No Debt Plan

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Christine recently commented on one of my posts with a question about The Concept That Changed Our Financial Life.

I am trying to wrap my head around this concept but can’t. Can you possibly explain it to me in a little more detail? Is this an emergency fund or is it in addition to an emergency fund and how do you not use the money?

I’ll be glad to try and explain it better. Sometimes I’m not the best with examples.

To answer the question, no this is not a use of the emergency fund. It could be, but we prefer the “safety” of having additional funds set aside in case of emergency.

Below I contrast how the average Joe earns, spends, and saves money to what we do. Average Joe is living paycheck to paycheck. Money comes in on payday and lasts the next two weeks — just in time for that next paycheck.

Joe finds it hard to plan or save any money because he is constantly worried about paying his current bills. If he lost his job, he would be in quite the pickle because more bills would be do soon.

We do things a little bit differently. We saved up a monthly “buffer” in our checking account. That buffer is equal to the amount of money you spend consistently each month. If your rent, utilities, food, etc. is budgeted to cost you $2,000 per month then you’ve got $2,000 sitting in your checking account. So on Day 1 of the month, you’ve already got that money sitting in your account ready to be deployed for this month’s expenses.

Throughout the month when you get paid, you don’t spend that extra money. You keep it in the account, but it’s as if you’ve put it into an envelope that says “Next Month” on it. You can’t open the envelope until the first of the next month. Any additional income you earn over your monthly expenses goes into your savings. Any money that you don’t spend on your expenses (say your utilities cost $17 less than you expected) also goes into savings.

How about another visual?

Step 1: The Beginning of the Month

You’ve got your $2,000 in the account ready to be spend on your expenses. The expenses are listed below, sort of like an envelope system. If you write a check on April 2nd for your electric bill, you lower the amount in the “utility” row. If you buy groceries on April 7th and April 21st, on those days you would lower the “Food” row by whatever amount you spent at the grocery store.

As you earn income throughout the month, it is “deposited” into the “Deposits for April” row. Remember, you’re not spending that money. You’re spending the $2,000 you already had saved. And you don’t have anything in the savings row yet either. That comes at the end of month.

Step Two: The End of the Month

At the end of the month your Excel spreadsheet might look like this:

1. You’ve earned more than you spent on the month — a good sign. You earned $2,500 this month, but your budget from last month’s money was $2,000.

2. Some of your costs were lower than expected. You saved $38.63 on a combination of spending less on food, utilities, and whatever else you had in your budget.

3. Note you still haven’t spent a dime of the money you earned in April. That $2,500 is sitting up in “Deposits for April” ready to be turned into next month’s budget.

Step Three: Re-fill the Budget Categories

Now all you have to do is distribute the money you earned in April for May’s budget, as seen to the right.

1. Note that the total amount of money in your checking account hasn’t moved. You are just moving it from one place to another on a spreadsheet.

2. You’ve taken $2,000 out of your April deposit money (originally $2,500) and distributed it throughout your budget. $800 here, $300 there, etc. This leaves you with $500 left over from the previous month — a healthy amount.

3. You’ve also dropped that extra money you didn’t spend in April — $38.63 — to the To Be Saved line. You would add the $500 income left over as well to this amount, and apply it towards your savings goals.

And that’s that. You just went through a whole months worth of budgeting.

The hardest part of this whole concept is getting a month’s worth of expenses saved up. It could take a while to save $2,000. In the example above, it would take 4 months if you consistently earned $2,500 per month. Once you’ve got the money saved up, keep it in your checking account (we use ING’s Electric Orange, so we earn interest on it). As money comes in, it doesn’t touch the budget until the next month.

Following this concept will also make your life a lot more simple, at least in my humble opinion. We no longer have to time our bill payments based on when our paychecks will hit the bank account. We just pay the bill out of this month’s budget.

Christine, I hope this makes it a bit clearer to you. To use this concept, you’ve got to have a budget. You’ve got to know how much you can spend each month (the budget is the monthly maximum). Of course, if you spend less money, all the better. It drops to savings.

