Wrestling the Costco beast

Whereas February began with a trip to Costco to replenish our non-edible household items, yesterday's expedition had us stocking up on food staples. From flatbread, cheese and breakfast cereal, to peanut butter, olive oil and milk, we seemed to buy something from just about every aisle. Add to that the cost of our membership renewal, and you've got one impressive Costco bill.

We stuck to our list, but the sheer bulk of our purchases translated to a very hefty bill. The membership fee comes out of an already accumulated balance in the Freedom Account, but even so, it was a painful bill to pay.

Yesterday was an hour shorter than most Sundays, and very nearly found us short of funds, as well. We need to get ahead of the curve on grocery spending; I think I may finally have identified a starting point for my chequing cushion. If I can set aside one pay period's grocery budget as a cushion, then I'll be better equipped to absorb these periodic overages.

Managing your finances: pretend you're a corporation

I work in the marketing department of a large Canadian corporation. In my day-to-day job, I'm constantly dealing with different departments and business units and their individual business objectives and budgetary constraints. However, the scale of it all makes the actual dollars and cents seem very abstract; it's often hard to look at a multi-million dollar advertising budget and see it in terms of real money.

A couple of weeks ago, Ms. Loonie and I attended our condominium corporation's annual general meeting. We live in a building with about 100 units, and approximately 30 units were represented at the meeting. This was my first time attending such an event, and it was very interesting. Somehow, the smaller scale of this corporation's financial picture made it much more tangible, and I was really geeked out to go over the financial report. There are a lot of things from the way a small corporation like a condominium operates, that you can apply to your own finances:

• Reserve Fund - A big part of our common element assessment every month goes toward building the condominium reserve fund. This is the fund that is used to cover any "out-of-budget" expenses. Need to replace your boiler? Use the reserve fund. Need to fix leaks in the parking structure? Use the reserve fund. It's essentially the corporation's Emergency Fund, just on a much larger scale. I was interested to learn that the Condominium Act requires that a reserve fund be held in an interest-bearing savings account, just like your personal Emergency Fund should be.


• Operating Budget - Much of the rest of the common element fees help to cover things like keeping the lights on, paying the maintenance staff, and heating the building. These are all planned expenses, and the corporation takes pains to stick to this budget in order to maintain a positive cash flow. It sounds simple, but corporations need to do this just as much as individuals need to stick to their own budgets.


• Reserve Fund Study - This was the item I found most fascinating. The condominium commissions a study on a periodic basis to determine the general status of its assets and infrastructure. A team of engineers conducts a very thorough review of the building, and determines the amount that the corporation should set aside to pay to fix or replace elements when they eventually fail. This really makes the reserve fund a combination of the Emergency Fund and Freedom Account concepts; it's where we keep our "rainy day" emergency cushion, but it's also where we save up for periodic major expenses, like re-paving the driveway every 10 years, or replacing the heating system every 20 years.

It's not exactly a new idea to think of yourself as a corporation; lots of bloggers have written about how we're all essentially self-employed (even if you work "for the man", you're essentially a service provider, and your employer is your only client). It helps, however, to shake up your way of thinking about your finances. I know this meeting was an eye-opener for me, and I think I learned a lot.

Costco carnage

Last week, the Loonie household ran out of several household staples simultaneously. We suddenly found ourselves with no sandwich bags, coffee filters, facial tissues, or toothpaste. So yesterday morning, with a short list in hand, we braved the crowds at Costco to do some bulk buying.

As always happens when we go to Costco, several "extra" items somehow found their way into our cart. We always find ourselves drawn in by the fantastic price of their salmon filets ($20 for ten servings' worth), and their pharmacy has a great discount on our allergy medicine.

Overall, our bill came to $172.71, which, although money well spent, kind of takes a bite out of our grocery budget. I think I need to take Jaimie's advice to think long-term about my grocery spending.

When I put $172.71 in terms of getting a few months' worth of staples, I feel good about planning ahead and buying in bulk.

When I put it in terms of riding out the days until Thursday's paycheque... ouch.

Perhaps my Freedom Account should acquire a "bulk" category...

Fitness on the brain

JD at Get Rich Slowly has a great post on the shady marketing practices of athletic clubs. This post resonated with me, as Ms. Loonie and I recently checked out a local gym based on a promotional flyer we had received. The flyer basically claimed to offer "$15 per month" to the first 50 new customers, but when we went over the details after taking a tour of the club (which was, admittedly, a very nice facility), we found out that only the $15 applies only to the first two months, after which you are subject to their regular rates. The cheapest option was for us to use the corporate discounts available to our respective employers, and even that would come out to more than $50 per month per person.

