Steve’s blog – how to sink your boat (or not)

Stephen Nel — Tue, 01 Sep 2009 19:33:00 GMT

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Here’s the picture: you’ve taken a good look at your financial situation, realized you’re not where you want to be and aren’t even going in that direction, made some hard choices and put a plan in place to change things. What is one thing that can scupper your plans effectively? Simple – don’t discuss them with your significant other or involve them in any way.

“Honey,” the story will go, “I saw such a great deal on this fantastic pair of boots/computer/leather couch, I actually saved us a fortune!” And that will be the end of your carefully planned budget for that month – or several, depending on the amount of the “savings” in question. It’s no wonder that the issue of money and how it is spent is one of the most contentious issues in any marriage or other long term relationship. For myself, I have the great good fortune to be married to a Scot who is naturally parsimonious and frets about money far more than I do; even we have found that it’s easy to be out of sync on this subject and the effects of this can take a long time to unwind. So I thought I’d relate some of the lessons we have learned and you may find them useful too.

First, assess your situation together. You need both to understand and agree on what your situation is and what the future looks like if you continue with your current patterns. Many people split the financial duties in a relationship (e.g. you pay the groceries and I’ll pay the bond) which, while a good idea in terms of sharing the load, does mean that neither has a complete overview of the joint financial situation. It can be a very sobering thing to see that only one of you has the discipline needed – especially when you’re not that one!

Secondly, agree on your budgets and goals together. We’ve found that it’s vital to decide on this together, because it’s all too easy to pull in different directions if you have different likes/dislikes/priorities. This is especially so when you come into extra cash together: one wants to save and another wants to spend on that shiny new toy, but money gives only one opportunity to do either. The same is true of the budgeting process: realizing that the pot is only so big, it’s vital to ensure that you’re on the same page as to how it gets allocated or the temptation will be to ignore the budget if you don’t feel things are fairly split.

Third, meet regularly to review where you’re at. My wife and I have found this to be the hardest element as talking about this aspect feels more like a chore than anything else. It seems only Trevor Manuel can make budget talks vaguely interesting! Nevertheless, not checking how we’re doing lets things run away with us far more quickly than we’d like. Scheduling an evening every two weeks or so to go through things is incredibly handy in staying on top of our situation.

As a final note, the real benefit is to be found in what it does for your relationship. It isn’t always easy to be honest about these matters, but doing so means that a very contentious topic can be dealt with smoothly (ultimately) and setting goals and working through something together will cement your relationship with your partner in many ways. And, at the end of the day, isn’t that worth more than anything else?

The 20% rule and what they don’t tell you about money management

Stephen Nel — Tue, 19 May 2009 07:41:00 GMT

So here’s the thing they don’t really tell you when it comes to all these good money management principles: sticking to them is haaard.

Let’s face it, if we were naturally good with our money we wouldn’t get into debt in the first place. The majority of us find it hard to avoid the “spend, repay debt, spend, repay debt” cycle and, even when we are disciplined, we find that it’s not as simple to stay on top of our finances as it seems. There always seems to be something that sets us back: the unexpected school outing, the sudden repairs to the house or car or that unforeseen trip to the doctor. Then all our carefully planned budgets end up in the proverbial handbasket and we seem to be right back where we started.

I’ve felt the effects of this personally and was wondering how to overcome them when I saw an interesting article by Richard Jenkins. He advocates keeping all your fixed expenses (including taxes) to 60% of your income, saying that this would leave enough savings income to get on top of your financial situation. Permanently and completely. Working out the practical effects of this on my own situation was eye-opening, to say the least, but I think that the principle he tries to work in make sense; perhaps we could modify his suggestions to come up with a 20% rule?

The principle is that we have to create space in our budget for two things: one, a way to deal with those unforeseen expenses; and two, a way to make living by a budget easier for ourselves. As far as the first part goes, the expenses that seem to knock my budget are either replacement/repair costs or the “miscellaneous” expenses that creep up no matter how carefully you plan. It’s easy to forget those items when working with your monthly amounts, so, working on the kind of figures mentioned by Jenkins, it might be workable to set aside 10% of your income for the replacement/repair costs category and 5% of your income for “miscellaneous”. That would be quite an increase personally, but there would be huge peace of mind in knowing that I had enough of a buffer to face whatever came my way.

What about the other 5%, you ask? That’s the second part of the principle. Jenkins describes it as “fun money” - you get to spend it on anything you like as long as you don’t go over the percentage. It may seem a waste to spend these kinds of amounts on nothing substantial, but I’ve found that it is actually an important way of releasing the pressure that comes from living frugally and it helps ward off the temptation to disregard the budget on a bigger scale. It helps you stay on track.

The trick is, of course, first getting all your other expenses (and I do mean all) to fit into 80% of your income. If you have large debt repayments at the moment, this might be a rule to consider for afterwards. Then it would be easier to take the amounts that were being used for debt and use them for the 20%. For the rest, it always comes back to asking hard questions about the gap between your income and your lifestyle but that’s generally a good thing to do.

I have to be completely honest and say I haven’t yet fully implemented this rule myself, but it seems like an interesting solution. What do our forumites have to say about it?

Stephen's Blog : budget

Steve’s blog – how to sink your boat (or not)

The 20% rule and what they don’t tell you about money management