The budget that is featured at the bottom of this post is the one that I have used for the past couple of decades, and I’ll share with you how I use it, as well as how I handle the cash flow of our household in relation to the budget.
For starters, when my wife and I were first married, we used a budget to maintain a boundary on various aspects of our spending. I worked for a clothing company and the employee deals were often too good to pass up on — resulting in me going overboard at times on my clothing line item. My wife had an obsession with the endcaps at Target — the clearance deals called to her like a siren in the distance.
If you’re in the beginning phases of debt repayment, getting ready for a major purchase, or just really adamant about staying within your boundaries, I think the budget is a miraculous thing.
The idea of a boundary came from a friend of mine named Lauren Greutman, author of The Recovering Spender. She likened the budget to having a fenced in backyard as a kid. The reason for a fenced-in backyard is to create a safe boundary to keep kids, dogs, and neighbors in or out. When we have no boundary on our spending, it can very easily get out of hand. Especially if we pay little attention to how we spend and on what we spend.
The M.O.M. Cash Flow Model
Several years ago I learned about a model of controlling cash flow that made so much sense to me I adopted it, then adapted it to my own personal economy. The cash flow model is based on an idea known as Income Efficiency — basically the idea that your income should really do four things:
- Pay expenses
- Eliminate Debt
- Build Wealth
- Do Good/Have Fun
For the majority of people that make a decent living, they probably do two of the four of these things — (they pay expenses and they have fun). Nothing wrong with either of those two, but if you’re not eliminating debt and building wealth you are essentially damning yourself to work for the rest of your natural life. Not exactly my cup of tea and I highly doubt yours either.
One of the cornerstones to this particular model working effectively is having a HELOC (Home Equity Line Of Credit) or a PLOC (Personal Line of Credit) available. How much you have available is somewhat dependent on how much income you have coming in every two weeks. You’ll see why this is important in a moment.
It is possible to use this method with a savings account as well. I recommend having an emergency fund that is enough to get you through at least 2-3 months of expenses before leveraging this system. In my opinion, the HELOC method provides the greatest outcome.
For most people their income model looks like this:[/cs_text][/cs_column][/cs_row][cs_row inner_container=”true” marginless_columns=”false” style=”margin: 0px auto;padding: 0px;”][cs_column fade=”false” fade_animation=”in” fade_animation_offset=”45px” fade_duration=”750″ type=”1/1″ style=”padding: 0px;”][x_image type=”none” src=”http://www.masteryofmoney.com/wp-content/uploads/2017/11/Screen-Shot-2017-11-21-at-6.15.59-AM-1.png” alt=”” link=”false” href=”#” title=”” target=”” info=”none” info_place=”top” info_trigger=”hover” info_content=””][/cs_column][/cs_row][/cs_section][cs_section parallax=”false” style=”margin: 0px;padding: 45px 0px;”][cs_row inner_container=”true” marginless_columns=”false” style=”margin: 0px auto;padding: 0px;”][cs_column fade=”false” fade_animation=”in” fade_animation_offset=”45px” fade_duration=”750″ type=”1/1″ style=”padding: 0px;”][cs_text]Income comes in and goes directly to the checking account where all the normal monthly expenses are paid. *IF* there is anything left over, it generally either goes to savings, investments or, for most households — Target (or Costco, or whatever your jam is).
In the M.O.M. Cash Flow Model, the income still comes in as it normally would, but instead of going into checking, the income is deposited straight into either the HELOC or the PLOC.
Your monthly expenses are then paid from the LOC account (much like they would be from your checking account). In an ideal scenario, your income greatly exceeds your expenses and there is money left over in the LOC that you will use to reduce your principal balance on debt (mortgage, student loans, car loans, credit cards).
We use a software called Shred My Mortgage that handles all of the calculations about how much principal to pay and when.
Because we borrow from the Line Of Credit on a bi-weekly or monthly basis, we’re essentially borrowing relatively small amounts from a simple interest account, and applying that to a much larger compound interest loan. The effect is two-fold: we eliminate debt and build equity (or wealth) in our home. We also pay a significantly smaller amount of interest over the life of our mortgage.
The M.O.M. Cash Flow Model looks like this:
[/cs_text][x_image type=”none” src=”http://www.masteryofmoney.com/wp-content/uploads/2017/11/Screen-Shot-2017-11-21-at-6.19.05-AM.png” alt=”” link=”false” href=”#” title=”” target=”” info=”none” info_place=”top” info_trigger=”hover” info_content=””][cs_text]As you can see, the only thing that’s really changed is the way that cash flows through our household. Because the Line of Credit is a simple interest loan and the balance on that loan fluctuates throughout the month (as our income flows in and expenses flow out), the average monthly balance might only be a few hundred dollars. Even a $1,000 average monthly balance on the HELOC at 5% would have a $4-5 interest charge per month. Put $1,000 on your mortgage and see what kind of interest savings you’ll have — WAY more than a few dollars. It’s simple arbitrage and banks do this everyday with your money.
Simplifying Our Boundaries
I’ve used this method successfully for the past 5-6 years and paid a $250,000 mortgage down to around $85,000 in just 3 years. During the process, my wife and I determined that it was easier to put the majority of our household and life expenses on a credit card. It eliminated sending in a variety of payments throughout the month, allows us to have oversight in one place for all of our monthly spending, AND simplifies our boundaries significantly.
As an example, we know that we should not spend more than around $1200 every two weeks on the credit card. By simply keeping track of the balance every other day or so, we know our overall spending and keep it within the boundaries that our budget allows. If we happen to go over, we typically adjust accordingly, or we fully realize that we’re going to be putting less toward eliminating debt that month.
The boundary created is less about one category or another but in household stuff in total. So I’m not as particular about spending only $125 a week on groceries, but if we’re at $1100 and there are still three days left before payday, we typically won’t go out to eat or spend frivolously. The goal is to stay within those boundaries.
What You Value
I think it important to note that if you desire certain things in life, as in things that you value in your day-to-day like coffees, gym memberships, security system subscriptions, it’s important to have them in your overall budget. Again, if the goal is to have less debt and own more of your income, then scrimping on some of these things now will pay off in spades later. However, for those that have already obtained Debt Mastery, I don’t view things you value as splurges.
What To Do First
If you think this cash flow and budgeting strategy is right for you, the first steps are fairly simple:
- Add your name and email address to the box below and check your inbox straight away for a copy of our simplified budget template. Fill out the budgeting template form as completely as possible.
- Make sure that you have more money coming in than going out. This system FLAT OUT won’t work unless you have more money at the end of the month, not more month at the end of your money.
Inquire from your local bank or credit union if you’re eligible for a PLOC or HELOC. - Check out www.ShredMyMortgage.com for more details on how this system works. Click on the Savings Analysis tab and the system will tell you how quickly you can blast away your mortgage and begin building wealth.
- Send any questions you may have to questions@MasteryOfMoney.com. I’ll make sure and answer them either through the blog, YouTube, or on the podcast.
Let us know where to send your budget to start Mastering Your Money!
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