“Create a definite plan for carrying out your desire and begin at once, whether you are ready or not, to put this plan into action” ~ Napoleon Hill
I really don’t like the word “budgeting”. There’s just something about it that conjures up a sense of restriction and frugality that I find really hard to get excited about and even harder to stick to. It’s not that I think budgets themselves are bad, on the contrary, I think they’re an integral part of financial success. It’s just the word I have an issue with. I’ve learned over the years that often the best way to deal with something that bothers you is to undergo what my friend, Joanne refers to as an “attitude adjustment”. Rather than ignore the thing, you choose instead to look at it from a new perspective; to find something positive about it and focus on that instead of the negative. It’s a process that works beautifully in the workplace, the home and all kinds of difficult circumstances and it’s the reason that I chose to replace the word ‘budget’ with the phrase ‘Money Management System’.
What’s in a Name?
Names and titles are very powerful. What appeals to me about the phrase Money Management System is that it implies being in control (Management) and being organized and efficient (System). For some people the idea of actively managing their money is intimidating but the fact that there’s a system makes it less so. Nothing about the phrase implies austerity, restriction or limitation, just effective management and empowerment.
The keys to developing an effective money management system are awareness and simplicity. You need to have a clear understanding of how much money is flowing in each month and how much is flowing out. You need to know where the incoming money is coming from and where the outgoing money is going. If your income fluctuates, for example because you are self-employed or receive bonuses then you need to know what your average monthly income is so that you can put money aside in the more prosperous months that you can dip into during the leaner months.
Tracking your spending is an excellent way to gain a really solid understanding of how your money flows in and out. You can get a fairly clear perspective after tracking for 1-2 months but if you can stick to tracking your spending for a whole year you’ll become more aware of any seasonal changes in your expenses, for example: increased heating costs in the winter or increased daycare expenses in the summer. Being aware of changes like this allows you to build additional savings funds into your system so that you’re not caught off guard by ‘unexpectedly recurring’ expenses.
Give Every Dollar a Purpose
If you’ve read any of my previous posts you’ll probably have picked up on the fact that I believe very strongly in giving your money a purpose! Having a Money Management System allows you to very clearly define how your money will work for you and it also enables you to identify how much of your money is currently allocated for Needs (Groceries, Housing, Transportation and Insurance), Savings (Retirement and Long Term Saving for Spending) and Wants (everything that’s not a need or a saving strategy). Finance blogger, JD Roth recommends that your net income should be split so that 50% is for Needs, 30% is for Wants and 20% is for Savings (10% to retirement and 10% for other savings goals). I’ve found that these percentages generally work well and, if you’re looking to find ways to cut back on expenses, focussing on the items in the “Wants” category is a great place to start!
Automate and Pay Yourself First
Once you have a clear understanding of how much money is coming in and how much is going out, you have the framework for your Money Management System. If the amount coming in is greater than what’s going out then decide on a purpose for the difference. Next figure out how each expense will be paid for. Many people find that having their pay cheque deposited into one account and then transferring the money needed to pay all their bills into a second account makes it much easier to keep their bill money and their play money separate. Some people pay for all their monthly expenses using one credit card and then pay that card off in full each month when they get paid. If you choose to do this, make sure that your credit limit doesn’t exceed the amount you’ve allocated for those bills. Banks have a wonderful habit of increasing credit limits and if you don’t track your expenses carefully it’s easy to end up with a nasty surprise when the bill arrives. Making payments ‘automatically’ using either pre-authorized debit or internet banking can be very simple ways of making sure that your bills are paid on time and they’re an excellent way to make sure that the money you’ve allocated for savings leaves your bank account on the same day you get paid. Paying yourself first is proven to increase make a huge difference to your financial success and is a simple way to dramatically increase your savings.
Review and Refine
Like any system, your Money Management System needs to be reviewed on a regular basis and tweaked as necessary. It’s unlikely to be perfect right away but refining it is part of the process. Having a system in place allows you to take control of your money and direct how it should be spent. It gives you the ability to build wealth and the freedom to plan, not only for retirement, but also for vacations, home renovations and other large expenses. It protects you from unexpected expenses and from the late fees and damaged credit that often result from late bill payments. Most importantly it puts your focus clearly on your money and what you focus on has a wonderful tendency to expand!