Each time you spend money, you deduct it from what you had before and carry down the new balance. So if you spent $45 on food, you would deduct it from $100, which would leave you with $55. As you can see, you always know exactly how much you have to spend. No guessing. Dating it lets you see your spending patterns (are you going to the store too often?), and itemizing what you’re spending (on groceries, coffee, veggies) lets you see exactly where your money is going.

If at the end of the first week you have $2.25 left over, you add it to your next week’s $100. Remember, some of the jars are meant to accumulate money. For example, in the Transportation jar, there’s money for both gas and car repairs. If you spend all the transportation money on gas, or borrow money from that jar because it’s “left over,” you won’t have anything set aside when it comes time for an oil change.

Once you start keeping track of your money, you will spend less. That’s part of the magic! Having become aware of your money and how much (or little) you have, you will become far more choosy about how you spend it. Simply by paying attention, you will save money. If after six months you have a lot of money left in the jars that you’re not going to spend, leave enough of a float to cover unusual expenses and by all means slap the rest against your debt or into your savings. You should also revamp your budget numbers so they reflect your lower-than-you-thought spending.

Okay, you’ve balanced your budget and you now know how much to pull from your bank account each week (or however often you’ve chosen) for the jars. It may be that some jars, like Clothing & Gifts or Other, may remain empty until you’re
back in the black. All the rest of your money stays in your bank account and can be used to pay your bills.

Managing your money isn’t rocket science. And it isn’t magic. It’s discipline. You have to be determined to live on what you make, passionate about getting your consumer debt (credit cards, lines of credit) paid off in three years or less, and convinced that it is important to have some money set aside for the future.

‘Course, if you’re at all wishy-washy about what it’ll take to get you out of debt, if you just can’t work up the guts to do things differently, it won’t be the jars that failed.

Whether you’re a contract employee, a freelancer, working for yourself, or working on commission, one of the biggest challenges you face is Feast Today, Fast Tomorrow Syndrome. One month you do really well, have enough to plan a holiday, build a deck, buy some new clothes. The next, you’ve barely got enough to make it to the end of the month without racking your cards to the max.

Working with a variable income isn’t as hard as people think it is. You can still make a budget and stick to it. You can still have the things you need and the things you want. But you must have a plan.

First, you need to set yourself a “salary” and live on it. If your work efforts bring in $2,000 one month and $6,000 the next, and you think of all that money as spendable, you’re going to run into trouble, it’s only a matter of time. So smooth out your cash flow by deciding what your minimum monthly
income needs to be to keep body and soul together. This is your Salary. No matter how much money you bring in, it’ll all go into your Business Account and you’ll only transfer your Salary into your Household Account for spending.

To figure out your Salary, do up a household budget that covers all your basic monthly costs: food, housing, transportation, medical, and the like. The “we can live without it” items like clothes, toys, and partying don’t make it to this list. However, savings and debt repayment do. And don’t forget taxes. This is your first-tier budget.

On your second-tier budget, needs like home maintenance, clothes, and entertainment should also be part of your Salary, but with the proviso that if the going gets tough, these spending categories can be shorted until the money starts flowing in again.

Now, you could have a big fat monthly total if you’ve weighed yourself down with big fixed expenses—like that $800-a-month car payment or a home that’s way too much for your wallet. Ditto if you’re carrying tons of debt. Let’s assume for the purposes of this discussion that if you have those things you can pay for them. (If you can’t, this may be the time to reassess your priorities.)

In good months, you’ll have plenty left over in your Business Account. Don’t be tempted to touch it. It’s your cushion. In a month when you haven’t brought home as much as normal, you’ll still have a whack of cash in your Business Account so you can transfer your Salary to your Household Account without a hiccup.

Use whatever additional income you earn above your tier-one
and tier-two budget needs for other goals. Whatever you have in your Business Account—your Business Buffer and earnings beyond your Salary—should be invested in a high-yield account. If you’re doing very well financially, you can decide what other goals you want to accomplish (like the deck, a vacation, or a shopping spree). Build or replenish your emergency fund if you’ve dipped in, and pay down your debt. Make sure you’re also having some fun.

