I know budgets can be a pain.
I get that.
I also know how useful budgets are if someone is trying to claw their way out of debt.
I use a budget.
But, there are some solutions for people who would rather pull their teeth out than sit down a figure out a monthly budget.
I wasn’t always a happy budgeter.
When I was in my early twenties, spending hard, partying, and blowing through cash like a drunken sailor, the last thing I wanted to discuss was budgeting and money management.
I had a friend who got a job at a financial planning agency as a recruiter.
He invited me to one of the meetings.
Another friend and I sat in the back, and my eyes rolled as they went through slide after slide. This was pre-Power Point, so the slides were on a carousel.
We were bored and when It was all over, the time came to get us in the chair for the big sales pitch.
We ditched.
The other friend understood, but he had a quota to fill.
That was the closest I came to money management at that point.
Then, the crunch hit.
I can’t pinpoint the exact time and place, but for some reason, it hit me that I needed to put on the brakes.
I went to the library and started reading everything I could about budgeting and managing my finances.
That’s when I started budgeting and began the cash envelope system.
I got rid of my credit cards in the ultimate act of defiance. Looking back on it now, I should have kept the cards and just managed them more strategically. This was all before the credit card points boom, so the only thing to gain was to build a good credit score.
But, if I can’t get you motivated on budgeting, I have a system that should help wrangle your finances in the right direction without the excruciating pain of a budget.
The first thing is to pay yourself first.
I don’t know if you’ve ever heard this before, but in the personal finance world, this is just basic stuff.
To get this system to work you’ll need to take a percentage of your paycheck or monthly income and just set it aside.
I have taken as much as half of my income and put it away. And have set aside as little as ten percent when I was working at paying off my debt.
The typical number I see other people recommend is around 20%.
You’ll get a better idea after the next section as to how much you’ll be able to afford, but for now, I want to tell you why this is so important.
Especially if you are young, the power of putting a little away and having it become something substantial is impressive.
Let’s look at the power of compound interest for a minute. Many of you probably already know how it works but for those who don’t, here is a little primer.
Let’s say you make $3,000 a month.
Bank savings account interest is the worst you can get.
Usually, it’s around 2%.
I know you can do better, but let’s go with the least common denominator just for the sake of the example.
If you take 20% of the salary every month and stick it in the bank and don’t spend it, you’ll be saving $600 a month in an account.
Now say you are 20 years old and do this until you are 60 years old. At the end of the forty years, you’ll have accumulated $442,000. That’s a pretty good chunk of change for just saving 20%.
Now, if you put this off 20 years until you’re 40, you’ll only have $177,000.
Now, bump up that compound percentage to 7% which shouldn’t be too hard to achieve with conventional investment strategy. Your nest egg savings amount climbs up to $1.5 million after 40 years.
Wait twenty years and party that money away until you are 40, and you’ll have only $315,000.
Now, I like to have a healthy emergency fund to cover myself in case of, well, emergencies.
At some point and as quickly as possible, you will want to break off a certain amount and stick it into investments.
Saving only 20% of their income will be life-changing for so many people. But, after you hit your number, get that money earning for you at a higher percentage.
Make sure your required monthly spending doesn’t exceed your income.
If you take the 20% right off the top for yourself and add up your required monthly spending, you should have a little money left over.
If you don’t, you’ll want to start looking for ways to either cut your monthly spending or make more money every month.
I suggest a little of both. Start figuring out a side hustle for yourself where you are making some extra money outside of your job.
Look at ways you can also start cutting your bills.
Do you have a hefty monthly car payment?
You could sell it and get something cheaper or even trade into something more affordable. Just make sure your car is worth more than you owe.
Most new cars rolling around on the road cost the owners way more than they’re worth.
My in-laws are in the used car business. They call this being ‘up-side-down’ in your car.
If you are ‘up-side-down’, you’ll get less than you owe on your car if you try to trade it in.
This is where you’ll need to make a tough decision. Do you trade down in a car hoping the difference will pay off your loan, or do you keep it and ride out the payments?
Let me put this into numbers, so it’s a little easier to see.
Let’s say your car has a book value of $10,000, but you still owe $13,000 on it. You are $3,000 ‘up-side-down’. A dealer definitely won’t offer over $10,000 for it because they probably can’t make too much profit when they resell it.
Now, the decision becomes, do you trade into a car for $7,000 and sell the other car to the dealer for $10,000; this will give you $3,000 in cash to pay off the car loan and reduce your monthly spending. Or, do you make more money with a side hustle to pay off the car and keep it?
There are other options like asking for a raise at work or reducing monthly spending in other areas, but I wanted to use the car as an example because I see it every day.
Regardless of the decisions you make, you’ll need to get your income more than what is going out.