Readers, let me know if you have any questions. I’ll be glad to answer them via e-mail or, with your permission, use them on the site.

This is our first spring in our new house. We are getting to learn — and spend — money on landscaping, grass upkeep, etc. I mowed my parents’ yard growing up, and spread fertilizer when they told me to. I never really got into all of the details of what fertilizer to put on, and when.

So we learned our first lesson as clover started to pop up in the yard. It was a small patch toward the street. Unfortunately, I procrastinated. Before I know it, there are ten huge patches in various parts of the yard. It really spread like wildfire!

I went to Lowe’s and bought some general weed and feed to spread on the whole yard. I also saw some Weed-B-Gone on my way out that was marked down extremely cheap. Being uneducated in the fertilizing world, I bought the bottle for $2 or $3. It took me a few extra days before I actually went outside and sprayed the clover patches. It says on the bottle that it should take a few days to really kick in.

Well, a few days went by and the clover looked mostly unchanged. It had changed colors only where the spray had hit. Nothing was dying.

Then it struck me: I bought weed killer on clearance. Never buy weed killer on clearance. It is last year’s batch and will be ineffective on your weeds. It took a lot longer before the weeds started to look a little pitiful, but they definitely weren’t dead. I had to go out there with a spade and pull up the patches myself.

I’ll mark this one up to getting an education in home ownership. For the other homeowners out there, what mistakes have you made along the way out in the yard?

This is the fifth post in a series: The No Debt Plan.

You just set up your budget. Let’s take a look at it. Where do you currently stand? Do you have money left at the end of the month, or are you going deeper in debt?

This concept is called free cash flow. If your cash flow at the end of the month is negative, you are just digging a deeper debt hole. If your cash flow is positive at the end of the month, then you are accumulating savings or cash. I found two business related visuals that go with this, but I don’t have the rights to them. Instead, here are links to business examples of positive cash flow and negative cash flow. And yes, you might consider running your life like a business. The concepts work exactly the same in this case.

We call it free cash flow because cash ‘flows’ from the top (income) down through expenses and hopefully into your pocket. Even $1 of positive free cash flow is something to be celebrated.

If You Have Positive Cash Flow…

Even if it only that measly little dollar, positive cash flow is where you want to be. If this is your current situation, congratulations. You are well on your way. Even if you are deep in debt, your positive cash flow can begin to chip away at the debt. For starters, you need to build up an emergency fund. We’ll talk about that next time.

Again, positive free cash flow means that you have cash left at the end of the month. You can put that cash to work in whatever way is necessary — savings, debt repayment, or investment. Strive to continue having this each month.

If You Have Negative Cash Flow…

Simply put this means you have no money left over at the end of the month, plus some additional debt. You have somehow found a way not to default on your debt, but you had to borrow more money to make it through the month.

I have some bad news for you. If you don’t do something to change the situation, you will eventually end up bankrupt. That is simply mathematical fact — after a certain period of time, you won’t be able to borrow your way out of debt. It will end somewhere.

You don’t want that. I don’t want that for you. So how do change your situation? I can’t do it for you, but here are suggestions:

• Cut everything you are spending money on out of your life. Of course you can’t cut literally everything, but this is what psychologists tell us the average human needs: shelter, food, water. That’s it. The basic necessities.
  • Shelter doesn’t mean…
    • A $500,000 house on a $50,000 income. Sell, and rent an apartment.
    • Keeping the thermostat at 77 degrees in the winter and 65 degrees in the summer. Lower the temperature in the winter, raise it in the summer.
    • A house, apartment, or condo full of nice things. Sell your HDTV, cancel your cable.
    • Cut everything that costs you a monthly fee unless it is absolutely necessary.
  • Food doesn’t mean…
    • Filet mignon at the fancy restaurants every weekend. It doesn’t mean elaborate meals at home every week. Cut your lifestyle, eat simple. Bread, peanut butter, jelly and some fruit should work just fine.
  • Water doesn’t mean…
    • Beer, soda, or even orange juice in the fridge. Water comes from the tap, you can filter it if you must. It is extremely cheap. Don’t buy expensive bottled water, either.
• Alternatively, you can earn more income.
  • Do anything you can to earn more money as long as it is legal. There are millions of ideas out there, so I won’t go into them here. Even if you had to bag groceries at a grocery store, or sweep floors at a factory, it is worth it. Remember, you have to get to positive free cash flow as soon as possible.

