When you hear the B word as in budgeting, does it cause cold chills to run up and down your spine? Or maybe it feels as if someone had just run his or her fingernails up and down a blackboard. If you hate budgeting it’s probably because you’ve always tried to do it the hard way, which means tracking every single little thing you spend money on down to that candy bar you purchased at work last week. Then you had to get out all of the receipts you saved so faithfully, your credit card statements and your checking account statement, make a list of everything and then divide it into categories. Ouch!
Then there’s figuring out how much money to allocate to each category, hoping that when you total it all up there will be money left over to save or to pay down your credit card debts. But that’s not even the hardest part. The hardest part is sticking to that budget. This is so much work we can understand why you would hate the B word. Well, take a deep breath and relax. There is a much easier way to budget but that will still get you to where you want to be.
No complicated tracking schemes
If your goal is to get your finances under control without the headache of budgeting the traditional way there are easier answers. It begins with making a simple spreadsheet. List on it your monthly expenses and income. Don’t have a cow over your expenses. Just estimate how much you spend each month by general categories. You can probably do this in about five minutes.
Have just a few categories
There’s a lot of budget software out there where you are required to fill in a zillion different categories and subcategories. If you’re kind of a linear person this can be useful but it’s not required. Use broad categories instead like food, gasoline, entertainment, housing and utilities. You can always make adjustments or add more categories later.
A simple budget
There are many different ways to organize a budget but the easiest is what’s called the “60% solution.” This just means fitting your normal monthly expenses into 60% of your net income so that you will have room left over for savings, retirement and “fun money.” These are the areas that can break you budget if you forget to include them.
What goes in the 60%?
These should be your monthly expenses including housing, insurance, food, Internet, and transportation. And yes, this is the part that is generally thought of as being your budget.
The rest
Of the 40% you should have left then 10% should go towards your retirement. The easiest way to do this is to have the money automatically withdrawn from your checking account and put into your 401(k) or IRA. If your employer offers a 401(k) that’s where the money should go at least for now. Ultimately you will want to have an IRA, too, but that’s the subject for another article.
A second 10% should be allocated towards debt reduction or long-term savings. This is money that you should invest in stocks, a mutual fund or an index fund and can also serve as an emergency fund. If you’re having a problem with debt, you should use this money to pay it off and you might even want to take some money from another of your categories such as retirement so that you could increase this to about 20%. Of course, once you’ve gotten your debts paid off then you can change back to long-term savings. In the event that you are working to reduce your debts, you should also create a small emergency fund out of either this category or the next one.
Short-term savings
A second 10% should go for expenses you can’t exactly anticipate. This would include auto repairs or maintenance, medical expenses, birthday and holiday gifts and home maintenance. Don’t be afraid to spend this money when these expenses crop up.. That’s what it’s for. When you run into these expenses the money will be there to cover them instead of having to take it out of one of your other budget categories or worse yet putting it on a credit card
Fun Money
Here comes the good stuff. As mentioned above, you need to have some fun money and this should be the final 10% of your budget. You can use this money to eat out, go to movies, buy books, go clubbing, camp out overnight or whatever it is that you enjoy. And you can do it guilt free because you’ve covered all your other bases.
Pay all your bills online
You can simplify your financial life considerably just by arranging to pay all of your bills online. This should be most of the stuff in your 60% category such as rent or your mortgage payment, utilities, cell phone, etc. If for some reason you can’t pay these electronically arrange to have your bank mail checks to your vendors. And arrange to have these payments made automatically so that you will never have to worry about missing a payment.
Automate your savings, too
You can also automate your saving, which makes it much easier because it’s harder to miss money you never see. Get a high-yield online savings account such as from ING Direct, or HBSD and have transfers made automatically to it from every one of your paychecks.
Use cash for everything else
Assuming that you’ve set up automatic bill paying and saving you should be able to pay cash for everything else such as your fun money, gas and groceries. You can go to your bank, credit union or a nearby ATM and get the money twice a month. The reason that you want to do this instead of using credit cards or checks is that it’s simpler. When you pay cash for things you never have to worry about overspending. In fact, you shouldn’t use credit cards unless you absolutely have to such as when you’re traveling.
Have three envelopes
If you decide to use cash for the three categories listed above, get three envelopes and label them accordingly. When you go shopping for groceries, bring the groceries envelope with you. You will know exactly how much is left in that category before you begin shopping. Pay for your groceries out of the envelope and you’ll easily be able to see how much is left. It’s simple and requires no tracking. Of course, when the money is gone, it’s gone. You’ve spent the amount you budgeted. If you’re a few days short of when you will next get cash, you could move the money from one envelope to another with no need to make adjustments to your budget.
Just 20 minutes a week
There, you now have a budget, you’re organized and you have your finances under control. However, you’ll need to do some maintenance and that should require only about 20 minutes weekly. Schedule each week a day and time to review your finances. Spend that time putting your transactions into your financial software or spreadsheet. Assuming you’re using the plan outlined in this article all you’ll have to do is go on the Internet review your bank account and enter the bills you paid, deposits, ATM withdrawals and any fees you were charged. You might want to spend another 5 to 10 minutes reviewing your budget to make sure that all of your bills were paid. If not, pay them. It’s that simple.