Living Within One’s Means

Money WorriesWhen I started my permanent job in March 2006, I calculated my net debt at the time was two-thirds of the gross salary I would be getting. What’s more, I was officially being hired on a one-year contract, so while I hoped that it would be extended beyond that point or even become permanent, I didn’t count on it. Therefore, I made plans to use that year to make a serious dent into my debt load and to transition back into my freelance venture.

As it turned out, at the end of that year, my contract was extended by six months and, within a few months during that time, I was made a permanent employee. Furthermore, I had made financial preparations because I had anticipated keeping my previous freelance work as a sideline on evenings and weekends, except that the day job turned out to be so intense and time- and energy-consuming that I did little to no side work, choosing instead to delegate much of it.

However, the thing of which I was most proud in my first 12 to 15 months at the then-new job is the near-miraculous debt repayment I managed to pull off. Even with buying out the remainder of Junior ‘s lease, I found myself with a debt load below 30 percent of my gross income by early summer 2007.

I achieved this feat in two ways: First, I mapped out in detail my income and spending for 12-18 months in an elaborate spreadsheet and, second, I kept my expenses roughly at what they were when I was earning so much less. Granted, I allowed myself some extras, like getting “grown up” accommodations while travelling (i.e., staying at B&Bs rather than with friends) and making a few essential purchases (e.g., a new computer and replacing a desperately need dinette set). But the most critical element of the two was keeping a close eye on that spreadsheet and sticking to it and cutting back in some places to compensate for those places I went over budget.

By summer 2007, a small expected and a big unexpected happened: I decided to move to Montréal and I fell in love, in that order. Followed a spending frenzy during which I pulled all the stops. Yet when I recently decided to start paying attention again to my finances, which I hadn’t the energy to do for more than a year (when “depression light” started in earnest), I had to reach a rather pleasant conclusion: my financial position today is closer (though certainly not quite as good) to early summer 2007 than late winter 2006.

Since that personal financial “high spot” of 2007, much has occurred outside day-to-day life, most notably worldwide economic uncertainty stemming from the Great Recession, which today is threatening to return. Even though it doesn’t seem likely that my job will be terminated soon, I decided that I can’t make such an assumption. Despite racking in billions per quarter most of the time, an employer like mine could start crying famine after one or especially two consecutive quarters of deficits. And to be sure, executive salaries wouldn’t be the first thing on the cutting block; front-line workers like myself would be expected to take the brunt — and this despite past performance or the very negative impact on clients.

So that brought me to thinking about my “miraculous” spreadsheet of ’06-’07. “If I could do it once I can do it again,” I thought to myself. Therefore, I fired up OpenOffice Calc a few weeks ago — I prefer not to have Micro$oft products on my newer computers, except for the operating system itself — and by now I’ve refined a financial outlook to the end of 2012 that would lead to an improvement similar, though perhaps not as spectacular, to the one of ’06-’07.

The biggest challenge in my opinion is realizing that a budget is theoretical and can be quite detached from cash flow. We tend to think in terms of months, quarters and years, but those of us who are paid every two weeks actually receive 26 paycheques per year, not 24 as a monthly projection would imply. Yet it seems those “extra” two paycheques always go to waste.

So what I designed on the first worksheet is a yearly budget, trying to come up with all unavoidable expenses like haircuts, web hosting, insurance, annual auto plates/insurance renewal, and so on. The only thing I didn’t consider is gas for Junior or the occasional refills on my transit pass, as those are next to impossible to predict. As for a budget item like food, I decided to go much higher than average to take into account that I’m not likely to change overnight and start eating in nearly 100 percent of the time. (Basing budget numbers on hope rather than reality is, in my mind, a sure-fire way of creating a doomed budget.) The most important line item I added was to automatically place 16% of my net income on servicing my debt, which one day will become an automatic deposit into a savings account. I then calculated in subsequent columns how much each line item represented by month and, most importantly, by pay period.

That’s how I figured out how, despite a year-plus of neglect, I managed not to sink back too far into debt: my expenses remain lower than my income, albeit not by an enormous amount. I found that there is some wriggle room when looking at the yearly and per-period picture, but the trick is to plan months ahead rather than paycheque to paycheque.

So now what I do is save small per-period amounts into fictional accounts for all recurring expenses. For example, I spend about $300 per year on my dentist, but setting aside $11.54 per paycheque is much easier than scraping up $150 after one visit to the dentist, which usual ends up going on the credit card and gets paid later. (And if one visits ends up costing more than was set aside, there’s that much less to defer.) The same goes for once-a-year payments like auto plates/insurance. Since I leave those set-aside sums in my general account, I ignore what my actual bank balance is at any given time; I trust only the balance shown my spreadsheet.

Although the per-period leftover is small, I add that amount to all those fixed “set-aside” amounts; I then consider that lump as one row of “money spent” in my general ledger but track in detail in a separate worksheet a detailed breakdown of that lump that includes all those fixed per-period amounts placed into my fictional “accounts.” I have another worksheet where I tally only the fictional “accounts,” which gives me a running total of what’s waiting to be spent in the near or medium future. And as I mentioned, I have another worksheet which is the general ledger in which I track cash flow: one row for paycheque, another for fixed debt/savings payment, another for living/”set-asides” into the fictional “accounts,” and one row placed “just in time” (i.e., at the date each is expected to hit my general account) for each item like phone, hydro, cable or rent. That means when I do pay cash for my dentist or a haircut, I don’t record the expense on the general ledger but on the “running total of money set aside” spreadsheet.

Theoretically, some periods end in the red, but the beauty of this scheme is that, after a few months of following this regimen, the accumulated savings into those fictional accounts prevent me from actually dipping into my overdraft yet the cash is there “just in time” when I need it (to pay my dentist or hair stylist cash). I also added formulas so that if I go slightly over budget during a period, I have less discretionary income in the next period, but if I stay slightly under budget, the surplus goes into the next period and it can go either to making the next period balance more easily or towards more debt servicing or savings.

It’s a thing of beauty, I tell ya! I’m keeping a few details secret from this blog for now, but what I can say is that within a foreseeable future, I should be in the situation most financial analysts say one should be, namely with a few months’ savings in case of sudden unemployment (although employment insurance would likely kick in as well at first). And although Junior continues to run well for an aging car, I can foresee replacing him when I have to without getting back too deeply into debt. I know there’s bound to be unexpected expenses (right down to vacation getaways), but those can comfortably go into the debt column for a while because, under this scheme, credit is for such extras that can be reimbursed in full within a reasonable period of time and not for day-to-day living.

I know this is a terribly boring topic; we unfortunately all have to worry about our personal finances. But I suddenly feel like such a responsible adult for a change! And I recognize, after this exercise, that I’m more fortunate than most …no pun intended. I may never be able to afford real estate in Montréal, but otherwise there are many who would envy the situation I’m in.