Runaway Checkbook
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Why should I be interested in “Runaway Checkbook”?
Why do many people have problems with their finances?
How do I create a “Spending Plan”?
How do I make a decision when buying something big, like a car?
Should I pay off my debt quickly or put money in savings?
Is it bad to carry a balance on a credit card?
Are school loans bad?
How do I teach my children proper money management skills?
What do I do if I want to tithe to my church, but I cannot afford to tithe?
How can I give to charities, or help others, when I do not have enough to pay my bills?
Why should I be interested in “Runaway Checkbook”?
The purpose of this section of our website is to provide information that will help people understand why their finances are not in good condition, and provide a plan that will help them reduce spending and live within their income. Even if you have done a good job with your finances, we hope that some of the ideas in this section will help you be even better with your finances. (Back to Top)
Why do many people have problems with their finances?
For the first time since the Great Depression, Americans have a negative savings rate. That translates to we are spending more than we are earning. Unfortunately, that calculation is an average, and includes people who are able to save a lot of money. The people who are not saving money are the ones having trouble with their finances. If I were to choose ONE main reason why people have financial problems it would be they want to buy something they cannot afford. We have trained ourselves to buy now and pay later. Americans think nothing of borrowing to buy furniture, cars, boats, lake houses, vacation homes, and even vacations. We do not hesitate to buy something with a credit card and not pay off the balance when the bill comes in. If you borrow money without having savings in the bank to pay off that loan, then you are spending more money than you are earning. Read that sentence again.
The generations that grew up and worked prior to the 1970’s rarely borrowed money. If they did not have the cash, then they did not buy the item they wanted. They waited until they had the cash saved up to buy it. During this period, car prices did not escalate much. Interestingly, car prices started dramatically increasing when they started offering car loans. It was easier to buy a more expensive car if you borrowed money. The monthly payment seemed less painful. Then, then we started buying other things we wanted using loans and credit cards. Debt is the single greatest cause of our financial problems.
Rule of thumb: If you have more debt than savings, then you are spending more than you earn.
You cannot possibly get your finances in order until you start living within your income. To live within your income, you must stop taking on new debt, and start paying off existing debt. You need to develop a “spending plan”, which is described in another question. (Back to Top)
How do I create a “Spending Plan”?
To begin, it will be significantly easier if you have a computer and purchase a program like Quicken. We have used Quicken for years, and it is the only checkbook program we are familiar with. So, I will be referencing techniques that can easily be done in Quicken, but I am not sure whether they can be done in other programs.
Step 1: You need to determine your “fixed expenses”, and it is helpful to understand your “discretionary expenses”. Everyone has fixed expenses. I like to refer to these expenses as those bills you pay from home. Discretionary expenses are those expenses that occur away from home, like eating out, groceries, gas for cars, haircuts, clothes, etc. You have at least a certain amount of control over discretionary expenses, but not fixed expenses.
Step 2: Create a spreadsheet that has 14 columns. Down the left column write down the name of the fixed bills you have. For example: Electric, Telephone, Cable, House Payment, Car Payment, Other Loan Payments (list individually), Car Insurance, Home Insurance, Life Insurance, etc. These categories should be those bills you pay regularly. Then, write “Cash” for the last category.
On the top of each column, starting in column 2, write the name of the month for each of the last 12 months. And, in the far right column, write “Total”.
Step 3: Gather the last 12 monthly bank statements from which you pay your bills. Work one month at a time. Assign one of the categories you have from Step 2 to each of the checks and drafts that are on that bank statement. Then, total the amount of checks for each category, and write that total in the corresponding column for that month next to the corresponding category. Any check or draft that does not fit into one of your categories should be a discretionary expense and should be added up and that total put under the “Cash” category.
Once you finish one month, total the expenses you wrote down in that column, and write that total amount at the bottom of the column. That total amount should match the total amount of debits (ie. Checks and drafts) shown on your bank statement.
Repeat those steps for each month.
Once all months are completed, then take one category at a time and add up the amounts on that line for each of the twelve months to get the total amount you spent in that category over the last twelve months. Write that total amount in the far right column on the corresponding category line.
Repeat that step for each category.
Step 4: You have now completed the spreadsheet, and you need to determine your “average” monthly expense by category. Most people would take the total in the far right column for a given category and divide it by 12 months. We pick an amount that equals or exceeds the amount in the spreadsheet for that category at least 10 out of 12 months. That amount is our “average” for that category. Determine that amount for each category and write it to the right of the total for each category on the right side of the spreadsheet.
Step 5: On a separate spreadsheet, make 4 columns. Title the second column from the left “Annual”, the third column “Month”, and the fourth column “Week”. Down the first column on the left, write “Income”. Leave several lines for the various income sources you have, then write “Expenses”. Below “Expenses”, list all the expense categories you came up with. Write the “Cash” category first, then the write the others below it. Leave a couple of lines between the Income and the Expense sections, so you can total your income. This spreadsheet will be referred to as the “Spending Plan” from now on.
