You don’t have to be a financial planner to know that one of the key ingredients of financial security is having a budget. And yet according to a Gallup poll, only 32% of U.S. households prepare a detailed budget. The purpose of a budget is threefold:
- To ensure you are not spending more than you make.
- To figure out how much you can actually afford to save.
- If you are spending more than you make or you’d like to save more, then it helps to figure out where you might be able to cut back.
Putting together a budget is one thing. Sticking to it is another. The putting together is relatively simple and while there are lots of tools to help, the sticking to it is where most people give up. So let’s talk about that part, assuming you already know how much you need to spend each month on needs versus wants. (If you need help on that first step, try our Expense Tracker to get started)
Confession: I can’t tell you exactly how much I spent on dining out last month. And I can’t tell you how much I plan to spend on it this month. That’s because that number isn’t as important to me as first making sure I’m covering all my other financial goals.
What I can tell you is how much I’m saving toward several small but important financial priorities so that whatever is left over is what I can spend on things I can go without such as sushi night, shopping, spa services or Target. (Yes, Target is a discretionary expense for me and don’t tell me you also haven’t discovered their magnetic carts that just attract things.) By prioritizing the things I know I need to make happen financially, I essentially back into what I can spend on wants without any tracking beyond setting up an alert to tell me if my account dips below $100.
I do this through automatic transfers set to happen each pay day. I have a series of savings accounts, one for each financial priority, through an online bank that lets me set up as many different savings accounts that I want. It’s the electronic version of the envelope system. My checking account for spending money is at a “bricks and mortar” bank, and I have a checking account for bills that’s also housed at the online bank. Here are some of the accounts that you might set up:
Monthly bills: Separating your known monthly bills into a separate account and then setting them on auto-pay might just revolutionize your relationship to money. This account is for things that have due dates and relatively set amounts like rent/mortgage, cable, cell phone, etc. You may need to estimate for things like electric and gas.
I use the highest amount from the past year, which ensures I’m well-funded. What isn’t this account for? Things you can pick and choose how much and when to spend each month like groceries, personal care, and even your dog walker. Yes, this is money you need to spend, but it doesn’t have a due date or a set amount, which defeats the purpose. This should be a fixed amount that would only fluctuate if you made a drastic change like move, cancel cable, etc.
Emergency fund: Getting this account funded with 3 months of expenses was my top priority so before I even opened another account, I was saving as much as I could into this account. Now it’s just there, accruing interest. I can’t over-emphasize the peace of mind this gives me.
Car stuff: This account is for all things car-related such as insurance, new tires, repairs, registration, etc. Once it’s paid off, I’ll start transferring my monthly payment into this account too so that I can save to buy my next car with cash.
Pet medical: Pet insurance can run from $10-$90 per month and Consumer Reports found that it’s not worth the money for the average healthy pet. Instead, pay yourself the premium so that if/when an expensive injury or illness pops up, you have some money saved.
Kid activities: If you have kids then you know that their extracurricular activities can add up pretty quickly. Try annualizing the costs and transferring one-twelfth each month to ease the burden of sign-up and gear up season.
It takes a little bit of work to get these accounts set up, but it’s worth it. I shared this system with a colleague of mine who is a busy mom of two young children and her email to me says it all:
“I just wanted to say thank you. I’ve separated all my fixed bills through those accounts and set up a couple of savings account for shorter term larger dollar items – Christmas, home improvements, and travel. That way, we don’t have to either put off those things or feel guilty about spending money on them. Plus, I set up accounts for the girls for them to earn money and use on toys or whatever, and the transition of seeing the numbers is easier for them, because they are still learning math and identifying the value of the paper/coin money. So, they earn it in cash, then we add it up and deposit into our bank, and I transfer the money to their accounts.”
If you’re having trouble sticking to your budget, why not give it a try? What will your accounts be? Feel free to share your results in the comments section below.