Four Piles of Money
Posted by Gail | Filed under Money Management
I’ve always thought of my money in piles, separate and distinct, with a purpose or a place. Maybe it’s because I’ve been self-employed forever and run my own small biz. The money that comes into the business is the business’s money, and doesn’t become mine until the business has paid me. The money that I put in the house account to pay the bills isn’t for buying stuff… it’s for keeping the home fires burning. And my emergency fund… well, that’s for emergencies of course.
Perhaps one of the biggest problems people have is that when they see they have money in the bank, they think they can spend it on whatever they want. And if there are two somebodies, and they both have that attitude, then there’s never any money in the account when the bills roll in. It’s like a game to see who can spend all the money first.
Don’t laugh. I’ve worked with people who shop to try and stay even with their partner’s spending. Lord love a duck! What hope do they ever have of having money left at the end of the month?
It may help to think of your money in four major piles:
- Cash flow
- Planned Spending
- Long-term Saving
Cash flow could also be called keeping-it-together-money. This is the money that comes in and goes out every month to pay bills, buy food, and get you from hither to yon. It’s the majority of your budget (it excludes savings and some other stuff we’ll look at shortly.) When you do up a budget you’re creating the framework for your cash flow. When you get paid, the money flows in. When you pay for something, the money flows out.
Emergency is the money you set aside just in case. You’re supposed to build your Emergency Pile up to between three and six months’ worth of Essential Expenses. And this money should be kept liquid – easy to get to – in a high interest savings account, for example.
Planned Spending is what most people never do. I’ve just bought a new house and I know I’m going to have to replace the roof next year. That’s about $5,000. So I’m going to open up a Roof Account – hey savings accounts are free so go nuts – and every month I’m going to have $500 moved from my house account to that Roof account. When the time comes to do the roof, I’ll be ready. That’s Planned Spending. I’m going to spend the money and I have a plan.
Planned Spending is what you do so you don’t have to use credit. Tons of stuff falls into the planned spending category. From home maintenance to the seasonal clothing you have to buy for the kids, from vacations to that new TV you’ve been eyeing, if you have to accumulate money so you can make a purchase, it’s Planned Spending. You can manage the money in a couple of ways:
- You can set up a separate account for each planned spending thingy you’re doing, or
- You can set up on savings account and then keep a paper trail of what’s going into the account and what it’ll be used for.
So you might set up a page that across the top has the months of the year and down the left side has the things your accumulating money for, and each month you put into the appropriate column the amount in the account for the purpose you’ve designated.
Let’s say you’re saving for a roof ($5000), a vacation in two years ($2500), and those fabulous new boots ($240). You’ve allocated $350 to the roof, $250 to the vacation and $50 to the shoes. Okay, so now you’d move $650 a month to your savings account each month. And each month you’d note how much more you had for your Planned Spending within each category. When you hit your goal amount, you go shopping. See how easy?
It doesn’t have to be big amounts to work. If you have a shopping list and have five things on your list, you may want to set aside $10 a month for the new wallet and $25 a month for the new sheets you need. The idea is to have a plan for accumulating the money you’re planning to spend so that you don’t use credit that can’t be repaid IMMEDIATELY.
And now we come to Long Term Saving. This is the money you don’t touch for a long, long, long time. It’s your retirement money. It may be your kids’ school money. This money is sacred. You don’t dip into it for any reason. It’s your safety net.
If you can wrap your head around the idea of piles of money instead of one big pot, then you’re more likely to keep the amounts you allocate for specific purposes intact. It’s easy to think you’ve got money to burn when you look into your account and see you’ve got $7500 just sitting there, begging to be spent. But if you’ve allocated $5000 to your roof, it’s already spent… on the roof. And if you want a sunny vacation without a credit hangover, that $2500 is already spent… it’s going to pay off the credit card in full when the vacation charges come through.
This idea of piles of money is perhaps one of the most significant differences between the people who are successful managing their money and those who aren’t. Having allocated money to a pile, a body isn’t tempted to spend it on anything else. And having piles of money can be a lifesaver if you’ve got a pal who can’t keep his or her hand off the money in the house account. Having moved to the money out of sight, it’s out of mind until you’ve got enough to make your purchase.