For a lot of people the thought of living on a budget brings negative visions of lowering their living standards, living on beans and rice, and having no fun. But, if done right, living on a budget just means taking control of your money, and you will most likely find your living standards improving. You will be able to spend money without feeling guilty because you already planned it out according to your overall financial position and goals.
This strategy was created with much trial and error from a couple of non-disciplined spenders. That is my wife and I. She would make lots of small purchases and not realize how much that added up to, and I would make big purchases after going a long time without spending anything and immediately have buyer’s remorse. We tried many things, but the bottom line is that if the plan is not easy, it will not be followed.
We finally settled on the plan detailed below and have been using it for two years now, and the results are amazing! There is no fighting over money, we work together and communicate better, and are closer now than we have ever been in our 9-year marriage. Not to mention, our financial position has greatly improved too.
1. Create spending categories
Pick these categories based on items you buy at the same time. For example, food and household items should be in the same category because they are often bought at the same time. You will not want to divide up your grocery trip into two different transactions.
The most important categories are for individual fun money accounts. These allow for no questions asked impulse buying and allows you and/or your partner to get your fix of irresponsibility without harm to the budget or spousal resentment for that ‘dumb buy’.
2. Open multiple, linked bank accounts for each category. Label the debit cards by account category.
You should keep a main account that is linked to sub-accounts. The main account should be used to accept your paychecks and pay bills only. The rest of the money should be distributed to the sub-accounts according to the budget plan. Make sure the sub-accounts are set-up to not allow overdraft and that the debit card will just decline if there is insufficient funds.
3. Create a zero-based budget plan together.
This must be a team effort. All parties must be in agreement to the plan ahead of time or it will not work.
3.1 Plan how much money goes to bills, savings, and each spending category account.
Do a rough estimate for each category. If you try to budget your sub accounts down to the grocery list level it will become too hard and you will quit. Keep it simple.
3.2 Account for every last dollar in or out.
Do not leave more than $10 of fluff. The closer your planned incoming and outgoing cash flows equal to $0, the better. If you get used to fluff, you open yourself up to mistakes that may force you off your plan.
3.3 For variable income streams, prioritize the spending.
Instead of using fluff, prioritize where you will put money above your baseline. For example: If you know you get a certain amount of base pay, use that for your base budget. Then create a prioritized list of where additional moneys go. Maybe the first $30 goes into a fun money account and the next $20 goes to paying down a specific debt, etc. If you have no base income or extremely volatile income flows, then prioritize the whole budget. Start with Food, then shelter, etc.
4 Tweak as you go.
If you find that you ran out of money in one category and had to steal from another category, just adjust your budget plan for the next month. This is normal in the beginning and may take a few months to nail down. The point is that you have to make an emotional decision to have less of one category in order to have more of this one. It makes you confront the cost of going off the plan upfront instead of worrying about it later (and then forgetting about it).