Needless to say, we left without signing anything. There just isn't $100 extra in the budget at this point, especially when we already have some basic fitness facilities available to us through our condo.

We've since looked at the flyer that initially piqued our curiosity, and there is some minuscule type that lays out the "first two months" terms, but the advertising still seems quite disingenuous.

We were probably hopelessly naïve to expect a gym membership for $15 per month, but those were the only terms under which we were ready to commit to an ongoing membership. At the very least, we want to make sure that we're able to commit to using our current facilities before making a significant financial commitment.

The joys of merging finances

I'm currently on a kick of improving the level of communication between myself and Ms. Loonie regarding personal finance. As part of this, we're looking at combining our finances. Currently, we hold a joint chequing account, our mortgage is a joint account, and Ms. Loonie is an authorized user on one of my credit cards. Aside from that, however, we have separate accounts.

I don't believe that a couple should only hold joint accounts. It's nice, for example, to be able to use our respective credit cards to shop for gifts for each other, without giving away the surprise. However, I absolutely believe that a couple needs to have transparency around their finances. To have one partner hiding debt from the other is a recipe for disaster.

Ms. Loonie and I have decent communication in this area, but it tends to be mostly in the form of short "did you pay the bill?" conversations, just to make sure we're keeping on top of things. Beyond these basic checkpoints, we don't often discuss our respective budgets.

One thing has come up in our renewed discussions around finances: the two of us have different approaches to paying our credit card bills. Although neither of us carries a revolving balance on our cards*, she uses each month's income to pay off the previous month's bill. I, on the other hand, set aside cash every time I make a credit card purchase, and use this accumulated cash to pay the bill when I receive it.

From what I've read, the ideal approach to budgeting is to use last month's income to cover this month's spending. Neither of us is at this point yet; I'm using this month's income, and she's using next month's income. This poses a problem for developing a consolidated budget, and I'm not sure exactly how to tackle this.

One solution, building on yesterday's post, is to build up a cushion of one month's worth of Ms. Loonie's discretionary income, and use this to get "ahead" on her credit card. It won't get us to the one-month-ahead ideal, but it will at least get us in sync with each other. I think we'll try to go this route. Until we get there, I'm not sure how we can put together an effective household budget.

Do any of you have experience with this?

* I currently have most of my revolving debt on a 0% credit card, and the rest is on my line of credit. Our regular-use credit cards are paid in full at the end of the month.

Another look at the treadmill

Back in August, I wrote about my frustration with the paycheque-to-paycheque treadmill, and the feeling that, despite my efforts, I still seemed to be struggling. My question at the time was whether you ever actually step off the treadmill, or simply get used to the effort it takes to stay on.

Since that post, my situation has improved quite a bit. My Freedom Account is doing its job by covering irregular (non-emergency) expenses as they come up. My Emergency Fund can comfortably handle any emergency under $1,000, my debts are shrinking, and I'm generally sticking to my budget.

And guess what: it is starting to feel easier.

Oh, I still worry about coming in under budget, and sometimes the last few days before payday can feel like an eternity, but I definitely feel less pressure now than I did last summer. A few things have contributed to this:

• I've converted my budget from monthly to bi-weekly, to be in sync with my paycheques. This means that, every time I get paid, the same amount gets paid toward bills, shunted to savings, and left in chequing as spending money. The days of "OK, this is the first pay of the month, so I have to send $400 to my Freedom Account" are over, and the volatility is gone.


• I've "promoted" more of my regular expenses into my Freedom Account. This means I don't need to remember not to spend that $45 that's sitting in chequing, because it's earmarked for widgets.


• I've improved the tracking of my Freedom Account balances (inspired by Trent and Michael). This has stopped me from over-using these savings, and gives me a clearer picture of what I can actually afford. Without knowing what your budget is, you can't possibly stick to it. If I want something for which I haven't yet saved enough, I wait. If I need something for which I haven't yet saved enough, I look to the Emergency Fund.


• Speaking of the Emergency Fund, I've surpassed the magical $1,000 threshold, so my "bare minimum" cushion is in place. That helps a lot with the mindset.

Personal finance is an interesting topic, because it really requires you to walk a fine line. Automation is always encouraged, in order to take emotion and discipline out of the equation, but it's also important to stay engaged enough that you don't become complacent. You should always know what's going on, and look for areas for improvement, but you also want to put things on auto-pilot. That can be a tricky balance to strike.

In the interest of stretching myself out of complacency, I have a few tweaks that I want to make to my finances:

• Create a chequing "cushion". This will complement my Emergency Fund, and essentially give me a buffer to cover any temporary expenses that may come up. An example is a health expense where I am expecting a reimbursement. Basically, this would be my first line of defense for "out-of-budget" expenses. I have to work out how big this cushion needs to be, and train myself to know I'm effectively "broke" when the cushion is all that's left in the account.