This may seem extreme, but I hope it opens your eyes. You cannot maintain negative cash flow indefinitely. It is only a matter of time before you can’t pay any of your bills. Make a change today. Get on the road to financial freedom. Cut some expenses. Get a part-time job. Get going!

Update #2: I posted a follow up on this article for a reader question. That article included more images to help everyone understand what is going on.

Update: Hello, Reddit!

If there is nothing else I can share with you on this blog, let it be this: keep a one month income buffer. This has been the key to our budgeting success. (We are no longer living paycheck to paycheck thanks to this system!) This concept is so important, I fear I will explain it incorrectly. Please don’t hesitate to comment with questions or concerns. Again, I honestly think this is the most important thing I can offer to you.

Here’s how it works: don’t spend the money you earn this month. You are going to spend it next month based on your monthly budget. That means you should be living this month on last month’s income. It sounds confusing, but it really isn’t. I think it is a simple system if you can get your head around it. How about an example?

A Simple Example

You earn $3,000 after-tax every month. Your direct deposit is sent twice per month on the 14th and 28th. You have three expenses: rent ($800), food ($300), and utilities ($200). Rent is a fixed cost — it shouldn’t change until your lease runs out. Food and utilities are variable — they change each month. Some months you eat out more, some you cook more. Some months of the year it is cold and you use the heat more, other you are using very little heat. On average, your expenses total $1,300. This leaves you $1,700 to do with as you please, preferably savings.

Now your typical person will take the money they receive on the 30th of the previous month to pay the next two weeks worth of expenses. Then when the check comes in on the 15th, it pays for the next two weeks of expenses. If you used 100% of the money every two weeks, you wouldn’t have any savings. Doing this is called living paycheck to paycheck. That is, if your paycheck doesn’t arrive in two weeks, you can’t pay your expenses. Bad news.

What We Do

We take all of the money in month one, say March, and leave it in our checking account. It’s in the account, but we don’t touch it. Every time we get paid in March, we simply put the money aside and hold onto it. At the end of the month our budgeted amounts for food, utilities, and the like should be pretty low. That’s okay, it’s the end of the month. Hopefully we aren’t in the red, either (for the budgeted categories, not for our checking account in general). Remember, we’ve got all of March’s earnings sitting in the account waiting to be utilized for April.

Using the above example, this is how it might look:

• March 1: Just getting started
  • Total in checking: $1,300 ($1,300 budgeted for March, $0 earnings from March)
• March 8: Buy groceries for $50, pay electric bill of $100.
  • Total in checking: $1,150 ($1,150 left for March, $0 in paychecks from March)
• March 14: Get paid $1,500; buy groceries for $50
  • Total in checking: $2,600 ($1,100 left for March, $1,500 in paychecks from March)
• March 16: Pay gas utility bill $100
  • Total in checking: $2,500 ($1,000 left for March, $1,500 in paychecks from March)
• March 21: Pay rent $800, buy groceries $100
  • Total in checking: $1,600 ($100 left for March, $1,500 in paychecks from March)
  • At this point we are getting pretty low on our budgeted money for March. Hopefully we don’t have too much more expense to incur as we don’t want to dip into our paycheck money if we can keep from it.
• March 28: Get paid $1,500, buy groceries $100
  • Total in checking: $3,000 ($0 left for March, $3,000 in paychecks from March)
• March 31: We don’t spend any more money this month. We now re-allocate our paycheck money for April’s expenses.
  • Total in checking: $3,000 ($0 left for March, $1,300 budgeted for April, $1,700 left from paychecks in March that should be moved to savings)

Note that every time you spend money in March, it doesn’t affect the money you’ve earned in March. It only affects what you’ve budgeted for March.

