Financial Planning | Organizational Sunday Challenge Week #19

Now that we’re no longer chasing down our keys every week, we know what is in our fridge, freezer, and pantry we may have a little more mental space to deal with more challenging things like budgets.

This week’s challenge: Take Stock of Your Finances and Make a Plan

If someone else in your household handles all of the finances, your challenge is to sit down with the said person and go over the state of things. This should happen regularly, it’s not micro-managing, it’s not being nosy, it’s communicating.

If you need a starting point for getting your household expenditures organized, keep reading, otherwise, see you next week.

Note this was originally written in 2016, everything is absolutely fine in 2023.

The last few years have been a bit tumultuous on the financial side of things. I have a good job, so I’ve been able to keep my head above water, but divorce—lawyer fees, even for the most amicable, we worked out everything before coming to you, are shockingly high— the self-employment tax, (I was a contract employee that first year), buying a fixer-upper, fixing up the fixer-upper, and then combining households has been an interesting ride. I could have been in serious trouble if it weren’t for some discipline.

Back when I first wrote this post, I didn’t mind recommending Dave Ramsey’s course. While I didn’t agree with some of what he recommended, I could get behind the general outline (the stuff I agreed with will follow.). However, I can no longer comfortably recommend him or his products.

I like the concept of first creating the mini-emergency fund —which has saved my butt—and then paying down debt from smallest to largest.

I do the envelope system so many people rave about. I do the hey, we’re in the 21st century and online banking makes moving money between multiple accounts is a super-easy method. (I should probably work on a better name for the process).

The goal is if you are living paycheck to paycheck, to slowly dig yourself out of that situation. If you are just disorganized, the “payoff” will be an almost immediate reduction in stress. Next week, we’ll work on setting up a system to remember to pay each bill.

How it works.

You’ll need at minimum three accounts, two checking accounts and one saving. If your bank doesn’t let you have two free checking accounts and one savings account, it’s time to find a new bank.

Gather all of your bills and financial obligations, yes, all of them.

On a sheet of paper or spreadsheet, total your bills and multiply them to figure out the annual total. Inconsistent bills like utilities should be based on the highest month, not the average. Don’t forget your less regular bills like house and car insurance or property taxes. It’s probably a shockingly high number.

Breathe.

Divide the annual total based on how often you are paid. (I’m paid weekly, so I divide by 52. If you’re paid on the 1st and 15th, you’d divide by 24, every other week by 26, or monthly by 12). This number is your bill total.

If this total is higher than your income, this is a much bigger problem than being organized can solve. I’m sorry. We haven’t taken into account other expenditures like food and you still need to eat.

Each pay period, you’re going to sit down and perform the following math problem:

Income – bill total = savings and discretionary income

Decide how much of the remainder is savings at the beginning of the pay period.  When your paycheck lands in your account, move the money into:

1. Your savings/emergency fund – this one should only be able to be accessed in an emergency. As your savings grow, you’ll want to move the money over your minimum emergency amount into a less accessible place.
2. The bill checking account
3. Discretionary income

The key to making this work is to force yourself to live out of only your discretionary income for food, gas, entertainment, clothing etc. Do not rob Peter to pay Paul, the money in the bill account has already been spent and is only for bills. The savings/emergency fund is for emergencies, with no exceptions.

The wiggle room created by using the highest variable bill total should not be added back to your discretionary income. This money is your “buffer money” and you’ll use it to insulate yourself. It’s a good idea not to let your bill account hit zero each month. Buffer money helps with this. In a few months, you can use some, but not all, of the buffer money to pay down debt.

You may find yourself playing  Iron Chef: Scrounge the Pantry Edition on the last couple of days of a pay period. Try to keep a —this is a challenge, I want to meet my goals—mindset rather than focusing on a feeling of deprivation. It is hardest in the beginning or after an emergency, and you must rebuild your savings.

It’s going to be okay, and it’s going to be worth it.