Being self-employed brings loads of terrific benefits along with some very interesting challenges. I’ve been self-employed for about 30 years—some lean, some luxurious. And I wouldn’t swap the flexibility self-employment offers, no matter how hard I had to work when things were busy. There was one period where I worked 17 hours a day, 7 days a week for about 7 months. I literally rolled out of bed and to my computer, rolling back in to sleep. I had no life. I made a
lot
of money. And a good thing too because when I finally decided to have kids, because I was self-employed I wasn’t entitled to any mat leave benefits. But I had a whack of cash set aside. See what you can do with a plan?

GAIL’S TIPS

Even with a perfectly balanced budget, sometimes you can run into trouble if your cash flow isn’t properly aligned. Sometimes people’s cash flow is out of alignment because of how often they are paid. Sometimes it’s because of when their bills hit their bank accounts for auto payment. Mostly it’s because people don’t take the time to sit down and plan when the money goes out based on when it comes in.

The first thing to do is to make a Bills to Be Paid List of what you have to pay by date. If your mortgage comes out on the 5th, and that’s the first bill of the month, it goes at the top of your list. (This assumes you have enough income to cover all your bills. If you don’t, you’ll have to find a way to make more money.)

When you’re managing your bill payments, remember that you can’t wait until the due date on the statement to pay your bills. While some companies have a grace period, if you try to pay on the due date using online banking, telephone banking,
or a bank machine, and the payment isn’t posted that day, you’ll be charged a late payment fee. Get in the habit of paying all your bills at least three business days before the due date.

Plot when your bills are due and the amounts you must pay on a “month at a glance” calendar. You can photocopy any month from an agenda or datebook and use it as your template. You can now quickly see when the money needs to come out of your account.

Time to put in your paydays. That’s when the money is coming in. Write on the calendar the amount being deposited to your account.

If you get paid on the 30th of the month, that money will actually be used at the beginning of the next month. So if you are paid semi-monthly, you will pay half your bills from the 1st to the 14th with the money you deposited on the 30th, and the other half of your bills with the pay you got on the 15th.

If you get paid biweekly, there will be some months when you get paid three times instead of twice. You need to determine how many months of the year this happens, so you can allocate the “extra” paycheque appropriately. For your budget’s sake, you may have to live as if you only get two pays a month, and use the “extra” for boosting things like Home maintenance, your Vacation Fund, Savings … anything that doesn’t have to be deducted monthly.

When you align your cash flow, you pay only the bills for which you have money in the bank during any period.

Look at your calendar with the bills and pays plotted on. Do you have enough for your jars and to cover each of the bills that must be paid on the date they are due? If you have
bills you simply cannot cover in a particular pay period, then you will have to call some of the companies you deal with and change your billing date. Yup, you can do this. It’s a pain, but a little effort now will make managing your cash flow a whole lot easier over the long term. Simply pick up the phone and ask for your billing date to be changed to a time in the month when you do have the money available to pay the bill on time. Keep in mind that you’ll have to pay a pro-rated bill when you change your billing date, but it’ll eventually smooth out.

Once you’ve aligned your cash flow, go back to your Bills to Be Paid List and write the “paid on” date in beside the bill, so you have an at-a-glance list of when all your bills will need to be paid. One of the biggest benefits of having all your bills visible on a calendar and on the Bills to be Paid List is that you can track them as they come in. If for some reason a bill doesn’t arrive when it is supposed to, you’ll know the bill is missing and can call, get your balance, and make a payment before late fees and interest start to accumulate.

Doing this takes some time, but not as much as you might think. And finally having a system for when each bill will be paid will mean you’re not scrambling to find money. No more overdraft fees. No more interest and late fees. It’s definitely worth the effort.

GAIL’S TIPS