Now rinse and repeat for April. Save your paychecks in April, and live off of your $1,300 budgeted for the month. Any excess at the end of the month (hopefully near $1,700 or so) goes towards savings.

I hope all of that made sense. Essentially, you are setting aside your budget at the beginning of the month and only using that money for that month. The money you earn during the month goes towards next month.

Above all other things, this concept has helped us move towards financial freedom.

It Takes Time

I’m not saying it is easy to get to this point. If you are currently living paycheck to paycheck you may not have a lot of wiggle room. If your monthly expenses are $1,300 and you only have $25 left to your name at the end of every two weeks ($50/month), you have an uphill battle to climb. If you don’t make any other changes to your life, it is going to take you 26 months to save up a one month buffer. Even if it took you that long, it’s worth it. You might consider cutting your expenses or increasing your income to speed up your process. Of course, if you had $1,700 left at the end of every month then you can try this next month.

Flexibility

Living on last month’s income gives you some flexibility in your finances. If you spend $350 on groceries this month (versus a budgeted $300), your checking account doesn’t go into the red. If your utilities bill were slightly higher than expected, you aren’t having to choose which one to pay first. That overage can be covered by your excess money, and perhaps you adjust your budget for the next month.

Again, there has been nothing, nothing, more crucial to our success in managing our finances than this concept.

Stop living paycheck to paycheck. Stop trying to time when you pay your bills. Live off last month’s income this month. Try it one month, and I think you’ll be convinced. We absolutely love it.

* * *

To answer a question from a comment on how I came up with the numbers — I made them up.

“Why didn’t you include a car payment, or this, or that?” It makes the example extremely complicated very quickly. Having a handful of expenses simplifies things. I do understand that you probably have 10-20 different expenses you need to track.

You’ve decided you want to budget, but have no idea where to get started. Here’s a handy list of some tools you can use.

Free, Not Online:

• Microsoft Excel (or other spreadsheet software such as OpenOffice)
• Paper
• Envelopes

Software ($)

• Quicken
• Microsoft Money

Online (free and $):

• Mint
• You Need a Budget ($)
  
• Wasabe
  
• Yodlee Money Center

We use Excel. I’ve tried Quicken, Mint, and Wasabe in the past.

Why Excel?

• It’s “free”. Available on nearly every computer you can find (work, home, library, school…). If Microsoft isn’t your bag, try OpenOffice. (OpenOffice is a free, open source software package similar to Microsoft Office.)
• Data security. My bank information and logins are not sent to and from varying servers as with some of the online programs like Mint and Wasabe. True, our spreadsheet is on our home computer so someone could get access to it. We don’t keep any of the account information (numbers, passwords) on the spreadsheet. The largest risk we have here is I keep it on my thumbdrive that I carry with me everywhere. If someone stole it, they would be able to see how much money was in our accounts. Again, it wouldn’t show the account numbers or logins or passwords, so I think it is pretty safe.
• I can make Excel do whatever I want with the data. I don’t have to stick to Quicken’s “plan” based on my spending. I can say this charge for lunch was a work expense, and this one was me just eating out. In short, it can be simple, complex, full of charts and graphs, whatever I like — very flexible.

Why Not…?