• Start snowflaking. One idea I've been toying with is to round up my purchases to the next dollar, and snowflake this extra to debt. I'd like to try this for a month, and see what the result looks like.


• Work with Ms. Loonie to develop a household budget. I currently track only my own spending. Although Ms. Loonie is very responsible with her money, I think I need to stop thinking of our budgets separately. I've already talked about improving our financial communication, so let's put my money where my mouth is.

Let's see if we can get this treadmill to slow down even more.

Coping with the January pay-cut

For Ms. Loonie and me, tomorrow is the first payday of the new year. In Canada, the year's first paycheque is often substantially smaller than the last pay of the previous year, since it marks the return of our good friends CPP and EI. For those who haven't had the pleasure, these payroll deductions are used to fund government-provided pension and unemployment insurance, respectively. For 2008, the deductions are as follows:

• CPP - 4.95% of annual earnings in excess of $3,500, to an annual maximum of $2,049.30


• EI - 1.73% of annual earnings, to an annual maximum of $711.03

Once you've reached the annual maximum, the deductions stop, so you effectively get a pay raise around half-way through the year. The problem is that, if you get used to this increased income, it's a bit of a shock to the system when the deductions start again in January. Even if you have a year-end raise, unless it's an increase of 15% or more, your January paycheque will be smaller than its December predecessor.

How to deal with this "pay cut"? Ideally, you would base your spending around this diminished income, and have the discipline to save the extra that you earn after maxing out the deductions. Then, when January rolls around again, you're already spending less than you earn, and have built up a substantial cushion of savings. This takes a lot of discipline, but it puts you in great financial shape.

As for us, we have some room for reductions in several budget categories, so I'm making small cuts here and there to make up the difference. Since the Emergency Fund is already above $1,000, I'm reducing the bi-weekly contributions to $10. Our (modest) budget for eating out is also being cut. The good news is that, after having a cash-only Christmas, we don't need to spend January playing catch-up. I am also receiving my year-end bonus tomorrow, so that helps to ease the pain of a diminished paycheque.

UPDATE - The January "pay cut" only applies to Canadians who earn more than $41,100 per year. I completely overlooked this point when I originally wrote this post, and I should apologize for that. File this "pay cut" under "problems I'm fortunate to have".

The balancing act

Meg at The World of Wealth posted this week about why she uses two chequing accounts. Basically, she uses one to cover her committed expenses (including savings, donations and bills) through automatic payments, and the other for her discretionary spending. The idea is that she can spend as much of the discretionary money as she wants, because all of her savings and monthly bills have already come out of her primary account.

I manage my cash flow in a way similar to Meg's system. Ms. Loonie and I have a joint chequing account, and my paycheque goes into this account every two weeks. All our monthly bills come out of this account, and I transfer my leftover funds into my secondary account. Having my discretionary income sequestered in its own account like this means that I know at a glance how much cash I have left before my next pay, and it was a nice affirmation to read that someone else uses a setup so similar to my own.

In another post, Meg goes into how her budget actually works, including the details on what percentage of her income she allocates to each category (savings, donations, bills, and fun). This was where I started to see just how much room for improvement I still have. Meg targets a split of her gross income into 20% savings, 10% donations, 60% bills (including taxes), and 10% fun. When I look at my own allocation, I'm currently sitting at 9.4% savings, 1.4% donations, 78.4% bills, and 10.8% fun. A few things stand out here:

• Debt reduction (revolving debt and student loans) accounts for 12.9% of my gross income. Once I've paid off my debts, a big chunk of my "bills" allocation will be moved into other categories.


• My charitable giving is anemic at best. This is where I'm the most off the mark, giving less than one fifth of the generally recommended 10% tithe. When my debts are gone, this is the first area I'll look to increase.


• The definition of the categories is somewhat subjective. For example, I think housing and groceries should go into the "bills" category, since they're really basic living expenses. Vehicle maintenance/insurance/licensing costs probably belong here as well, although they're not strictly essential. I include cable/internet/phone in this category, because they are committed expenses, even if they are really luxuries. The way I look at it is that they're living expenses, but if need be, they can be pruned.


• Although I like Meg's target allocation, it's not gospel. I need to determine an allocation that matches with our own values and goals.

The message here is really that there are two requirements for a truly balanced budget:

1. The budgeted total across all spending categories is less than or equal to your total income


2. The budget allocates spending to categories in a way that matches your values and goals

My budget meets the first requirement, but I have a way to go before I really line up my budget with my goals.