This is a guest post by Christina Brannan, a ReadyForZero blog reader and all-around awesome individual. You can read her previous post here and you can leave her a comment below.
Budgeting: A Key to Paying Off Debt
Once you start getting into your debt payoff plan, you quickly realize that you need some sort of budget. After all, how else will you keep track of how much money you can comfortably shift toward paying off debt? The word “budget” frightens many people and I think it is because you usually hear it in conjunction with something negative. “You’ve spent too much money, so I’m going to put you on a budget!” or “I can’t go out with my friends because I’m on a budget.” It all sounds so sad. It sounds like someone’s being punished and put in time-out.
In reality, budgets aren’t bad things. They are just a plan. You wouldn’t go on a trip to someplace new without a map or your GPS would you? Of course not – you wouldn’t want to travel without your guide. Anyhow, think of a budget as showing you the way forward. After all, you are on a journey to become debt free and the budget is your GPS… your “Great Plan for Spending.” Okay, I know that is cheesy but if it makes budgeting sound positive I’m all for it. Bring on the cheese!
You don’t need any fancy software or computer training to make a good budget. There are many options out there for you if that is what you prefer, but honestly, a good, old-fashioned regular piece of paper and pencil can work just fine. I made a simple spreadsheet in Excel, and that’s what works best for me. Again, this is one of those areas where you should do whatever works best for you. You don’t even need to be great in math to do this exercise either. As long as you can add, subtract, multiply and divide (or have a calculator that can do it for you) you are good to go!
Setting Up Your Budget to Accomplish Your Goals
So here is all you need to do. In one area, you are going to list your income (your paycheck, any interest earned, hush money, milk money you steal from neighborhood kids, whatever), and in another area you are going to list ALL of your expenses. Some expenses are seasonal such as snow removal costs. For those you can either divide your annual cost by 12 and budget it monthly, or take the estimated annual amount and add it to your savings for use when you need it. I can’t stress this enough… do what works for you. As long as you include everything, there is no wrong way to do this.
Ideally, you will want the difference between the total income and total expenses to be zero (because any extra money saved will go to your debt plan, right?). Most people write out their budgets monthly, but for those with extremely varied incomes it is helpful to write out your budget quarterly or even annually. If your situation is different, do what works for you and your situation. Don’t concern yourself with what someone else does, because their situation is going to be different from yours.
Now that I’ve set up my budget, I don’t even really have to think about it much. Of course I have to tweak it slightly as unexpected things happen, but for the most part I basically just review it to make sure everything is on track. I know how much I can spend on pet food, how much will go to savings, and how much I can spend for oil for my furnace. I no longer worry so much when I get a bill because I have my budget and I know it has already been planned in advance.
I also have a “special trick” with my budgeting system. I have it broken down by paycheck to know exactly who/what gets paid with each check so I don’t even have to think about that anymore either. At the beginning of each month I set up my payments to be automatically paid based upon my plan and schedule the timing to coincide with the “proper” paycheck.
Fancy-schmancy finance people call it “monitoring cash flow” or something along those lines. Doesn’t that sound impressive? Well guess what… you’re probably doing the same thing too, without even realizing it. After all, when you pay your bills, you think about what you can pay now and what needs to wait until the next paycheck, right? See, you are already thinking like a financial manager and you didn’t even know it. Way to go!
Once you get your budget set, it is time to decide how to keep on budget. After all, that nice piece of paper isn’t going to do any good if you ignore it and don’t follow your plan. For one-time, monthly payments it is pretty simple. You can write a check, buy a money order or schedule an online payment for an exact amount and not have to worry about it again until next month. The challenge for me was finding a way to keep those expenses that are frequent and varied like groceries, gasoline, etc. under control and not reaching for my credit card just because it was convenient.
The Envelope Budgeting Dilemma
Several financial gurus preach the virtues of the “envelope method” of budgeting. It’s not a new method – it has actually been around in some form probably from the time money was invented. I remember my grandmother using different envelops for her money and I’m pretty sure she wasn’t the first!