• Quicken or MS Money — these are essentially the same program with different titles. For the most part they do the exact same thing like tracking your accounts, generating reports on your expenses, etc. I used Quicken in 2006 and was generally disappointed. There was no simple way for me to say Transaction A at Retailer A should go in one category (groceries) and Transaction B at Retailer A should go in a second category (household). Plus, you have to upgrade every year which further adds to the cost. I can generate some of those pretty reports if I wanted to with Excel and not pay a dime for it.
• Paper — Paper? I lose paper. End of story.
• Envelopes — People sometimes switch to an envelope system for budgeting. They will set aside $X for this month’s expenses and stick the money into categories within the envelopes. Once the money is gone in that envelope, you can’t spend any more money in that category. Before I bash this idea, let me say for some people this is a great first step. It forces you to control your expenses — or at least think before taking money out of your grocery envelope to pay for dining out. Otherwise, I hate these systems. Money in envelopes can be stolen and not tracked. Money in an envelope also does not generate interest. Money in an online savings or checking account can be tracked, earns interest, and is difficult to steal. The way we track expenses in categories is similar to the envelope method, but we just use a spreadsheet to show us where the money is at.
• Online tools — Wasabe, Mint, and Yodlee Money Center all require you to input your account numbers and login information so that their systems can access your financial institutions’ accounts. Instead of you inputing every transaction, they can just pull the data from your bank’s server and categorize those transactions for you. This makes me nervous. I’m sure they have security systems in place, but still things can happen. I don’t want my accounts to be compromised. I ran into the same problem with these systems that I did with Money and Quicken. They categorize things incorrectly sometimes, or in a way that I don’t think is correct. I end up going back in and moving stuff around anyways. I have used Wasabe and Mint, but not Yodlee or YNAB. Let me also note that You Need a Budget costs money and I believe it is either just a spreadsheet, or also some simple software. You can develop the spreadsheet yourself — I can show you how.

In the end you need to use what you are comfortable with. You will notice I use a lot of spreadsheets around here. Some people are intimidated by Excel, and I hope to dispel some of the mystery around the program. It really is easy to use.
I’m sure there are a multitude of other systems out there. What do you use?

This is the fourth post in a series: The No Debt Plan.

I have been afraid of writing this post for some time. Out of anything I will ever write on this blog, this is by far near the top of the list of the most important topics. To succeed in your financial life, to run your No Debt Plan, to really understand what is going on… you must be able to budget. There is no alternative. Call it a spending or savings plan if you like, when it comes down to it they are all the same — a budget.

Definition

From Webster’s Dictionary:

4 a: a statement of the financial position of an administration for a definite period of time based on estimates of expenditures during the period and proposals for financing them; b: a plan for the coordination of resources and expenditures; c: the amount of money that is available for, required for, or assigned to a particular purpose

Whew! Quite the mouthful.

I define slightly differently. A budget is a tool that

• lets you see where your money is coming from, and
• lets you tell it where to go

I think that last little bit is especially important. A budget doesn’t tell you where your money went. Your money shouldn’t be going anywhere without you knowing about it. It does show you were you told it to go.

The Pieces of a Budget

Your budget will have three main pieces - income, expenses, and free cash flow. Hopefully income is greater than expenses. This leads to free cash flow. I’ll talk more on understanding free cash flow in the future, but essentially it is what is left after expenses are deducted from income. If everything is going well, it is a positive number. If you are spending more than you are earning, it is a negative number.

Income is simply any money you bring in during the month. We typically only count income from jobs in this category. We use gifts, rebates, or money made selling personal possessions differently. Expenses are the things you spend your money on. Rent, utilities, food, gasoline, debt minimum payments, and car payments are all examples of an expense.

Where to Start

The budgeting process can be very eye opening. If you are sitting at your computer reading this and you have no idea where your money goes each month, a budget will solve that very quickly. Again, the goal is not where to see where your money is going, but for you to tell it where to go. But! If you don’t even know where it is going, a budget will do that too.

So, where do you start? Let’s just start at the top of the list above: income. Where is your money coming in from, when does it go in your account, and how much is it. For most people this should be pretty simple with just one job. Total the amount of money you expect to bring in every month, especially this month. Precise numbers are better than generalities, but anything will do at this point.