Step 6: Take the “average” amounts you determined in Step 4 and put them in the Spending Plan. DO NOT FILL IN THE LINE FOR THE “CASH” CATEGORY. Those amounts are monthly amounts, so put those amounts under the “Month” column. Then multiply those monthly amounts by 12 and put that result under the “Annual” column. And, finally, divide the annual amount by 52, and put that result under the “Week” column. Do the same for your income sources. You normally would use your NET paycheck IF you have income tax withholding and you do NOT have to pay additional taxes at the end of the year. If you are self-employed, you will need to put your income after business expenses, and then add a category for “Income taxes” on your spreadsheet under “Expenses”.
Step 7: Add up the total income and expenses for each column. For each column, subtract the Expense total from the Income total in the Spending Plan. If the result is NEGATIVE, then your fixed expenses exceed your income. If the result is POSITIVE, then write that amount on the “Cash” category line for each column, respectively.
Step 8: If your results in Step 7 were positive amounts, then the amount you wrote on the CASH category line is how much you can afford to spend on discretionary expenses. Compare those amounts with the amounts you entered in the first spreadsheet under the Cash Category. There is usually a significant difference between the two spreadsheets. The first spreadsheet tells you what you spent in that category, and the Spending Plan shows you what you can AFFORD to spend in that category.
Step 9: Take the Cash category amount under the WEEK column on the Spending Plan. That is how much you should withdraw from your bank account each Friday. If you are married, split the money however you determine between spouses. Remember, this is what is used to buy groceries, clothes, eating out, etc. This is all you can afford to spend each week on discretionary purchases. DO NOT USE CREDIT CARDS OR WRITE CHECKS FOR “CASH” CATEGORY EXPENSES IF YOU RUN OUT OF CASH BEFORE THE NEXT FRIDAY. Remember, the Cash amount is all you can afford to spend on discretionary expenses. The remainder of your income is needed for your fixed expenses. DO NOT TAKE ADVANCES ON YOUR WEEKLY CASH. Discipline yourself to live within your income.
SPECIAL NOTES:
· Try to have some amount going into savings for unexpected emergencies like car and home repairs.
· Try to structure all your loans and credit cards so they are able to be paid off within 4 years. You have a significant debt problem if it takes longer than 4 years to pay off all your debt.
· Do NOT decide whether you can afford something based on the balance in your checkbook register at any point. Typically, if you strictly follow the Spending Plan, you will notice your bank balance will be larger than you are used to. However, this money is needed for future bills, especially if you have some bills that are quarterly, semi-annual, or annual.
USING A PROGRAM LIKE QUICKEN WITH THE SPENDING PLAN:
I am not going to attempt to explain how to use Quicken, but I wanted to explain some things that program is capable of doing to make it easier to follow the plan.
You can enter “Scheduled Transactions”. Each one of your fixed expenses should be entered as a “scheduled transaction” and use the amount you entered in the Spending Plan for that category. Your weekly cash should be set up as a “scheduled transaction” too. In Quicken, you can tell the program to automatically enter the transaction in advance. We set ours to 180 days in advance. That means we can project our cash flow 6 months in advance. We can easily tell if I will have any excess money in my account in the months ahead.
The scheduled transactions have your projected bill amounts, so you will need to change the amount in Quicken once you receive the actual bill. But, again, this helps you project your cash flow. Since we chose an amount that will work 10 out of 12 months, instead of using an average, the actual bill will usually be less than our planned amount. This builds in some “fat” in our plan, and will generally cause us to have extra money in the account after several months. The extra can be moved to savings a couple of times each year.
If you are routinely spending more than the planned amount, you should adjust your spending plan, and change the scheduled transactions. Be sure to make sure the Spending Plan matches what you are actually doing every couple of months. Quicken gives you the ability to run “cash flow” reports that makes this process extremely easy. You can design the Quicken report to look virtually identical to the Spending Plan. (Back to Top)
How do I make a decision when buying something big, like a car?
If you are paying cash for the car and will be taking the money from savings, you want to make sure that the purchase will not derail any other plans you have (eg. College funding, retirement, etc.). Most people finance cars, and the decision whether you can afford the payment is harder. You need to be able to project your future cash flow. If you are simply keeping track of spending in a manual check register, then this analysis will be difficult. You need to know what your fixed expenses are. Look at the steps in how to create a “spending plan” above for help in this process. The bottom line is that you need to know whether you have enough excess income (income minus expenses equals excess income) to make the payment. A good rule of thumb is: if you are not saving money every month, then you most likely cannot afford any additional payment. If this is the case, then you must reduce some expense in order to free up cash flow for the new payment. Most people want the car so bad that they will add the payment and assume they will find some way to pay for it. This is usually done by using credit cards for groceries and other expenses, which adds to their credit card balances since they do not have the money to pay both the new car payment and the groceries. (Back to Top)
Should I pay off my debt quickly or put money in savings?
