Have you ever gone grocery shopping when you’re hungry and you found yourself adding a packet of chips into the trolley?
Your short term emotional impulses overwrote your logical pathways (and shopping list).
The desire to eat now (or desire for salt in the case of your chips) means you justify the decision to yourself to overwrite your original plan.
This happens with budgeting all the time: the fortnights pay arrives, and while on paper you know how it needs to be allocated “you’ve just have to get this thing that was not in the budget… because…”.
For most people the number one reason their budget fails is because they are their own worst enemy. To overcome this, take yourself out of the picture: automate your budget.
The steps are simple
Step 1: Build your budget, working out your fixed expenses and allowing for variable expenses.
Group your Variable expenses into categories.
An example could be ‘Annual Expenses’ such car registration, body corporate, insurances etc. Things that you should be putting money away for each week, but somehow you end up forgetting and getting hit with a huge annual bill each year.
Let’s say our annual expenses were $2,600 per year.
Step 2: Set up your fixed expense Direct debits for each month to come out of a central bank account.
This is the easiest step. Write a list of everything that can be direct debited, and where it is paid from. Work your way through that list to have then all come from the one account.
I recommend attaching a debit card to this account too, as some providers won’t accept bank account or credit card payments. Direct your pay into this account and DO NOT access it.
This will ensure you meet your regular expenses.
Step 3: Open a corresponding bank account for each Variable Expense Category, naming it to attach purpose.
Now if you take money out prematurely, you know you’re going to pay for it later.
For our example: “Annual Expenses account”.
Step 5: Set an automatic direct debit to move the required amount into that required account each pay cycle.
In this you are effectively making the direct debit another “bill”. As far as you should be concerned, this money has already been spent. Do not withdraw it unless for its purpose. You can even hide that account with most banks.
For our example, $100 per fortnight goes into this account.
Step 6: Budget complete!
Each pay you are allocating the money for expenses you need to pay, before you get a chance to spend that money. When you get your Registration bill in the mail, you already have the money for it (because you saved) and that large expense won’t throw off your budget.
This process can be repeated for all sorts of variable expenses included within your budget, such as
Groceries: Transfer your designated amount each week into your debit card.
Entertainment and spending money: Transfer what you can afford to spend each week onto your card, if you don’t spend it save it up for later. This is important too, you need some money to ‘waste’ within your budget.
Clothing/Christmas/Gifts: Work out for the year what you can afford to spend on clothes and allocate it.
Pets: Total the annual food, vet bills, toys, grooming, and a bit extra for when your dog eats something they shouldn’t. Break that down into a pay cycle and set up the direct debit into that account.
Kids: Total up season sports/hobby costs, clothes, toys and an extra bit for when they do something the shouldn’t. Break that down into a pay cycle and set up the direct debit into that account.
Date night: This is actually a brilliant idea for couples. A number of my clients have implemented this and because there is money aside for them to spend together, are actually going on more dates.
The number of different categories and bank accounts you use is entirely up to you, but I have seen the most success with clients where they break down their expenses for the most transparency and stick to it.
But I don’t have enough money each fortnight to allocate to every expense!
Then can you afford every expense? Go back to step 1.
With all of these bank accounts wont I be paying a lot in bank fees?
If you are paying bank fees on your normal, personal bank accounts – get a new bank.
This seems like a lot of work!
It can be a lot of work to get it started, and over time you will need to review and adjust; however, once you have it the budget running smoothly it is actually less work to manage.
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