Figure out how much you want to throw at debt.
Your next item of business is to figure out how to pay down any debt you have. If you have no debt, good, move on to the next section.
If you do have debt, let’s take a look at that and talk about how you’re going to get that paid off.
There are two main common beliefs when it comes to paying off debt. Both of them are right if they get the job done.
The first one is what Dave Ramsey of talk show fame promotes.
He calls it the debt snowball method. The debt snowball is when you take your smallest monthly debt and work to pay it off the heaviest.
Pay the minimums or near minimums on all your other debt, but work hard on the smallest one first.
When the smallest one is paid off, take all the extra money you used to pay towards that one move it over, and start paying heavily on the next largest one while still paying the minimums on the others.
This will give your pay-off money the effect of a snowball rolling down a hill. The further up the ladder of payoff you move, the bigger the ball of money you throw towards payoff every month.
The snowball method is easy to use and easy to understand.
I think that is why he promotes it. Something easy to follow gets followed.
I can relate.
The method I like will cost you a little more time but will save you more money.
Just like the above example of compound interest, compounding debt can also work against you.
This is where you will take your lump of cash and pay off your highest interest every month.
You’ll have to do some figuring and find out where you are paying the most interest. This is a little more complicated but will save you money in the long run.
Let’s say you have $5,000 on a credit card at 17% and you only have $3,000 on your car loan at 10%, the snowball method would have you paying off the car loan first.
I would knock that credit card loan down to a point where the interest you’re paying on the credit card loan is less than the monthly interest on the car. Then I would pay off the car. Or, the car and the credit card equally.
You will need to keep a sharp eye on the amount in dollars that is going out the window toward interest and adjust your payout accordingly.
It will take you a little more time to figure out, but you’ll save money down the road.
Set up your different systems of payment.
Setting up your different systems of payment is where your plan will get kicked into high gear.
Since I was in debt and started down the nest egg-building path, things got a whole lot easier.
The power of the internet and the ease of online banking are tools I wish I had years ago.
I had an E*TRADE account back in the 2000s but never did a whole lot of trading with it.
I could see the potential and knew we’d eventually get to where we are today. But, back then it was primitive.
Now it is super easy to set up automated monthly payments and move your money around while being in your comfy chair in the living room.
I suggest you set up an automated system where every month you ‘pay yourself first’ and the money goes directly into a separate account.
Next, I would consider putting your house payment or rent payment on some auto-pay, so you never have to see or deal with that money.
Doing this will skirt the idea of figuring a budget but still act like you are budgeting it every month.
You won’t have to deal with it.
A house payment will be easier than rent, but many of your corporate large-scale apartment rentals will probably offer some EFT payment option as well.
Gas and electric bills are a little more difficult to automate. But it might still be able to be done depending on where you live.
You will always be able to set up automatic bill payments through your bank. But knowing how much money you have to spend is tricky if you are not using a budget.
In our area, the gas and electricity are the same company.
We pay a lump sum for both every month.
We are also on an eco-plan where the company averages our monthly bill for the year, and we pay the same bill every month regardless of whether it’s summer or winter.
Then, once a year the amount gets audited, and they adjust our monthly bill for the next year.
If we paid too much the year before for our usage, we get a credit. If we paid too little, we pay a little extra.
My wife keeps track of it like a hawk, and she said it works out pretty good.
Check with your gas and electric provider to see if they offer something like that.
It’s pretty cool and can take the ‘big bill’ shock away in the middle of winter because of high heating costs and smooth out the excessive air-conditioning costs in summer.
Set up a cooldown system for your impulse buys.
Having a cool-down period to squash impulse buying is the last area of the ‘no budget’ money management system.
Everything you go to buy, except in cases of emergency should go through a ‘cool down’ period of a week to make sure you need it.
Now, I did say emergencies don’t count.
If my furnace goes out in the winter, there is no waiting around.
That thing is either fixed or replaced within a couple of hours. There is no way I’m going without heat while I consider all my options for a new furnace. Now air conditioning, I’ll give it a week’s worth of thought; though my wife would probably argue with me about that.
This cool-down period will give you leverage against the high-pressure salesman or woman trying to sell you that awesome couch.
It will also keep that little bit of bonus cash in your pocket which you got for winning employee of the month.
Give things a week and give it some thought to whether you need that giant-size gumball machine for your rec room.
I’ll bet most of the time that cash will remain in your pocket and those cool ‘gotta have it’ impulse buys won’t happen at all.
If you are a big budgeting person, a bunch of these tips will help you be a better budgeter. If you are sickened by the thought of sitting down every month to do these things I hope just using some of the tips will help you get your financial life a little more in order.
Till next time, be safe.
Kevin