Simplifying Financially – A System for Feeling in Control of Your Finances

Part of living “simply” needs to be practical too.  How do I clear the clutter in day to day living and simplify?

In the article, “how to get to the end of the year without regrets“, the authors recommend to: “clear the clutter in your physical and mental space”. They suggest that  “instead of figuring out how to make ends meet, work on having fewer ends“.  I think this is great advice.

When I made the decision to work for myself, one of the first things I did as a precaution in case my business did not thrive, was to create a budget based on “what we NEEDED”, not based on “what we WANTED”.  For me, if my biggest asset is my time, I needed to align my “systems” to prioritize that “asset”, which meant having less things and spending less, so I had more of that thing I value so much:  time.

The next thing was to create a system (which was easy, required minimal effort and was practical) to ensure that we could 1. Implement; and 2. adhere to our financial needs with minimal effort all while feeling in control of our finances.  We, like you, did not want to use our time undergoing tedious record keeping for the purpose of staying on budget. We wanted something that was simple and easy to implement.

The system we set up did not involve keeping receipts or tabulating what we were spending (a reactive approach that makes you compare what you spent, to what your budget says). Instead, our system was a proactive approach that positioned us to seamlessly and effortlessly stick to our budget protocol without time consuming administration (all it needed was 2 hours to set up).  So here is what we did (it works!):

SET UP (ONE TIME ONLY):

Step 1: Create the Budget Template

Create a template for your budget that includes categories for your main financial NEEDS.  This is about defining the main “categories” of expenses that you need to live and live in line with your priorities, which includes your basic staples such as (mortgage, food, childcare, etc.), as well as some accommodation for fun!

In this step, you want to cluster and group the expenses that are related under a main heading (this is your category).   As an example, you may want to take all your fixed expenses (i.e. things that do not change over the year and MUST be paid – such as mortgage, property taxes, certain utilities) and group them under one heading.  In our template, we called these type of expenses “Annual Expenses” as an example.  The “categories” are an important part of the implementation as you will see in the implementation step.

When I developed my budget, it was based on 13 categories.   I created an easy template such as this one:

Step 2: Budget How Much You Need for Each Category & Allocate Monthly Amounts

Once you have completed Step 1 and your general Budget Template is set up, start estimating what amounts you need per month for each category.    In many cases, these “estimations” can be based on hard data (i.e. what your mortgage costs or property tax costs actually were in the previous year).

The important thing here is to create a budget based on what you NEED, not based on what you WANT, which of course will also include some fun!   Focusing on “need” however, may motivate you to re-think some of the ways you have fun, without actually downgrading the level of fun you have.  Often the best times aren’t necessarily the expensive ones!!

Our goal was to figure out what we realistically needed for each category to live in line with our priorities (which did include good programs for our kids, fun activities (such as skiing a few times a season and some fun inexpensive day trips), 2 nights out a month and some organic food).

In developing your budget, try not consider or think about what your total monthly income is and distribute the funds (as many budgeting protocols advise to do). Rather insert amounts that you think you need to live in line with your priorities while balancing the goal of minimizing your costs.

Once we established the amounts for each category, and calculated our Total Monthly Expenses, only then did we check if our budget balanced (i.e. if our budget was at or below our joint monthly income?).   By doing this, we found what we needed was a lot less than what we were making and spending historically.

Often as one makes more money and has more disposable income, there is more available in the “bank” to spend and buy.  “Why not spend the money, we have it?” is the thinking. The problem with this approach is that you need to work harder and harder to keep up with all the things you are purchasing and then all the things you have to maintain.  More things, means more work and more time maintaining those things (i.e. More clothes, means more closet space, means the need for a bigger house – and so on).

Once we were finished creating the Budget Template with our estimated costs for each category, we printed it and discussed whether our assumptions were realistic. We also tested our thinking to see if we could bring the numbers down in any categories.

At this stage, it is also a good time to also think about the “opportunity costs” of your choices and initial allocations.  What does a one week vacation in Club Med at $5000 for the week mean to your family? Does it mean 1- 1.5 months of work for one individual (to get $5000 cash, you need to make $6,500 gross).  This is a good time to think of whether it is worth that amount and that “cost” (1.5 months of work) to you? It may very well be worth it or it may not. You may rather just have one full month off of free time.  Or you may decide maybe it is worth it every few years. Everyone is different, but it is a good exercise to go think about the implications and opportunity costs of our choices and discuss them.  Who knows, maybe the discussion will spur some fun, less costly and more creative ways to have fun!

• Your accounts always show “real time” amounts for how much is left (giving you the most a up to date picture of what your finances are in any point in time).  So you know exactly how much is left in each “category” at any point in time.  If you allocate $100 per month to “Clothes” and spent $80 on a pair of shoes in week 1, you know you only have $20 left for clothes that month.

• It also ensures that your VISA bill is always zero.  Think about all the times you have gotten a VISA bill in the mail and all of a sudden your monthly financial picture was shot, paying up the bill. This will not happen with this system, as your VISA bill is always paid in real time.