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Three Alternatives to a Budget

the envelope system: day one — Image by J. McPherskesen via Flickr

Budgets aren’t for everyone. For some people, the very idea of trying to track where their money going is painful. And that’s just the idea of tracking the money. It gets far worse when you’ve got $10 budgeted for coffee, $12 for fast food, $66.50 for gas, and $0.75 for entertainment. It’s can be hard to follow a strict budget for long.

If you know you need to track your money, and you also know that a strict, zero-based budget won’t work for you, what can you do? Luckily, there are alternatives.

1. Hope and Pray. This is otherwise known as the “Call my bank everyday and see how close I am to over-drafting” system. To fully embrace this system, you need to not only abandon a written–or even organized–budget, but you should also throw your checkbook register in the garbage. Make sure you’ve got a good overdraft protection account attached to your checking account and let your money take care of itself. This is the ultimate zen of personal finance. Don’t stress or worry, just hope for the best. This system works best if you make more money than Oprah and have modest tastes. For those of us who have to watch our money a bit to make sure the month outlasts our money, this probably isn’t a great plan.

2. The Envelope System. To implement this system, you do need to create a basic budget so know what you are obligated to pay. Once you have that done, take a stack of envelopes and label them for each item you have to pay. Add another envelope for food, another for entertainment, and another for miscellaneous because there is always a miscellaneous. Divide the money among the envelopes. Now for the magic. When you have to spend something, take the money out of the appropriate envelope and spend it. That’s it. If, however, there isn’t enough money in the right envelope, but you still need to spend the money, you have to take it out of a different envelope and spend less on the category that lost money.

3. Percentages. This is the simplest of the non-budget budgets. Take 50% of your money and spend it on necessities, like the mortgage, food, and utilities. The next 30% goes to savings and retirement. The last 20% is for fun or any other thing you want to spend it on. This naturally works best if you are out of debt, but if not, just make sure most of the 20% fun money goes to repaying debt. This system works best if your bills are automated and you will need to set up a basic budget first, so you can make sure your necessities come in under 50% of your income.

Not every budget plan will work for everyone, but there are always alternatives that can still help you manage your money.

How do you track your money?

Ignore Your Budget

Finance

For the first year of our journey out of debt, we had a strict budget, with all of our discretionary money spent out of an envelope system. We had an envelope for groceries, one for discretionary spending, one for clothes and one for baby crap. At the beginning of the month, we’d divide the money into the envelopes according to our budget spreadsheet. If we used a card for anything, we’d take a matching about of money out of the appropriate envelope and put it in a box to get reconciled the next month.

Ugh. Almost 2 years later, it has turned into too much work and too much nagging about everything either of us put on a card.

We decided to simplify the system a few months ago. Now, we still have a budget. It’s even a zero-based budget, but we ignore it. We only look at it if something changes for the worse. If something changes for the better, the extra money just gets automatically rolled into our debt snowball, so there’s no need to worry about updating the spreadsheet.

Instead of envelopes, we kind of eyeball it. We budget $450 per month for groceries, so we aim to spend $100 on our weekly grocery run. That leaves some room for losing track of how much we are putting in the cart, or a last minute addition to the list. It also leaves room for our secondary grocery trip to buy bread and milk later in the week. We do go through a lot of milk at my house. We budget $55 per month for diapers, but the deal we are currently getting with Amazon Mom is only costing us $30.79 for 6 weeks of diapers. We ignore the difference.

This—and our heavily automated bill pay and savings—lets us keep our finances on track, without stressing over every dollar or fighting over every little thing that comes home unplanned. I used to fire up Quicken and balance the checkbook every week. Now, that happens at the beginning of the month, usually. If I forget, it doesn’t matter. At the beginning of February, I balanced the checkbook for the first time in almost two months and we never came close to exercising our overdraft protection account. In fact, we had some extra, so that got sent directly to our debt.

Overall, it’s been good to test out a new system. We have almost no financial stress and managing our money takes about a couple of hours per month instead of per week. It’s all win.

Make a Budget

Finance

: Image by r.lovewell via Flickr

In the past, I’ve gone through a detailed series of budget lessons demonstrating how to make a budget and showing my personal budget spreadsheet template. If you weren’t here to see them develop, you probably haven’t seen them at all. I’ve never built an actual index for those posts.

This is the master index of my budget planning resources. As I develop more, this will grow.

Budget Lesson #1 – In this lesson, I go over how we handle discretionary income and I explain our modified envelope system. The discretionary budget contains things like our grocery bill, or the clothes we buy. We have near-total discretion over what is purchased, hence the name.

