Tl;dr: Use a few different checking accounts to physically separate money for bills and money for checking, as well as savings accounts, and AUTOMATE EVERYTHING: bill payment, spending money, and savings/retirement. After this is done your only job is to monitor the Spending account, that's it. Make sure it doesn't hit $0.
So as the title said, I used to attempt to do a zero-based budget because that seems to be everyone's recommendation, because "you can't save if you don't track every penny". I felt like a part-time accountant trying to balance my budget, and sucked at it. I was constantly pulling money from one category because I overspent in another category, and I just never got to a point where my finances were being well-managed. I also didn't feel like I was saving a lot, because I wasn't.
I ran across another type of budget, one that I had never encountered, called an automatic budget. This is where you automate as much of your finances as you can, which includes: paying bills, automatic transfers to savings/retirement, and automatic transfers into other checking accounts which are your spending categories. That's right, with this budget, instead of having one large pile of money and not being able to tell what category anything belongs to without software or a spreadsheet, you have a few checking accounts (it's up to you how many you want) and you label each checking account, one for bills, one for your spending money, and any others you need (my wife and I have a joint Groceries account and each have a debit card so we can both easily purchase groceries). You'll also have savings accounts with your emergency fund, other savings goals (recommended to have a separate savings account for each goal), and then retirement.
Here's how it works:
On the 1st of the month, even if you get paid twice a month, this is when all of your automatic transfers take place, we'll use the example that you have $2,000 for the month (doesn't matter if you get paid $2,000 once a month or $1,000 twice a month, you'll bugdet the same:
These numbers are just an example budget
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$2,000 is deposited into your Bills checking account.
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$1,000 is saved in here for your monthly bills/rent/mortgage
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$100 is automatically transferred to your Spending checking account
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$200 is automatically transferred into your Groceries account
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$200 is automatically transferred into your savings account
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$200 is automatically transferred to your retirement (either after it gets deposited or before it hits your bank account)
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$300 this amount is left and is not assigned to anything, it's best to leave some money as a buffer, you don't want your account to ever hit $0.
Ok so what is your job after you have set up all of these automatic transfers to pay bills, save, and invest for retirement? Monitor the spending account. That's it. That's your job. Make sure it doesn't hit $0. I get a text from my bank every morning with the balance in my Spending account.
What if I use a credit card? You'll do the same as above, but instead of directly spending from your Spending account, you'll use your credit card and just use the money in the Spending account to pay it off. You may also choose to put all of your bills on a credit card, so the same applies using the money from the Bills account.
Since adopting this budgeting method, I didn't have to spend any time managing my budget, and automatically saved $80k in 2 years on roughly $80k in income. That's about a 50% savings rate, and may not apply to everyone, but it's just to illustrate that I ramped up my savings rate by doing less work and having it work like a well-oiled machine. After slacking off of managing my budget (which always happened when trying to do a zero-based budget and then my finances would COMPLETELY derail) I checked back after a couple of months and everything was working perfectly without my intervention.
Book recommendation: I Will Teach You To Be Rich by Ramit Sethi
EDIT: formatting
EDIT: I'll add tips below this:
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One way to keep debit cards separate that I've done is to put a small white sticker on each card and label it (i.e. Spending, Groceries, etc)
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You should NEVER use the debit card associated with the Bills account
So I think some people are getting wrapped around the axle with having multiple checking/savings accounts and still think that you need to micromanage your money. This is a set-it-and-forget-it system where you set up your automatic transfers, and monitor relatively few account balances (there is no way to avoid having to look at your money), either by checking before you spend or receiving a daily text message (or both).
The power is in the fact that if you slack off, which I did after hardcore budgeting for about a month, it still works. It doesn't rely on you.
For people who have tried and tried to budget with limited success and ping pong between accounting for every penny and just total chaos, this method might be fore you. If you are on top of your finances and have something that works, just keep doing what you're doing.
Submitted January 09, 2018 at 02:20PM by Human_abstract1234 http://ift.tt/2mcaJbR
