I’ve read before that the wealthiest people don’t use daily or monthly budgets. Maybe that’s true in some respects. But those wealthy people got that way through fiscal responsibility, which at some point had to include some measure of a spending plan.
What system should you use to budget?
Whether you use Dave Ramsey’s envelope method (which I’ve used with some success starting out), a budget through an online program like Mint.com, or your own method of tracking, like an Excel spreadsheet or even sticky notes, budgeting is an important part of becoming fiscally responsible.
If you are already a very controlled spender, then tracking every dollar may not be as important. But I’ve said it before and I’ll probably say it again: healthy habits are your foundation for success. Whether it’s eating right, exercising or saving/discretionary spending, the foundation is the most important part.
What system worked for me?
The system that my wife and I used to control our spending was a combination of a personal Excel tracker and structured spending accounts.
We created a structure that we got used to. Once we’d gotten into a habit, it was hard for us to branch out into other more advanced systems like Mint.com. Mint is great, but it wasn’t compatible with our style of saving or spending. Your mileage may vary.
My wife and I decided to keep two separate checking accounts for our dual incomes. We like having some semblance of independence, even though all of the money ends up coming and going to the same place(s) anyway.
Instead of an envelope system, we created separate checking accounts in our USAA profile for a structured method of saving.
Your employer may be different, but if you work for the federal government, your pay comes through what they call DFAS and can be managed on a site called MyPay (yeah, super clever). The benefit of MyPay is that you can set up allotments so that you can earmark money to go to certain accounts before it ever hits your primary checking account. This completely removed one of the biggest roadblocks to successful saving: the temptation to spend money before you can save it.
The Golden Rule of Saving
Ok, this is actually my golden rule, maybe not the golden rule. But I’ve heard it enough times from enough people, and put it into practice for long enough that it bears repeating: save at least 10% of your income before you spend a dime. Always pay yourself first.
With the ability to create allotments, we automatically put a predetermined amount of money into savings or specialized spending accounts before we could use it to by… say… chocolate (you might have noticed chocolate is a theme around here…).
So from each pay check came out the mortgage payment, the utility bill (approximated), child care fees, food money, and so on. Also from each pay check came out either a percentage of what we wanted to save, or a set amount. Using this method, we put about $15,000 annually away into investments, while still being able to afford all of the minimum things necessary to sustain our current comfortable lifestyle.
If we ever found ourselves falling behind or finding our priorities shifting, we would adjust these numbers as needed.
Create Digital Envelopes
I don’t particularly like having cash. I don’t really like having credit cards either. In fact, I don’t really like having spending money at all because what do you do with spending money? You spend it.
Instead, we created digital envelopes for our spending money by creating multiple checking accounts with our bank. For example, we had checking accounts for holiday gifts, car expenses, pet medication, entertainment, and so on. Every time we had extra money leftover from our savings and investments, we could decide where to put it.
If our digital envelopes were all looking well-padded, then we’d take the extra and invest additional money in our savings and retirement accounts.
Along with side gigs and multiple other strategies to make extra income, these accounts were lifesavers in getting us out of debt and more financially independent.
It’s one thing to create a budget on paper. And it’s another to physically limit your spending. Paper budgets are nice because they’re easy to make, but they’re also easy to ignore. The envelope method (or in our case the digital envelope method) forces you to spend within your budget.
Capitalize on Rewards
I’m not one to preach using credit, especially when you’re already in debt. Once you establish healthy spending habits and have sustained them for 6 months or so, I would advise using credit. Use a lower limit credit card to make payments, and then immediately pay off the expense using one of your “envelopes.”
Credit card rewards add up, especially when you find yourself trying to pay of $65,000 of extra debt or expenses.
I haven’t kept track, but we have earned hundreds of dollars in cash rewards from our credit cards. We’ve also incurred zero interest on them because we do not allow debt to ever accumulate for normal expenses.
You can also use an ePayment method like Samsung Pay to double up on rewards. We’ve made a few hundred bucks using this method as well.
Keep It Simple So You Don’t Get Stupid
The envelope method works for lots of people. If I had to advise someone on a first basic step for rudimentary budgeting, that’s probably what I would recommend. The digital envelope method we used was only after we’d set some very reliable spending habits.
With physical cash in an envelope, it’s impossible to cheat. Once the money’s gone, it’s gone. With digital envelopes, transferring more money in is only a couple of clicks away. This can be dangerous if you’re not disciplined about it.
Keeping your budget simple promotes responsible spending. Too many envelopes or accounts leads to poor structure. You don’t want a chocolate account (or do you?) unless chocolate is a crucial part of your lifestyle.
Understand the differences between wants and needs, and remember to always pay yourself first before contributing to your discretionary spending accounts and you’ll be off to a great start.
What methods do you prefer for budgeting?