Editor’s note: This is a guest post from my good friend Pauline of InvestmentZen.com. Pauline is a ‘budgeter extraordinaire’ and an investing maverick with considerable reputation in the personal finance community.
Budgeting has always been like watching paint dry to me. My brain can’t get around it. I understand the main concept: spend less than you earn, and am pretty good at putting it in practice. But who really enjoys writing down they’ve been spending $0.47 on a stamp and $2.19 on celery? Not me, that’s for sure. And I don’t blame you either if you have been postponing budgeting for years.
Today though, I come bearing good news. You can budget in just a few minutes per month, and forget about it. Here is how I do it.
Step 1. Define your goals
The whole point of budgeting is so you can have money down the road for stuff that is important to you. Not to keep track of your gas consumption. So write down your goals. They can be short term or long term, we just need a number and a timeframe. For example:
- $200 for Christmas gifts by December 1st
- $1,500 for a nice holiday next July
- $50,000 balance in your 401k by 2027
- $15,000 for a car replacement within five years
And so on. Now break down your goals into smaller, more manageable monthly goals. If you need $15,000 for a new car within 60 months, you need to save $250 every month. Christmas is four months away, so that’s $50 you must save with each pay-check. Do that for all your short term and long term money goals. You will be able to track your progress and gain momentum when you see yourself actually moving forward and getting closer.
Step 2. Make the money disappear
Saving money is not easy, especially when it is there at your disposal, waiting to be spent. We all have a limited amount of willpower, and the hardest you make accessing your money, the more likely you are to avoid spending it. If it is in your checking account, one debit card swipe and it’s gone. On the other hand, if it is in a high yield savings account, you need to log into your online banking and make a transfer in order to be able to access the money. If it is locked for a year or two with a CD, then there would be a penalty on top to withdraw anything. And the worst that could happen would be having to withdraw from your 401k and pay the taxes, when the markets are down.
So to resist temptation, let’s make the money disappear every month. To meet your retirement goal, you should take advantage of your company match, and the money will be taken off your paycheck straight away. You won’t miss it if you don’t see it.
Then, all the other savings accounts can be funded via automated payments on pay day. You should do the same for your mortgage, your bills, and any other recurring expense. You have to pay all that anyway, so make it easy on yourself and set up monthly debits then forget about it.
Step 3. Relax
Knowing that your savings and investing goals are met every month, whatever is left in your checking account is yours to use freely. The thing I dislike the most about budgeting is you have so many lines of spending they make you dizzy. Oh my god, I overspent by $12.99 on eating out, but thankfully I am under by $27.43 on transportation. Who cares, really? You are in a good place because you are actively saving for retirement, college for the kids, and other short term money goals. So have fun with the rest of your money. And if it is gone by the 25th, next month, tighten the belt a bit more.
That’s it. Budgeting shouldn’t be more complicated than this.