Budget Lesson #2 – Lesson #2 contains the details of our monthly bills. These are the ones that are consistent, predictable, and actually due each month. Most people take these for granted as the bills they have to pay, but it’s not true. You can get almost all of your regular bills reduced just by asking. You would also be surprised what you can do without, when properly motivated.

Budget Lesson #3 – This is where I explain how we deal with the non-monthly bills. That is, the bills that have to be paid, but are not due on a monthly basis. I also share the personal budget spreadsheet template I developed. I am working on a few sample templates to match various imaginary scenarios. If you’d like to be an anonymous case study, and get free help setting up a budget, let me know, please.

Budget Lesson #4 – In this lesson, I describe our “set-aside” funds for things that will need to be paid eventually, but not on a set schedule. Sometimes, they are never actually due. We set aside money for the parties we throw, for car repairs and for a number of other things. A few of these items are outright optional, but they are part of what makes life fun. You can’t make a budget without including some of the extras.

Budget Lesson #5 – This is the companion piece to lesson 2. Learn how I’ve reduced–or attempted to reduce–each of these bills. For the better part of two years, I called Dish Network every few months to ask for a discount. For almost 2 years, it was granted. Then one, day, they told me they were putting a note on our account to keep us from getting any more discounts, so I canceled. 100% discounts help us save more.

Budget Lesson #6 – This is the reduction companion to lesson 3. These bills are harder to reduce. Have you ever successfully gotten your property taxes lowered?

Budget Lesson #7 – This is the reduction companion to lesson 4. Notice a pattern, yet?

Budget Lesson #8 – Here, completely out of order, is the reduction companion to lesson 1. Watch as I magically reduce–or rationalize–our discretionary budget.

So, dear readers, what part of budgeting should I address next?

ING Rocks

Finance

I just got an email from INGDirect. To celebrate Independence Day, they are having a sweet, sweet sale.

You can:

Open a checking account and get between $50 and $126 for doing so.
Open a Sharebuilder account and get $76 to start buying stocks.
Get $1776 knocked off the closing costs of a mortgage.
Get $76 in a new IRA, to give you a little boost for retirement.

Take advantage of all of that and you’ll get $2054 in cash or discounts.

Seriously, this deal rocks. If you don’t have an INGDirect account, get one. There are no overdraft fees and no monthly fees.

The sale ends tomorrow at midnight, so hurry.

Your Budget is Worthless

Finance

When you realize that you’ve buried yourself in debt and decide to get out from under that terrible burden, the first thing you’ve got to do is build a budget because, without that, you’ve got no way to know how much money you have or need. After you’ve got a budget, you’ll start spending according to whatever it says. Hopefully, you’ll stay on budget, but what happens when an emergency does come up? What do you do when your car dies? When you suddenly find out your kids needs vision therapy? How do you manage when your job suddenly gets shipped off to East De Moines?

Your budget isn’t going to help you meet those expenses. Most people don’t have enough money in their bank account to make it all the way to the next payday, let alone enough to keep the lights on and food on the table. How can you possibly hope to deal with even the little things that come up?

You whip out your emergency fund.

The problem with a budget is that it does a poor job of accounting for the unexpected. That’s where an emergency fund comes in. An emergency fund is money that you have set aside in an available-but-not-too-accessible account. Its sole purpose is to give you a line of defense when life rears up and kicks you in the butt. Without an emergency fund, everything that comes unexpectedly is automatically an emergency. With an emergency fund, the things that come up are merely minor setbacks. Without an emergency fund, your budget is nothing but a good intention waiting to get shattered by the next thing that comes along. With an emergency fund, you are managing money. Without it, it’s managing you.

How much money do you need in an emergency fund?

Every “expert” has their own opinion on this. Dave Ramsey recommends $1000 to start. Suze Orman says 8 months. The average time spent looking for work after losing your job is 24.5 weeks(roughly 6 months), so I recommend 7 months of expenses. That’s enough to carry you through an average bout of unemployment and a little more, but that’s not a goal for your first steps toward financial perfection. To start with, get $1000 in a savings account. That’s enough to manage most run-of-the-mill emergencies, without unduly delaying the rest of your debt repayment and savings goals.

How do you build an emergency fund?