Next up are your expenses. This can be where the headache starts, so try not to get discouraged. A lot of data is involved because you aren’t normally spending all of your money in one location (unlike income, which is usually just one or two sources). To get this data, look at your bank accounts and credit card activity statements. This should cover most everything. The bank accounts will cover cash withdrawals as well as debit card use. Credit cards will show you each location you are spending money. Figure out what category each purchase is in. Sometimes you just have to pick one category if it is mixed.

Now compare the two categories. If your income is $3,000 after taxes, and your expenses are $3,400… you are in the hole. If expenses are $2,900 you have some breathing room. Either way, you now know where you stand. Now what?

Tell Your Money Where To Go

Line up all of your expenses and determine how much you should be spending on them. Make a list of expense categories. Put what you normally spend next to the category name. Now, determine where you can cut back. This is where you are telling your money where to go. Commit to spend only $300 on groceries this month and don’t allow yourself to eat out. Call your cable company to reduce your cable package. Cancel that gym membership.

Once you make your adjustments, look at the bottom line. How much extra money could you save if you implemented your changes? This is money that can be applied to debt (and later in the process, for savings). Remember, you don’t necessarily need to earn extra income if you can commit to just cutting back.

This is a huge step and it does require some work. You aren’t going to find yourself debt-free in the future without doing some work. Later on in the process I’ll share some tools you can use to help set up a budget.

I received a reader comment/question on The Savings Snowball. Instead of answering within the comments, I thought I would share it here and flesh it out a bit. Here’s the question.

But how do you separate what you’re saving for?

My bank lets me put the money into a savings plan (banking in Israel is different - we don’t have “savings accounts”, just savings plans).

What financial management system do you use to separate out what you’ve saved into various blocks?

Let me clarify how our savings work. We only have one savings account with ING Direct. All of our “saved” money goes into this account. (ING does give you the option to open up multiple mini-accounts to save for specific purposes, but we don’t use it.)

Instead I use Microsoft Excel to track what is in the account. We have a Excel Workbook for our finances, and each worksheet within it tracks one account (savings, checking, etc.). So there is a worksheet for the ING savings account. We then break down and track each category within the spreadsheet.

An example that is similar to what we use is shown to the right. The top 5 rows are what is currently in the account. The first line shows the total of the four categories below it. All of the money is in the one savings account, but we track it individually with the spreadsheet.

Below that, if we transfer money into the account, it goes towards a specific category. If we were depositing $400, it might be broken up as shown.

The grouping on the bottom is the new total… simply the first group plus the deposit group to give the new totals in each category. I then copy the numbers from the bottom row to the top row to complete the update.

That’s how we track everything. Excel is a very powerful tool if you can learn how to use it. Most of what we do is just addition and subtraction, so your average user should be able to handle it.

I received an e-mail from a reader with a question. I told him I would answer on here to open up the discussion to anyone else that wanted to bring in some input. This post is rather long, but hopefully there are some advice that is useful to you.

I have been following your blog and I have a question about one particular item that I have not seen you discuss.

How do you and your wife prepare for major purchases that you know are unavoidable?

Obviously you have an emergency fund for things that come up that you do not expect. But what are you currently doing for the things that you do expect?

The main item in question for me is cars. I know that my vehicle will not last forever, and I know what my plan is for replacing them someday. But I am just curious what your plan for that is. I will share my plan. It is Dave Ramsey’s idea, but I think it is a good one. Basically you invest the equivalent of a car payment into a good mutual fund for 5 years.

After that first 5 years there is enough money in that fund to pay cash for a good slightly used car, plus enough money left in there that will continue to accrue enough interest that you will never have to put any more money in it. Meaning that every 5-7 years the fund will have earned enough interest to pay again for a good used car. The only modification I plan to make is to put the money I get from selling my current car back into the fund. I believe this will allow me to upgrade every 5-7 years as well.

All this is to ask:

1. Do you think this is a good plan?
2. Do you currently have a plan in place?
3. And if you don’t think this is a good plan what would you recommend?

