Does the thought of creating a budget make you cringe? This may surprise you, but as a financial planner, I also hate traditional budgeting methods. They are tedious, time consuming, and restrictive.
That’s not to say that you don’t need to have a plan in place for spending and saving, it just means that you don’t have to spend hours tracking your every purchase.
There is an easier way, and I call it the Separate & Automate System.
Separate Your Money Using Different Accounts:
Step1: For this system to work, you do need to start by adding up your total monthly (after-tax) income and your total expenses. Look at your last 3 months of spending and categorize where your money went.
Step2: Once you know how much you’re spending each month, divide your monthly (after-tax) income using the following categories:
Lifestyle Expenses: food, clothing, entertainment, etc.
Savings & Extra Debt Payments: retirement savings, emergency fund, vacations, etc.
I follow the 50/30/20 method. This means that no more than 50% of your income is spent on fixed expenses. 30% is spent on lifestyle expenses, and the remaining 20% is for savings.
These percentages may not work for you. If you’re not able to save 20% of your income, start with what you can save such as 3% or 5%. Make a goal to increase your savings each year when you get a raise.
Step3: Set up separate bank accounts to match the categories mentioned in
Step2. You should have an account just for paying your recurring fixed expenses. You should also have an account for just your lifestyle expenses and a separate account (or accounts) for savings.
You can actually have more than one savings account to match different goals such as one for an emergency fund and one for a vacation fund.
Automate Your Money With Bill Pay
Step4: Now that you have your accounts set up, sign up for bill pay to pay all your bills from your fixed expense account.
Step5: You should also create automatic transfers between your accounts to match the amounts you need for each of the 3 categories. For example, if you make $4,000 a month, transfer 2,000 to your fixed expense account, $1,200 to your lifestyle expense account, and transfer $800 to your savings account(s).
The key to making this system work is to make sure that you only spend money from the lifestyle expense account. The awesome part is that because you know your bills are already paid automatically from your fixed expense account and money has been automatically transferred to your savings account(s), you can spend the remaining money without feeling stressed!