A budget is a great road map for your financial life… but in the end, it’s only a document. It takes a lot of action on your part to execute that plan and make it your financial reality. Fortunately, there are some great habits and tricks that can help make that process happen more smoothly.
Once you’ve put together a good monthly budget for yourself and your family — either on paper or on a computer spreadsheet — you can use some of these methods and programs to put your plan into action. Here are four suggestions to get you started.
1. The envelope method
A lot of our budget items, like housing, utilities and tithes, are fixed. The amounts are the same each month, we pay them monthly, and they’re easy to plan for and handle. But some other expenses, like clothing, groceries and dining out, can vary widely from week to week or month to month. These expenses can also be subject to impulse buys, which can torpedo a budget really quickly.
The envelope method is a way of using cash to control your spending in some of those less predictable categories. The idea is that each month, you withdraw cash representing all of those categories in your budget, and then label some envelopes with the names of each category — “Clothes,” “Groceries,” “Eating Out,” etc. The month’s budget allocation goes into the envelope as cash. This allows you to have a tactile, easy-to-grasp measurement of exactly how much money you have left to spend in that category each month. Once the envelope runs out of money, no more spending until the next budget period comes.
Dave Ramsey made the envelope method of handling cash famous. But you can really use any kind of container you want — a jar, a box, a can, whatever. If impulse buys or credit-card spending are challenging for you, the envelope method will help you stay out of trouble and build some discipline.
2. The set-side account
Some of the items that show up in our monthly budget don’t always get paid monthly. Things like car registration fees, insurance premiums and Christmas gifts come around only once or twice a year. And so while we should always be planning for these future needs in our budgets, we don’t always need to leave that money sitting in our main checking accounts.
As the year goes by, you’ll build up small amounts of money that are earmarked for paying those expenses. But if you leave that money accumulating in your main checking account, it will artificially inflate your balance, making it seem like you have more spare money than you actually do. That can lead to irrational decisions and impulse purchases — so instead, we use a set-aside account to store money for earmarked expenses.
A set-aside account is a simple savings account associated with your checking account. In your budget, you can group all of your set-aside items together, and run a total of those expenses for each month. Then take that amount of money each month and move it over to the set-aside account. When time comes to pay those annual expenses, you can pull the money right out of the set-aside account. And you won’t have been fooled by an artificially bloated checking account into thinking that you had more spare cash then you actually did.
3. Automatic transfers
It may go without saying in our high-tech world that automatic bank transfers can make your life much easier. Many people get paid via direct deposit, and pay bills like mortgage and utility payments electronically as well.
Automatic transfers can help make budget implementation easier, too. First, get as many monthly bills as you can on automatic payment — that saves you time, and removes the temptation to spend money in your checking account that is needed to cover a basic expense. Next, arrange for an automatic transfer to take your set-aside money over to the savings account each month. This saves you from forgetting to make a transfer and ending up short later on.
You can also use automatic transfers to help you discipline yourself in saving money or paying down debt. If you set the process up to happen automatically when you’re in a clear state of mind, you’ll be less likely to cheat on your budget when you’re tempted in the future.
One thing that we’ve found helpful recently is to create a sub-budget to keep track of certain items in our master budget. In our budget, clothing is an annual expense — Laura and I are each allotted a certain amount of money to spend on clothing each year. So we’ve created a second tab in our master budget spreadsheet where we keep track of how much each of us has spent on clothing. That helps us to stay on top of our records, and keep from struggling to remember how much we’ve already spent as we plan our clothing purchases.
You can use a sub-budget for any item that you want to pay close attention to. We use sub-budgets to track clothing spending, vacation and travel spending, and deposits into and withdrawals from our set-aside account. This helps us to stay on top of expenses that have a tendency to get out of control. Sometimes, it also lets us see that we have more money to spend on a certain item or gift than we thought we did. Those are the fun times.
Those are our top four tips for putting your budget into practice. What tricks have you learned for making your budget work for you?