So, a lot to tackle here. Let’s break it down.

For expenses that are unknown, the reader is right. We have an emergency fund for unexpected costs (water heater exploding, flat tire, car/house insurance deductibles, etc.).

For anticipated expenses that are down the road, we try to budget it out as reasonably as possible. Are we currently saving for our next cars? No, but they are on the list. Here’s some examples:

• Saving for a ‘new’ used car - we would like to get to the point that we are consistently saving for this, even if it were $100 per month. Every little bit counts. Saving a full car payment depends on what your idea of a car payment is.
• Saving for new tires for our cars - I think it would be a bit overboard to save up a specific amount each month for new tires right when you buy a new pair. If our monthly cash flow is healthy, I may just eat the cost of tires in the month it happens. If not, we may spread the cost out over a couple of months. If I see the tires are wearing down and I can plan for it, I would share the cost over several months.

In regards to Dave Ramsey’s plan, this is how I understood it. Assume you have a car payment of $350. You pay off the car this month. This should leave you $350 next month to do as you please. Dave’s advice is to continue to save that amount every month, just like you had a constant car payment. When the time comes to sell your car, you’ll have enough cash on hand to purchase a new used one… and restart the cycle. That’s the plan I’ve heard.

As to the plan that was mentioned by the reader, I am a bit skeptical. Let’s run the math (link to Excel sheet I created). If you pay $350 per month to yourself and earn 0.67% growth per month after fees and taxes (8% per year / 12 months = 0.67%). Pay the $350 for 60 months, and you should have $25,888.35. Let’s take out $15,000 for a used car, leaving you with $10,888.35. (Of course, you would add the selling price of your previous car to that $15k as well, so you might not need the full $15k.) That principle is going to have to grow over the next five years to not only pay for the next used car, but also keep funding itself to buy the car after that. Running the math, the likelihood of that happening looks slim to none. It would work to buy the first and second car, though.

If you bump it out to seven years of payments and seven years between cars, the math is a lot more promising. It looks like you could pull it off. Really, in the end, if you have enough in an account that earns a consistent return, you would be able to estimate what your ‘income’ off of the fund would be. If that amount over your specific period of time is greater than the cost of a new used vehicle, then you’re golden.

However, you can only crunch numbers for so long before it starts getting really complex. You can’t factor in for issues like investment loss (or lower growth), inflation, taxes, or the value of the car you would sell. Well, you could, but it would be complex!

I would always be cautious in putting money into an account that I am going to need within a short time frame. I think five years is a relatively short period of time compared to retirement. Imagine putting your money into the mutual fund in 1999 and watching it lose a large amount of its value over the next few years. If you had to buy a car in 2001, you would be in some pain. If the money was in a more safe vehicle (bonds or a high yield savings account), I would be more comfortable, but then you are giving up possible investment growth (difference between what it could have grown and the yield on the account).

To answer the questions above:

1. Do you think this is a good plan? - I think it can work. It might be a little too risky for my blood. I would prefer a savings account for liquidity purposes. As JD at GetRichSlowly likes to say, “Do what works for you.”
2. Do you currently have a plan in place? - Actually, no. (Gasp!) Saving for a new car is on our savings snowball list (more on that later), but we are focusing on funding our NYC trip, emergency fund, MBA debt in deferral, and Roth IRAs currently.
3. And if you don’t think this is a good plan what would you recommend? Again, do what works for you. I don’t think it is necessarily a bad plan. It really depends on the cost of the ‘new’ vehicle, how much your investments really return, and a ton of other factors. The bottom line is awareness is a big step forward in this arena. Simply knowing that a car is going to be need to be replaced ahead of time puts you a step ahead in the game.

We are planning a trip to New York City in December of this year. We are consistently saving up for it with an end goal of having $3,000 by the end of August. We’re putting away $200 per month for it, and are right on target to wrap up saving in August.

