Personal Financial Budgeting – How to Simplify Financially

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.

In my Success on My Terms Post Script, I describe how when I made the decision to work for myself, one of the first things I did as a precaution in case my business didn’t thrive, was to create a budget with my husband based on “what we NEEDED”, not based on “what we WANTED”. This was about defining what was important to us, which included some nights out and fun days with the family, in addition to our “staples” (mortgage, food, childcare, etc.) I asked myself: How little can I live with? and I wrote that question on a little card which I still keep in visual view beside my desk. It inspires me and is a good reminder when I am about to buy things like a glow in the dark “moon” light for my toddler because he likes moons (which by the way, is close to $100 and I know will just go into storage in 2 years). So why not just look at the real moon? If my biggest asset is my time, as I explain in that post, 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 we did was create a system (which was easy, required minimal effort and is practical) to ensure 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.

Our system 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, rather than position you to not over spend).

Instead, our system was a proactive approach that did not require time consuming administration, just a few hours to set up. So here is what we did (it works!):

SET UP (ONE TIME ONLY):

Step 1: Create the Budget Template

We developed a budget based on 13 categories. The “categories” are an important part of the implementation as you will see in the implementation step. We created an easy template such as this one:

Personal Budget Template

Step 2: Budget How Much You Need for Each Category

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 and day trips), 2 date nights a month and some organic food). It did not include Club Med vacations for example in which we could spend $5000 in one week ($5000 meant a whole month off for one of us, so why blow it in one week, was our thinking), etc. In developing the budget, we also did not consider or think about what our total monthly income was and distribute the funds, as many budgeting protocols advise to do. Rather we inserted amounts that we thought we needed to live in line with our priorities while balancing minimizing our 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. Before,, as we were making the money, and it was at our disposal to spend, we had the money, so why not go to club med and why not buy lots of stuff? We could afford it. The problem with the approach is that you need to work harder and harder to keep up with all the “toys” you are purchasing and then have to maintain.

Once we were finished creating the template, 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.

Step 3: Set Up FREE E-Savings Accounts at a Bank for Each of the Categories in Your Budget

The purpose of this step is to create accounts to “hold” money. Most banks now a days have accounts that are free accounts (no monthly fee) that you can use to “hold” money, rather than use for transactions. You will use these accounts Semi-monthly to transfer the amounts listed under each category in your budget template to the respective account.

B. IMPLEMENTATION (HOW TO APPLY THE BUDGET IN DAY TO DAY LIVING):

Step 1: Transfer Each Amount Stipulated in the Budget Every Two Weeks (or Monthly)

The first step of implementation involves transferring each amount stipulated in your budget to the respective “savings” account every time you get paid. So you are basically funneling money into the right account immediately after you get paid. This will ensure that at the start of every semi-monthly period or monthly period, you have the exact amount you established in your budget (or more).

By doing this, there will be no need to keep receipts or compare what you spent to what you budgeted (as only the amount you budgeted will be available in the account).

Step 2: As You Spend, Move Money in Real Time!

Assuming you had $200 per month for Entertainment, which represents $100 every two week pay cycle: Every two weeks you would transfer $100 to your “Entertainment” account.

This is the key element of the system: We move money in real time. So if we go to a restaurant and use our VISA, as soon as we pay, we transfer the money from Entertainment to VISA on our smartphones. So our VISA bill is always zero and so our accounts always show “real time” amounts for how much is left.

This gives us a real time picture of what we have spent and what is left at any moment in time. So if our budget is $200 per month for Entertainment and we have just gone out for a $150 meal, we only have $50 left in the account for the rest of the month. It is up to us, whether we do 1 fancy meal per month, or 4 less fancy meals and a concert. The decision is up to us, but at the end of the day, we only have the $200 in the account to spend.

This system therefore does not require one to keep receipts and undertake lengthy and frustrating bookkeeping to see if you are on budget, or compare what you have spent to what you have budgeted: you know you are on budget because you only have $200 in the entertainment account at the beginning of the month (and so that is all you can spend!). We also do not need to keep receipts for anything as we know, that we only have access (and therefore can only spend) $200 per month or $2400 per year on Entertainment.

This system has been working beautifully for us. Not only does it make us feel in control, it is easy to set up and easy to implement. Also, the discipline allows us to control our finances without doing much (all we need to do is funnel the money to the accounts 2 x per month and use the right account to spend), which means less time working and more time for fun!!!

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