For anyone who has never heard of this method, the concept is very simple. You convert your entire monthly budget into cash and then put the appropriate amount of cash into separate envelopes based upon the budget category. For example, if you have $200 budgeted for food for this month, you would take $200 in cash and place it in an envelope marked “food,” and you would do that for each category (i.e. gas, utilities, clothing). As you spend money from your envelope, you place the receipt in the envelope, and write down what you’ve spent to keep a tally of the balance remaining in that envelope. It is very simple because when you run out of money in your envelope, you’re done spending in that category until next month. This method has been a godsend for many people because of its structure, but it absolutely did NOT work for me.
For one thing, I hate carrying cash around. It makes me nervous. Even if you don’t carry all the envelopes out of the house with you, you’re still walking around with cash for your daily purchases. And if you lose it or someone steals it, you’re basically out of luck. Same goes if you misplace an envelope and can’t find it. You have no money until next month and no real recourse for getting the money back.
There are also lots of logistical questions as well, such as how to use the envelopes as a family or a couple. What if one family member takes cash from the “gas/transportation” envelope but forgets to tell the other person? It could lead to confusion. Then there are the places that do not accept cash. The bottom line is that while the envelope method works well for many people, I lasted only about 2 weeks before I gave up in frustration.
All it took was one trip to the grocery store on a very busy day fumbling around and dropping these little envelopes followed by a trip to a gas station (that didn’t accept cash) for me to realize that there HAD to be a better way for me to do this that doesn’t involve excessive swearing and paper cuts. And I found it!
The High-Tech Version of the Envelope Budgeting System
I am a product of the technology generation, so instead of maintaining several little envelopes, I now maintain several little bank accounts (with debit cards). I am no longer that oblivious person in the store counting out change from my little envelope. I just flop down the appropriate debit card and I’m on my way. No more reaching for my credit card because it is convenient or because I’m in a hurry either. However, in order for this to work, you have to be willing and able to really be on top of your account balances because you don’t want to incur overdraft fees.
In fact, if you try my method, I recommend that you talk to your bank about rejecting debit card purchases greater than your balance (which will keep you from additional fees). For me, the multiple bank accounts are simple because it is almost entirely automatic. Most of all it is convenient. It is the same basic concept of the envelope method with a more modern twist (and the benefit of FDIC insurance and purchase protection).
Here is a breakdown of my setup: I actively use three checking accounts, one savings account and one money market account. By the way, none of these accounts cost me any fees to use. First, I get direct deposit of my paycheck into two of the checking accounts (the max my payroll department will allow). Account #1 is strictly for household expenses (mortgage, insurance, etc.). These are fixed costs that rarely ever change, so it is easy to identify and stay within budget. The rest of the money goes into account #2. This is my “main” account, and also where my debt payoff expenses are paid. I transfer out of account #2 the rest of my budget items (excluding debt payments) to the remaining accounts. The budget items that vary monthly like gas, groceries, pet costs, etc. get transferred into checking account #3. These are small items so it doesn’t matter if they are combined. I had thought about breaking them down even further into smaller accounts, but decided that it was not necessary.
I also have transfers automatically scheduled to move 40% of my budgeted savings to my savings account and remaining 60% of my saving budget to my money market account. These savings accounts are separated because one is easier to access and the other is more difficult, so it is perfect for short term and long term savings. Now, at first glance this sounds complicated, but for me it works fabulously. I write one check each payday from account #2 to account #3 for my miscellaneous expenses and that’s it. Everything else is done automatically, and at no cost. No fumbling with cash in line at the store, no worries about dropping money, and no trying to get change at a restaurant to leave a tip. I don’t even have to go to the bank to physically deposit the checks going to account #3 because I can deposit it through an app on my mobile phone. The only thing I do is check the account frequently to make sure everything is flowing properly. While I do pay nearly everything online, I have not automated all of my payments because I do like to keep control over the actual payment amounts. I don’t want to get too lazy with this after all.
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Choose What Works Best For You
Ultimately, you should use the method that works best for you. I’ve heard of other people doing similar things using prepaid cards, and if that works for them I say keep it up. I find prepaid cards to be a bit of a pain, and it can be difficult to find ones without fees. However, it could be a great option for someone who perhaps is unable to get a bank account. Regardless of how you manage your budget, the important thing is just to find something that works for you. Remember to always make it as easy as possible; otherwise, you will not stick to it. Easy is better.
So, have you made your budget yet? What do you do to stay on budget? Have you used the envelope method? If so, how did it work for you?
Image Credit: friedpickles