We want this trip to be memorable, of course. On the other hand, we want to be as “travel frugal” as possible to get the most bang for our buck. We’re not going to be cheap about it because this is probably the only time we’ll ever go to NYC. We’re not afraid to drop some money on something really special, but we’re not here to see how quickly we can blow through the money. We are planning on staying 5 or 6 nights, if possible.

Some ideas we had. Do you know how much some of these activities might cost?

• Statue of Liberty
• Grand Central Station
• Rockefeller Center
• Broadway
• Central Park (we want to go ice skating :))
• Empire State Building
• Metropolitan Museum of Art and the Guggenheim
• Times Square
• WTC Site
• Radio City Music Hall
• Wall Street
• China Town
• seeing The New York Philharmonic
• shopping in general
• great, unique restaurants
• Maybe we’ll get lucky and see the Cash Cab…

We have no idea where we might stay. So I’m asking you — if you were going to New York City, where you would you stay, what would you do, and how much it would cost you?

Many times in the personal finance world, we focus on the small things. Cutting coupons, getting 1% better rates on savings accounts, or using index funds to cut investment fees (and thus raise long term returns). This is all well and good; heck, you will see me saying the same things. The little things really do add up to become big things.

Ah, yes. Those bigs things.

Before you start focusing on the little things, focus on those giant, elephant in the room issues. Adding up many little things may add up to one big issue, but if you’ve got ten big issues to tackle then you are not helping yourself.

How about an example? It’s full of detail for a reason, so pay attention…

Jack brings home $2,700 per month after taxes. He lives downtown close to work, and rent on his one bedroom studio apartment runs $1,000 per month. His cable/internet bill is $150 because he just loves those movie channels. He usually spends $300 on groceries, and his cell phone is $100 each month (he just had to have the data plan for his Blackberry). Utilities usually run $150 each month as well.

Since Jack lives downtown, he walks to work every day. Yet he pays for a parking spot in his apartment’s deck, and keeps his commuter car there. His total car costs run him $500 per month.

Jack is a recent graduate with a heavy student loan load on his shoulders. His loan payments cost him another $200 per month. While in college he racked up some expensive credit card debt. He pays his minimums of $50 per month.

So it seems that Jack’s total expenses run $2,450 per month. His income is $2,700. Not bad, right? Jack is cash flow positive with $250 left at the end of every month. A little bit to save, a little bit to put toward retirement, or hey — pay down that debt!

Jack is a lucky guy. He seems to have discovered this new personal finance website called No Debt Plan. He reads it daily and has decided he wants to make some changes. Jack decides to definitely start cutting back in some areas and makes the following changes:

• He only puts regular gas in his car, and only drives if he absolutely has to. Otherwise he walks or takes public transportation. This saves him $10/month.
• He really goes after the sales at the grocery store . He tries to buy in bulk and make large meals so he has leftovers. This saves him $18/month.
• He cuts the heat down a few degrees, saving him $8/month.
• He calls his credit card company and successfully wins a reduction in his rate, saving him $5/month on his minimums.

He sits back, turns on the TV, and feels pretty happy with himself. He’s saved himself $41 each month just by these extra efforts.

But wait. Let’s look again. Jack has missed several big ways he could save…

• Cut his cable/internet package back. Get rid of the movie channels, and all the other extras. He could cut his monthly cost down to at least $100, probably $75. Savings: $50-75.
• Reduce the cell phone plan - get rid of the data plan unless work pays for it. Possible savings: $30.
• Jack probably does not need a car. If he stays in the city most of the time he can walk or take public transportation. If he needs to go out of town, he can always rent a car. This is an enormous savings of $500 per month.

The total savings from these ranges would be at least $580. Jack’s original $41 savings doesn’t sound that great in comparison. His focus on the little things has made him feel great about finances. Yet if he could make some serious changes (namely, getting rid of the car expenses), he could make some serious progress.

The bottom line: tackle the big issues in your personal finance life before you really focus on the small ones. It might even save you some effort from all that coupon cutting!