You should do BOTH! Most people make the mistake of using all their extra income to pay off debt and do not put any money into savings outside of retirement plans. The problem with this approach is that when the unexpected repair or medical expense occurs, they have to go into more debt since they have no savings. In order to stop the debt from increasing, it is important to structure a plan so you are paying off debt AND adding to savings each month. One rule of thumb is to structure your debt reduction plan so that all your debt is paid off within four years or less. You have a significant debt problem if you cannot pay all your debt (except a mortgage) within four years. Ideally, you should have in savings an amount that is equal to at least six months of income. This can be in readily marketable investments. It does not have to be just in savings or money market accounts. (Back to Top)
Is it bad to carry a balance on a credit card?
Yes! If you do not have enough money in savings to pay off any credit card balances (and other consumer loans), then you are spending more than you are earning. This is not good. Credit cards will make most people spend more than if they paid with cash. Debit cards will also make you spend more than if you wrote a check or paid with cash, but they are not as bad as credit cards. Always pay off credit cards each month. No exceptions. (Back to Top)
Are school loans bad?
It is increasingly more difficult to pay for college without some kind of financial aid. If you have to use loans, then be sure to only use the loans for tuition, books and fees. DO NOT LIVE ON THE LOANS! Pay your living expenses either out of savings or by working. Keep track of your loans carefully, and project the amount of loans you will exit college with. Be sure that the income you will be able to earn after college will be more than enough to service your college loans. Be realistic and conservative on your income projections. Apply for scholarships. There are numerous scholarships available especially to those who have lower incomes. It is a lot of work to apply for scholarships and many of them are small, but take the time. It is free money! Many institutions indicate that they have more scholarships than are applied for. In other words, they do not give out all the money they have for scholarships each year. (Back to Top)
How do I teach my children proper money management skills?
You have to start by having proper money management skills yourself! But, even if you do not, here are some ideas to teach your children proper money management skills:
1) No matter how old or young they are, do NOT give them an allowance. That is welfare. Teach them that you have to work to make money to then be able to buy the things you want. No one is going to pay them to clean their own room or pick up after themselves later on in life, so do not pay them to pick up after themselves. Give them jobs to do, or if they are old enough, make them get a job. The amount you pay them to do jobs around the house is not important when they are too young to understand. However, as soon as they are old enough, make them negotiate their wage with you. Teach them to negotiate as high as they can, but be sure to stop at a fair wage. Do not over pay them when they are old enough to negotiate.
2) Make them use their own money to buy discretionary items like movies, eating out with friends, and things they want. Tell them if they ask you to buy something for them, they have to use their money. Feel free to buy them things occasionally that they normally think they are supposed to pay for, but never pay for it if they ask for it. Nobody is going to buy things for them when they are on their own.
3) When they are old enough to drive, get them a checking account and debit card. Make them pay for their own gas for their car. Make them pay for eating out. If the child is active in extracurricular activities and is making good grades, you can give them a “salary” per month since they do not have time to work. However, even a very part-time job is better than no job. Make sure they know the “salary” is a reward for hard work and good grades. Be sure to teach them how to keep a check register and balance a bank statement. Their finances are simple, but it is easier to learn now then later when their finances will become much more complicated.
4) Make them pay the deductibles if they have a car accident, and make them pay for any increase in insurance premiums due to a car accident or traffic violation. They need to understand the consequences of their actions. There is no better motivator than money! Be sure they understand the rules up front, and make sure you follow through with the rules. Do not be lenient! (Back to Top)
What do I do if I want to tithe to my church, but I cannot afford to tithe?
I believe you cannot afford NOT to tithe. The Bible is very clear on tithing. One scripture is Malachi 3:8-10, but talk to your pastor or minister for further guidance. I believe you should tithe from your gross income, and I believe you should tithe BEFORE you pay your bills. I believe God will provide for your bills if your motivation is correct and you are being a good steward of the money you have been given. I will be glad to visit with you more about this subject. (Back to Top)
How can I give to charities, or help others, when I do not have enough to pay my bills?
I believe the single biggest problem Americans have is we want things now and are not willing to wait until we can afford them. My father taught me a long time ago “if you cannot pay cash for the things you want, then you cannot afford those things.” Americans spend so much on things they want that they have nothing left to help others. Why are we on this earth? What is our purpose? Why do we work? I believe we work to provide for the NEEDS (not wants) of our families, and then I believe we are to help others in need. So, we first have to reduce our spending, so there is some money left to help others in need. There is nothing more rewarding than to share with others who have more need than you. Be sure to teach this to your children and include them in on the ways you give to others. (Back to Top)
