Take those large, less-frequent expenses that usually send you into a financial
tailspin, and break them into monthly chunks. Result? Financial peace. Climb
out of that Financial Crisis Roller Coaster. It’s smooth sailing ahead.
There are no normal months. Your expenses do not occur evenly throughout the year, and if you don’t plan for the high-expense months, you’ll be in a world of hurt. Rule Two forces you to look at the larger, less-frequent expenses (car insurance, life insurance, Christmas, school tuition, VACATIONS) and break them down into monthly, manageable amounts.
Your car insurance premium is due every six months. It’s $600.
You see you have $1000 in your checking account, do some quick (almost always faulty) math in your head and remember your cable bill is due in two days ($100), the refrigerator is empty ($150), the car payment is due next week ($400), and the gas bill needs to be paid by Friday ($120). Total bills tallied in your head: $770.
You think you’re flush with cash! $1000 less $770 means you have $230 of impulse-shopper money!
A week later, with $100 in your checking account (you impulsed away $130 already), your car insurance bill comes due. You owe them $600. Keep your hands and feet inside the ride at all times...you stress. You put it on the card. You dig yourself a bit deeper into a hole.
Yet you “make plenty of money.”
You looked ahead six months ago. You knew the car insurance premium would be due in six months, and you knew it would be $600. You’ve been budgeting $100 per month into your ‘Car Insurance’ category each month for the past six months.
Where has the “extra” $100 per month come from? Probably from your impulse-shopper money. As mentioned with Rule One, when you start giving your dollars jobs, you tend to “get a raise.” Your money is more obedient. It lines itself up with what matters to you. It’s not magic, though it feels that way.
So, snoozer alert: The bill comes, you pay it. That cRaZy month, that would have sent you into complete and utter panic mode, felt pretty normal. Kind of boring actually. You didn’t even feel the bill.
With Rule One, it’s critical that you give every dollar a job. You’re basically saying, “Okay, given what I know right now, what should this money do for me before I’m paid again?” That’s half of your True Expenses equation.
The other half is what gets us in trouble. It’s those larger, less-frequent expenses that do a sneak attack (at our most vulnerable moment—every time), cause us to stress out, and have a bad day—or month.
Your True Expenses =
What You Have/Want to Pay Now + What You Have/Want to Pay in the Future.
So yes, you’ll give every dollar a job, but it’ll be like you have Future You telling Present You what You should do.
You: “I really, really need a new bandsaw.”
Future You: “What about that putter you’re saving for?”
You: “I was hoping to get a new lamp to accent the throw rug.”
Future You: “If you purchase the lamp now, it means you won’t be able to buy the new couch you’ve been saving for in June. It’d be in July.”
You’ll go from knee-jerk reactionary, to visionary. You’ll make high-quality spending decisions because you’ll have the relevant information. No pointing fingers. No judging. You’re just informed. That’s all it really takes.
All this talk about bills, obligations, and debts is a bit misleading. You use Rule Two to save for things you want as well. Vacation. Anniversary getaways. New gadgets.
I love to play golf. It’s a ridiculously expensive sport, and there’s no way to justify the price. Except that I love it, which is all the justification I need. And I budget for it.
I know you’re sitting there shaking your head in bewilderment because you can’t understand why anyone would pay good money to swing wildly at a tiny ball. And I shake my head in bewilderment because I can’t understand how you can possibly justify spending money on stamps, stencils, and stickers.
What you buy doesn’t matter, as long as you’re spending money with full awareness, and good information (which you’ll have right on your Budget screen).
I tell you, it’s a wonderful thing to want something for a bit. It’s good for you. You’re healthier for it. You’re certainly better-looking (which comes from better sleep and less stress).
Rule Two is about anticipating the unexpected. So yes, you budget money into the ‘Car Repairs’ category every month (even though you don’t know when repairs will be needed or how much the repairs will cost). That money stays in that category until you use it. It grows from month to month. Both of my cars are about ten years old. My wife and I found that $150 per month budgeted into ‘Car Repairs’--even if we don’t expect repairs--keeps us ready for the unexpected.
Most financial advisers recommend an emergency fund of three to six months’ expenses. That’s fine advice, but once you start budgeting, your definition of an emergency is going to change. Expect the unexpected by setting money aside for inevitable, sudden expenses such as car repairs. Planning for this kind of typical occurrence will leave your real “emergency fund” untouched and intact.
You plan ahead for probable expenses. Here’s a starter list of probable expenses:
|Predictable Rainy Days||Unpredictable Rainy Days|
|Car Insurance||Car Repairs|
|Property Taxes||Home Repairs|
|Vehicle Registration||Unexpected travel (funeral, sick relative, etc.)|
|Medical Deductible||Medical Bills Beyond Deductible|
Budgeting this way makes the unexpected expected. Nothing will blindside you anymore. What was a financial roller coaster, is more like a leisurely walk on the beach.
It’s those larger, less-frequent expenses that do a sneak attack (at our most vulnerable moment—every time), cause us to stress out, and have a bad day—or month.
It’s a wonderful thing to want something for a bit. It’s good for you. You’re healthier for it. You’re certainly better-looking (which comes from better sleep and less stress).
Go back through your checking account. They’ll jump right out at you. Don’t forget to go through your credit card statement(s) as well. A lot of those “emergencies” end up there. Between thinking ahead, and looking back, you’ll catch the vast majority of them and you’ll be able to prepare for them appropriately. Keep in mind that your budget is a plan that can be adjusted if you happen to miss one!
Let’s say you decide you’ll spend $1,200 on Christmas. You have 12 months to save for it (if you’re beginning in January), so you’ll need to save $100 per month ($1,200 divided by 12). You’ll budget $100 into your ‘Christmas’ category each month. If the money isn’t spent in a category, it rolls forward into the next month. You’ll see the balance grow each month, which will bring the “Merry” right back in to “Merry Christmas”.
You don’t have to. Some people grow uncomfortable when their checking account has $7,000 in it because they’re afraid they’ll spend it. However, if you’re following Rule One, where you’re letting the budget tell you what you can spend, not your account balance, you should be just fine.
If you’re enticed by the idea of having that money earn a teensy-tiny bit of interest, you could certainly put the money in a high-yield savings account. Your budget doesn’t care where your money is physically, it just wants to know how you spend the money.
No. Your cash flow isn’t constant from month to month. Following Rule Two lets you even it out enough to make things feel normal. But there will always be surprises.