“Simplicity is the ultimate sophistication.”Leonardo da Vinci
The other day, I was out for a girls’ night and we got on the topic of budgeting. One of my best friends said “Remember when Amanda used to have her purse full of different envelopes of cash for different things?” We all laughed a little over it and moved on to something else.
What she doesn’t know is that I still budget in a very similar way to the envelope days. I’ve just put it on auto-pilot, so I don’t have to think about it anymore. Because of this, I’ve stuck with the same system longer, and I follow it better.
When budgeting is simplified, we’re more likely to do it.
The Old Way
Several years ago, I decided my budgeting needed some major improvement. My savings was non-existent and that needed to change.
After completing some online research on top budgeting techniques, I went with the envelope method. Each payday, I would go down to the Credit Union and pull most of my direct-deposit payment right out of my checking account.
I’d sort the cash into my various envelopes: Utilities, Fuel, Groceries, Rent, Fun & Entertainment. Then, I’d transfer whatever was left over to my savings account.
Everywhere I went, I paid cash. At the gas station, I waited in line, paid more than it would cost to fill my tank, fueled up, then waited in line again to get my change. And this wasn’t the most ridiculous part of my routine.
Whenever a bill was coming due, I would take the cash back to the Credit Union (from my utilities or rent envelope), deposit it right back into my checking account, then write and mail a check.
Pretty sure I actually managed to stick to this routine for a full year, but it sure wasn’t fun, and it really wasn’t working. I kept forgetting miscellaneous expenses that come up from time to time, like renewing vehicle tabs or buying new tires. So, my savings really wasn’t building up at all.
Four Simple Categories
After abandoning the envelope technique, I went rogue for a while. I set up automatic payments for as many bills as possible and basically just hoped for the best while spending what I thought was leftover.
Eventually though, I realized I really needed to start saving again. This is when I started my spreadsheet technique.
Basically, I have a column for anticipated income and anticipated total expenses on the left. To the right of that, I list the detail for every expense I have, broken down to a monthly amount, and then totaled at the bottom. This total feeds my expense section on the left.
In the left column, my total expenses are broken down into four categories, which ultimately total back up to my full income. The categories are simple: Bills and Recurring Expenses (the right column total); Emergency Savings; Vacation and Event Savings; and, Fuel, Groceries and Spending.
Bills and Recurring Expenses
This section is the most difficult to nail down, which is why I keep an up-to-date list and utilize Excel to maintain it.
Bills and Recurring Expenses are every category your money is going that doesn’t fit into one of the three other categories. Mine are things like electricity, propane tank rental & fills, cable, Netflix, Amazon Prime annual membership fee, insurance (auto, home, life), haircuts, Christmas gifts, vehicle tabs, oil changes, tires, and of course our mortgage and property taxes.
Anything that in this column that is not a monthly expense is formulated to the monthly amount that should be set aside. For example, Amazon Prime is an annual payment. I get to the monthly amount by dividing my annual payment by twelve. We get a weekly milk delivery (thanks, Smith Brothers Farms!!), so, I get to the monthly total on that one by multiplying the weekly payment by four.
You get it.
This is a number I arrive at by a percentage of our total net income. My ultimate goal is to be saving 15%. Right now, we’re at 4%, so there’s obviously room for improvement.
Obviously, emergency savings are just that. Money that is set aside for an emergency situation. Maybe a car breaks down and needs an expensive trip to the mechanic. Maybe somebody loses their job and you need to live off the savings for a few months.
Vacation and Event Savings
This is another number I arrive to on a percentage basis. 3% of total net income is a great place to start. These are funds that are set aside for more costly fun and entertainment like vacations, or a really special date night.
Fuel, Groceries, Spending
Everything leftover after setting aside for the previous three categories is for filling up fuel tanks, buying groceries, and spending money on fun things like clothing and meals out.
If you calculate out all the other categories and there is nothing left, or not enough left for your fuel & groceries, some adjustments may need to be made. The best place to start is a review of all bills and recurring expenses. If something can be eliminated, it’s got to go (this part is tough!).
Once everything possible has been eliminated from bills and recurring expenses, check the remaining amount again and if it’s still not high enough, start lowering percentages from the savings categories.
Set It and Forget It
Now, comes the fun part!
Once the dollars are figured, make sure you have the corresponding accounts set up (two savings and two checking).
- Bills and Recurring Expenses = Checking #1
- Emergency Savings = Savings #1
- Vacation and Event Savings = Savings #2
- Fuel, Groceries, Spending = Checking #2
If your employer allows multiple accounts to be set up for direct deposit, just have your paycheck automatically broken up by the amounts for each account. If not, set up automatic transfers. Typically, this can be done through online banking, but check with your financial institution if you need assistance.
Next, set as many of your bills and recurring expenses as possible up for automatic withdrawal from Checking #1.
Going forward, monitor account balances and update your spreadsheet, direct deposits and automatic transfers as needed.
Embrace the Freedom
Just like with anything, the key to budgeting your way to financial wellbeing is to keep it simple. The more complicated we make these things, the less likely we are to stick with them. Simplify your budget, simplify your diet and exercise, and watch your life fall into place.