I have budgeting on the brain. Who doesn't, considering the budgeting brouhaha we've endured from Washington, D.C.? While our budget isn't nearly as dysfunctional as the national one, the McGuire household could use a brush-up. We try not to go overboard and once the month is over, we look to see if we blew it.
J.J. Sessions calls that the "trip-down-guilt-lane" form of budgeting.
Sessions, a Maple Grove-based financial planner, believes managing cash flow is as critical as investing for retirement. It's so easy to get carried away with day-to-day spending, which hinders the ability to reach big financial goals. Sessions didn't have a good system for his own family, let alone one for his clients. Then he found First Step Cash Management.
The system, created by advisers at the Planning Center in Moline, Ill., encourages families to take their paychecks and divvy them into three buckets.
The first is the "Static" bucket. That's the bucket for money to pay for your fixed expenses such as mortgage, debt payments and day care, preferably with automatic bill pay.
Then there's your "Control" bucket. Think of that as your weekly walking around money -- the money that will be spent within the next seven days on everything from going out with friends to groceries and gas.
Finally, there's the "Dynamic" bucket, or money set aside for future use on vacations, gifts, charitable giving, home improvements, financial emergencies or non-workplace retirement savings. Sessions has clients set up a savings account for each specific goal, funded by automatic transfers from their main checking account.
He tested the system with his wife. With five kids ages 7 months to 9 years, the couple needs to manage their finances closely with limited time to spare. Since they started using it, he claims they haven't had one fight about money. "There's no more 'Where'd all the money go?' conversation," he said. There's no more overspending at Christmas. "My wife knows by Black Friday how much money she's going to have."
It takes an investment of time to comb through your finances and set dollar amounts for various buckets. Then there are the necessary tweaks when you realize that the amount you want to set aside for future spending far surpasses the amount available in the bank.
The 'bigger yes'
Depressing, yes, but that's where the heart-to-heart conversations about money and what matters most begin. Do you love to travel? Then shrink your seven-day control money bucket and eat out less so you can vacation more. Shocked by the pathetic amount you give to charity? Slice the birthday gift budget and funnel more money into the "for a good cause" account.
Sessions says some clients bristle at first, saying it feels too restrictive. He tells them, "It's the freedom to dream." He suggests they focus less on the "nos" and focus on the "bigger yes." In other words, don't fixate on having to bring lunch from home every day. Think about getting to sit on a beach for a week in the middle of the winter.
There's also something liberating about putting the fixed and future elements of your finances on autopilot and just worrying about the next seven days.
First Step can also help with the "What ifs?" and forecast the effects of current money decisions on future financial security. If a client comes in wanting to buy a bigger house, a quick spin in First Step shows how a higher mortgage payment would affect the bigger picture.
The program is not available off the shelf. But consumers can get access through Natalie Wagner, a Denver-based cash-flow consultant who teaches consumers around the country how to use the system. Price tag? $120 for individuals and $150 for couples, plus an $8-per-month fee for ongoing use of the program.
You can also fashion a similar system for free, sans the forecasting tools. My husband and I actually learned a similar technique years ago from St. Paul financial educator Ruth Hayden. She taught us to plan for expected but unpredictable expenses such as car repairs in an account called "escrow mandatory" and an account for vacations and life's other big ticket discretionary purchases in an "escrow optional" account. We set up a spreadsheet, opened a few savings accounts for particular goals and stuck with that system for a couple of years. Then we switched banks and had another kid, which threw the system out of whack. I think it's time to get back on board.
Kara McGuire • 612-673-7293 or firstname.lastname@example.org. Twitter: @Kara_McGuire