New York -- All financial planning starts with a budget. But many people seem constitutionally incapable of keeping one.
If that describes you, planner Michael Davis of the Resource Consulting Group in Orlando, Fla., has a better idea. He knows that you'll probably spend the money you see in your checkbook. So he spirits some of that money out.
He evolved his system, he says, because "talking about budgeting falls on deaf ears." People tend to do all right with their regular monthly bills. "But then a big item comes along, like a vacation, and they don't have the money to pay for it." So they put it on their credit cards.
To save his clients from themselves, Davis devised what he calls a "three-account system" for putting a budget on automatic pilot. Here's how to use it:
* Keep a checking account at a bank, S&L; or credit union. Your paychecks go into this account, which covers your regular household bills.
* Open a money-market mutual fund that lets you write checks on your fund account. Alternatively, use a bank money-market deposit account. This is for big bills that turn up irregularly -- like quarterly life-insurance premiums, vacations, Christmas presents, estimated taxes, household repairs.
Go through your checkbook to see what you're spending annually on these "regular, irregular" items. Then divide the total by the number of paychecks you get each year (if you're paid biweekly, divide by 26). Write a personal check for that amount every time you're paid, and deposit it in your money-market fund. When the big bills come in, you'll have the cash to cover them. "This takes some fine-tuning," Davis says, "but after a while it works well."
Ideally, you want a money-market mutual fund that lets you open an account with $1,000 or less and processes checks written in small amounts. Six to consider: the Boston Co.'s Cash Management Fund in Boston; the FBL Money Market Fund in Des Moines; Financial Daily Income Shares in Denver (an Invesco fund); Gradison Cash Reserves Trust in Cincinnati; Midwest Short Term Government Income Fund in Cincinnati; and SteinRoe Cash Reserves in Chicago. Some bank money-market deposit accounts also accept $1,000 or less. Banks, however, levy a fee if your account falls below the minimum; money-market mutual funds usually don't.
* Establish an investment account. For beginners, it might be a bank savings account (the money eventually to be reinvested elsewhere). Or it might be a mutual fund. Every time you get a paycheck, you write a fixed check to your investment account as well as your money-market account.
"These accounts are sacred," Davis says. By paying into them first, you're achieving two goals: better cash management and future financial independence.
Everything that's left in your checking account is yours to spend, without worrying about budgeting. Because people usually manage to live on the money in their check book, this system imposes a spending discipline that's not immediately apparent. You don't believe me? Try it. You'll be amazed.
Charles Hoppe of American Financial Services in San Jose, Calif., uses a similar system. If clients still have trouble controlling their spending, he gets super-tough. "No credit cards," he says. Pay cash or pay with checks. "When the 'D balance in your checkbook drops to zero, you have to stop spending."
Peg Downey of Money Plans in Silver Spring asks her clients to compile a detailed list of what they've spent in the past 12 months, plus a one-month diary of cash expenses. They all then discuss each separate item, to see if it's worth cutting in order to raise the client's savings.
Once you've worked out your ideal spending plan, Downey suggests that you get a small notebook. At the top of each page, put a heading and a monthly dollar amount. For example: Entertainment -- $75. If you go to a movie, subtract the $5 ticket, and so on. When you're down to zero, you have to stay home for the rest of the month.
Steven Ames of Ames Fee-Only Financial Planning in Annapolis advises clients to use their disposable income and savings to pay off consumer debts before they start a regular savings and investment program. Every one of us will have more money once we get our debts off our backs.
3' 1993, Washington Post Writers Group