Let’s not kid ourselves, $1000 is a lot of money when can barely make it from one check to the next. Unfortunately, this vital first step can’t get ignored. If you really work at it, you should be able to come up with $1000 in a month or so. Here are some ideas on how to manage that:

Cut. Drop every possible expense. If you drop cable, your cell phone, Netflix, and a weekly dinner out, you will already be saving $400 that month. You’d be almost halfway there.
Sell. How much stuff do you have that you don’t need, want, or use? I’d be willing to be there’s more than you realize. Last spring, I had a garage sale that brought in about $1300. Everything we sold was just crap we don’t use any more. We sold candles and candle-holders, DVDs, books, clothes, toys, electronics, games, and anything else we could find. I spent a month going through every room in my house to find my inventory. Craigslist is a good way to sell just one or two things at a time.
Work. Have you thought about delivering pizza or working weekends in a gas station? If you have some technical or writing ability, you could pick up some part time work on oDesk or eLance. Your opportunities are only limited by what you are willing to do.

Stop at a grand?

Dave Ramsey’s advice is to get your fund up to $1000 and then leave it alone until your debt is paid off. Screw that. I’ve got money going into my fund every month. It’s only $25 per month, but over the last two years, it has almost doubled my fund. Don’t dedicate so much money that you can’t meet your other goals, but don’t be afraid to keep some money flowing in .

Using the fund?

When can you pull the money out? That is entirely up to you. I have ju st two points to make about withdrawing from your emergency fund:

Don’t keep the money in an easy-to-access account. If your fund is in the savings account that serves as your overdraft protection account, it’s too easy to spend it, and it will go away. I keep it in my INGDirect account. I don’t use the checking account for anything in person, so I don’t carry the card. If I want to spend that money, it will take 2-3 days to transfer into my main bank account.
Never decide to spend the money on the spur of the moment. There are very few major financial decisions that can’t wait until morning to be answered. Sleep on it. If it’s still necessary tomorrow, you can spend it without guilt.

An emergency fund makes your life easier and your budget possible when the unexpectable happens. Don’t forget to fund yours.

How much money do you keep in your emergency fund? What would it take to get you to spend it?

Budgeting tips – sticking to your budget

Finance

If you are looking to get out of debt, or you are currently debt-free and want to stay that way, then it is important that you get a grip of your financial situation and live within your means.

A good way to do this is to create a budget as this gives you a clear indication of how much money is coming in, how much is going out and also highlights any areas where you may need to make cut backs should you be falling short each month.

Once you have sorted out the figures and made necessary amendments, for example paying bills by direct debit in order to make savings or cutting existing debts by carrying out a balance transfer to a lower rate credit card, it is time to start focussing on the lifestyle changes.

As you will find, it is one thing to create a budget and quite another to stick to it, but by adhering to the following steps and exercising a certain amount of will power, you should be able to ensure that you live within your means and resist the urge to reach for that credit card.

Keep focussed

Before you start to look at how you can stick to your budget you need to clarify why you need to stick to your budget!

A budget can initially seem like something that has been devised with the sole intention of stopping you having fun and buying or doing the things that you want. So it is important to remember that, though some cutbacks may be necessary in the short term, a budget is a long-term strategy that will allow you to take control of your finances and, all being well, live a happy life that is free from the worry of excessive debt.

Change your habits

Unfortunately, a successful budget can require a change in lifestyle and this can be one of the most difficult things to adhere to.

For example, if you have previously enjoyed eating out regularly then you may have to make cut backs in this area to ensure that you are living within your means. But, instead of seeing this as a negative, try to focus on the positives and remember the reasons why you are budgeting.

And a change in habits doesn’t necessarily mean that you have to cut back on your enjoyment of life and it may actually open your eyes to other pursuits you may not have previously considered.

For example, instead of eating out try preparing a meal at home and turn your dining room into a restaurant. This means that you can still have the fine dining experience but at a fraction of the price and without the worry of making a reservation!

Shop smarter

Lists figure heavily when creating a personal budget and list-making is a habit that you should get used to when trying to stick to your budget.

When budgeting it is vitally important to avoid impulse buying and a great way to do this is to always make a list of things you need before you go shopping.

This means that you will have a clear idea of what you need and you will be less inclined to make random purchases that may just turn out to be an unnecessary drain on your finances. It’s also worth mentioning at this point that you should always differentiate and prioritise the things you need over the things you simply want.

If you are unsure how to make the distinction then put off making the purchase for a couple of days and then reconsider if you actually need it. This cooling off period will often convince you that you can do without it and save you money.

In addition, savings can be made on your shopping by simply swapping big name brands for supermarket own varieties, using discount coupons and looking for any special offers.

Overall, it is important to be fully focussed and committed to your budget plan and to be aware that a change in finances may require a change in lifestyle. But a few short term changes may well add up to better finances in the long term.

Article written by Les Roberts, budget reporter at Moneysupermarket.com.

Search Results for: ignore-your-budget/INGDirect/three-alternatives-to-a-budget

How much money do you need in an emergency fund?

How do you build an emergency fund?

Stop at a grand?

Using the fund?