While there are some who enjoy the discipline and order of creating and maintaining a budget, those individuals are few and far between. I liken it to exercise—the act itself is not always fun, but the long-term reward is worth the short-term sacrifice. Personally, I don’t enjoy sticking to a budget in the traditional sense. It is much easier for me to know how much I need to save every month versus being told how much I can spend. It’s a subtle difference, but an important one for some people.
What is your system or strategy? How do you maintain a lifestyle within your means? Regardless of income, we all need some type of method (formal or informal) to help us live responsibly and stay out of debt. Thankfully, we don’t all need to create a detailed budget in order to implement a successful cash flow system. Listed below are just a few of the strategies that have worked well for our clients:
Traditional Budget – Set monthly spending targets for expense categories. Track actual spending versus planned spending over time. Make modifications to lifestyle or budget, as appropriate. If married, both parties need to “own” the budget and be accountable to each other for making it work. This system appeals to those who are organized and detail-oriented.
Forced Budget – Set detailed savings goals and allocate money to these “buckets” as soon as it is earned. Spend whatever is left, but don’t run out of money before the end of the month. Those that use this system generally have very little left in their checking account at the end of the pay period. This simple system appeals to those who are busy, disciplined, and focused on long-term goals.
Frugal Spender Budget – Some people have minimal needs and wants. Overspending is not a concern and cash tends to accumulate. Often, the Frugal Spender will be risk-averse and may keep too much money in low-yielding checking and savings accounts. The appropriate strategy is to have some amount of money transferred from checking to an investment account on a regular basis so that the money is working more efficiently.
All-Cash Budget – This is a rudimentary, but effective method for managing expenses. There are several ways to implement this strategy, but the “envelope-method” is perhaps best known. The basic idea is that you remove credit cards from your wallet and pay cash for everything. At the beginning of each month, money is withdrawn from your checking account and placed in envelopes, each one labeled with an expense category. When all the envelopes are empty, you have to wait until next month to make your next purchase. This system is great for anyone who wants to keep track of expenses without a lot of recordkeeping. It also appeals to those who want to create some discipline with respect to spending.
I use a variation of the envelope method in my personal life. In order to keep things simple, I ditch the envelopes and have all of my fixed costs (mortgage, utilities, insurance) taken directly and automatically from my checking account. After taxes, giving, and saving, everything else is considered discretionary. To pay for these expenses, I withdraw one lump sum of cash at the beginning of the month and that’s all I get. There is something very powerful and emotional about paying with the green stuff. I’m fairly confident that I spend less using cash than I would with a credit card.
Whatever method you use for managing cash flow and accomplishing your long-term financial goals, it is important that it works for you and your family. If you are at the point in life where you have experienced a measure of success and are ready to create a detailed plan to make work optional, give us a call. We can help you take that next step with confidence.