Chapter 11 - Fund Accounting

By Richard Valentine Reily, author of Gregory's Hero.


Okay, I heard that yawn, and don’t even think about skipping this part.

Let’s review before we move into fund accounting. What have you learned so far?

• How you got into financial trouble to begin with
• What is money
• The problem with spending
• Taxes
• How debt is created
• How to spend less
• How to pay down your debt
• How to begin saving
• How to control your spending desire

You may have been wondering through all this how you are supposed to live with all the focus being on spending less, paying off debt and saving. Where do living expenses come into the conversation? Right here.

Budgeting is not a bad word. It’s not a difficult task. It’s the next step to maintaining your financial freedom. You don’t need a complex budget, a simple plan will do. You don’t need an expensive software package; a pad will do (though bookkeeping software will make the job much easier and probably more accurate).

The thought required in the planning is the key. You need to understand those expenses that you have to pay or want to pay. Through the process you will define some expenses you have thus far failed to eliminate. When it comes down to planning to pay them they take on real value. Simply list all your expenses.

Aside from a formal budget, list your expenses as they correlate to the rate at which you get paid. If you are paid weekly plan your budget weekly; if you are paid biweekly budget on that schedule.

For planning sake let’s use this example of a budget when you are being paid weekly. Your expenses are:

Rent $150.00
Electric 20.00
Phone 10.00
Food 50.00
Entertainment 50.00
Auto Expenses
Car Payment 75.00
Gas 20.00
Insurance 50.00
Repairs 25.00

Total $450.00

Now you know that you require $450.00 per week take home pay simply to cover your expenses. At this point the budget does not include the most important cash flow item which is savings.

This budget is cash out, money you need to or intend to spend. You must have $450 net cash to fund the budget, not earnings of $450. The government gets their taxes first! Most people will need to earn about $600 to fund the budget example, and remember that is before savings.

Here is how you do it. You use a simple technique with a fancy name: fund accounting.

What is fund accounting? Fund accounting is a method of prepaying your expenses. This means that you set up accounts which you pre-fund for your planned expenses. When you are ready to pay the expense, the money is in the pre-funded account ready for you to use.

It works like this. Let’s say the budget example above is yours. You get paid weekly and your budget is planned weekly. Obviously you won’t pay your rent or your utility expenses weekly, but by funding an account for the amount of those expenses when you are paid, the money will not be spent on something else leaving you short when the due date comes around.

Set up a separate checking account at your bank for each of your pre-fund accounts. You will find many banks offer free accounts when you do something such as keep a minimum (or aggregate minimum) balance, use direct deposit or keep money in a savings account. With online banking you can manage your accounts easily from your PC.

Each payday you deposit $180 into your home account that covers the rent, electricity and telephone in our example. You deposit $100 into your food and entertainment account. You deposit $170 into your auto account which covers the car payment, gas, insurance and repairs.

On rent day you simply write a check for rent. You simply write a check for utilities. You write a check from the home account into which you have deposited your planned weekly amount. No muss no fuss no worrying about being able to pay the bills on time without late fees or bounced check fees.

At the supermarket you use your debit card to buy food directly from the pre-funded food and entertainment account. If you decide to eat out the debit card works like a credit card in the restaurant except you can’t overspend the balance of the account. Watch your spending or you might be on an enforced diet! Go back to the chapter on spending and review the part about shopping with a list and coupons.

Here’s the trick and fun part to fund accounting. If your rent is $600 per month and you fund your account $150 each week, at the end of the year you will have funded the account $7,800. Your rent payments will have totaled $7,200. You have one extra rent or mortgage payment already made.

How does that happen? Simple, there are fifty two weeks in each year and you divided your monthly rent by four even though there are more than four weeks in each month, on average.

You could take your rent of $600, multiply it by 12 to get $7,200, and then divide $7,200 by 52 and get your actual weekly rent of $138.46. But isn’t it much more fun to fund the few extra dollars each week and end up with an extra month rent prepaid by the end of the year? However, an extra rent or mortgage payment would not be used for that purpose now would it? What would you do with the extra money? Save it, you say? Correct. Each little bit of savings you create contributes to your wealth and sense of financial well being.

And the car payment too! The same holds true for your auto payment as well, though variable auto expenses such as gas and repairs may consume any overages. You can build up a little extra auto repair cushion using the 52 week method.

Life is not always easy, and all good plans will run into unexpected situations. When you fund account, you build in a cushion for the times when things don’t go your way. You have worked to hard getting your financial life in order to have it again thrown in disarray if you change jobs, get sick or have a significant unexpected expense.

Using fund accounting is a great way to really get ahead of your spending by planning a budget and prepaying your expenses. Fund accounting removes stress from bill paying since you pay the bills with earnings before those earnings get spent elsewhere.

As an adjunct to fund accounting another successful spending limiter is an account for each spender in your family. Probably you and your spouse have access to the checking account. Other than that being a recipe for disaster since no one has responsibility and both can spend, spending inequities invariably bring stress to the relationship.

Since you are reading this I’ll assume that you have taken responsibility for the money in your family. By extension I can also assume that someone else causes lots of spending related stress and problems by taking money out of the ATM whenever they want, and spending it on whatever they want without any planning associated. Sound familiar? If both partners in the relationship are not committed to financial planning and savings you are doomed to fail. There is no way to keep debt out and savings in a relationship when one person remains an over spender.

If you have the problem that many people do where one person spends without planning and keeps you constantly on the verge of bankruptcy, all you need to do is agree with your partner on a preset spending limit for each person. Each person gets a bank account and each period the agreed amount is deposited. The money can go out by any method for anything. But when it’s gone, it’s gone until the next scheduled funding. Sounds harsh, huh? Sometimes that’s what it takes to achieve financial freedom, savings and elimination of stress over money.

I once knew a woman who worked hard managing finances for her family. She worked, in addition to her husband. She got them into a house of their own, she prepaid the babies college funds, she made regular contributions to her 401K and made sure her husband set up a 401K at his job and funded it.

One day she looked really strange and I questioned her to find that she had discovered her husband had accepted one of those unending credit card offers that flow into the house through the mail. He had never told her about it and had charged thousands of dollars of meals with the boys and stuff she never saw or knew about. She only came to know about the card when the bill collectors began to call because he had not made minimum payments. He had never made any payment. They had nothing to show for the experience except a huge overdue credit card bill.

This turned out to be a case of him having to look good to his friends. Buy them a drink in the bar, lunch once in a while, dinner out here and there. And before he knew it he was in over his head and brought the family into jeopardy along the way. Both partners in the relationship must agree to financial planning, savings and financial stability, or the effort will crash and burn. This difficult problem has a simple solution.

Set up a bank account for each primary earner or spender in the family. The account is separate from the pre-funded expense accounts and is funded at the agreed upon rate each period. When the money is gone, it’s gone. The over spenders will learn how to manage!

Set up your new bank accounts and begin budgeting and fund accounting now. You may have to plan some time bring the fund balances to their correct levels if you don’t have spare cash around, but don’t let that be a deterrent to getting started. Prepaying expenses through fund accounting is a primary key to valid financial management.