Wacky Way #1: Don't bother with a budget

Every beginning finance book begins with having you make out a budget. But really, that is stupid advice. I tried!

For a year, I dutifilly sat down with our bank statement and laboriously added up individual check and debit card payments in about ten different categories in an effort to figure out the elusive budget. It didn't work--there were always incidental expenses, impulse buys, random fees and "miscellaneous money" (Who spent $73.47 on check number 2225??). Add to this the fact that when the paycheck comes in, it isn't always a constant number either. I attempted to average our income over a one-year period but that was also a laborious task...one that I would have to repeat year after year (assuming we still had it). And this is coming from a person whose aptitude test scores always registered "accountant" at the top. How is the not-too-keen-on-math person supposed to perform this feat? The answer: don't.

Here's what you do. You need to get the big picture on your finances, and Uncle Sam already forces you to do it. So dig up last year's tax return, and grab a Tupperware lid or something round and draw a big circle on a piece of scrap paper. Fold the paper in half so your lines match until you have some even-numbered amount of divisions in your circle. You start with your total amount of compensation on your W-2's (don't rely on the figure in box 1--add up all the little bonuses and benefits that are listed separately, because that list represents your total compensation). If your household depends on income from some other source, add that in. Don't worry about interest or dividends--just the income that you are counting on to come in on a monthly basis to pay the bills. This is the size of your pie. Write that amount across the top of the page.

Now start going through your deduction paperwork. It should tell you how much you've paid toward interest, principle, and taxes on your house (or you could just add up your rent, if you're lucky enough NOT to owe on a mortgage). Next, add up all the types of compensation on the W-2 that do not come to you in the form of money, because these represent money that you paid out through the company for various benefits that they administer for you (health care premiums, 401(k), etc). Then add up all the boxes of taxes that were taken out (don't forget state income tax and even sales tax). Get out your trusty calculator, figure the percentages, and draw them into your pie. You can see that these three categories already take a massive chunk out of your total take-home income. Don't get discouraged--we'll tackle these in later posts.

Next, add up your debt-service payments such as car loans, credit card bills, student loans, and any other debt that you pay a monthly interest payment on. If the payments differ from month to month, try to get an average and multiply by 12. Draw that one into your pie.

Now from here, you can take this exercise as far as you want--adding up your health care costs, charitable giving, food costs, utility costs, phone, whatever. The purpose of the exercise is to get you to see, of course, that what you are making on paper is far more than what you actually see in your bank account. So the next time you are feeling "rich" because you figure you make such-and-such and your house is worth such-and-such and you're tempted to splurge...just remember how small of a slice of that overall pie you are living on.

Your first goal, at the beginning of this money-management odyssey, is to get rid of all non-mortgage debt. To do that, you have to come up with extra money--and unless you are about to get a raise or big promotion (and assuming you don't want to have to send the Mrs. to work), you're going to have to reduce or eliminate some spending to free up money to pay off debt.

Do you see why budgets don't work? The moment you have a figure posted in your head, say $300 on food for the month, or $75 on a phone bill, you find yourself spending the whole amount, thinking you can "afford it"--without any incentive to examine the expense for more ways to save, substitute, or sacrifice. This is why governments may make "budgets," but they always overspend them.

Instead, aim for spending as little as possible. Try to find ways to keep cutting as the months go by. Monitoring your bank statements helps, as well as NOT pulling cash from the ATM. Cash tends to get frittered away, whereas every debit charge gets recorded on your monthly bank statement. Ruthlessly analyze this statement for at least six months, and slash extraneous expenses. This can be distressing at first, because unexamined spending tends to be loose indeed. But you will save far more this way, and will not be tempted to "go over," because you are always seeking the lowest possible cost. Once you've reached the level where you can't go any lower, you can note down the numbers if you like and call it a budget.

But don't get complacent.

The goal is to find money and re-direct it toward paying off debt. This will be easy at first, but gets harder as you go. Examine every utility and telecommunications bill that you get. Read insurance contracts and question charges that you don't understand. Shop loss-leader sales at the supermarkets and be sure to record prices in your notebook. Ask around for tips on saving money, and look for money-saving books and web sites. I only recommend The Tightwad Gazette because it is the most comprehensive re-education in frugality you can get for the money, and highly entertaining, too.

You might become obsessed with money for a little while, because you are embarking on a whole new lifestyle, but try to remain low-key about it. Comments like, "Hey, honey, when I mix your gourmet coffee grounds with half Folgers, we save 25 cents a cup!" may not go over too well. It's hard to convince the family that your goal is their eventual financial freedom when all they hear about is how wasteful they are with money. Just do what you can to work around the edges until the numbers finally begin to convert your husband. Then feed the kids on your vision of what debt-free life could look like. You could take trips. They could go to a horse-riding camp. If they would just give up their expensive sneaker obsession, it would be enough to pay for a family cell phone plan, or whatever ideas you can think of...

If you are lucky enough to have a small-ish debt or no debt at all, great! You can move on to the next phase of the plan that much faster. After all the non-mortgage debt is paid off, you will experience a surplus. Not only did you save money by cutting expenses, but now all that money that was going toward debt is freed up for your next financial goal--a six-month emergency savings cushion. "Great!" you say. "I didn't have any debt to begin with, so I didn't even have to cut expenses!"

STOP!!

You still need to cut your expenses as far as possible...not only does it become a fun challenge (when you're not stressed over debt), but you'll never be able to afford a six month cushion if you keep expenses at current levels. This is why people don't have an emergency fund--they figure they'd never be able to save that much. Plus, you'll still want the money for some other goals worth pursuing, so trust me on this one. Discipline yourself for one year or so and you'll soon find that saving and the tightwad mentality become second nature.

For some people, this is all too much. They would rather just re-finance or roll the debt onto a low-interest credit card, or tell the wife she "needs to contribute" with a low-paying service job. But what I hope you will eventually realize is that our life and our labor are valuable. That is our form of capital.

We may not own factories or natural resources or large tracts of land--we own our labor. And we housewives who depend upon our husbands' labor do not want to see it go to waste. Neither can we afford our own energy or interest in our family to get frittered away. For Catholics, this process is packed with great virtues like prudence and stewardship. Don't forget to pray for the help and resources you need. It might be a part-time job, for a while.

But don't lose sight of your ultimate goal, which is to be the God-centered family you always knew you should be.