Simplify your money life
and save yourself some headspace
Creating a budget is simple. Sticking to it is a whole other matter. It’s similar to dieting. We can choose to go on a diet, counting calories, logging all of our food, but then we find ourselves getting tired and giving up. This causes us to become discouraged and feel like a failure.
It turns out that a budget only works if we follow it. In the past, I would create a budget and then track everything. I would have categories for categories. I would use all of the financial tools, providing me with graphs and reports. But over time, life would get in the way and I would give up. Sounds like a diet?
It turns out that our financial life is like our dietary life. The more complicated we make it, the more likely we will give up. We still need to control our money or it will control us. Perhaps we can use a few productivity hacks to make our financial life easier. I discovered that I don’t have to focus on everything, all the time.
In this post, I’m going to share with you a method that I follow to manage my finances and save myself some headspace. This combines a few “auto-pilot” techniques as well as structuring bank accounts to make my life easier.
This path will help you alleviate some of the mental burden of keeping your finances straight.
First, let’s make a plan
Is a budget important? Yes! A budget is simply a plan. It’s you telling your money where it is going to go, ahead of time, instead of wondering where it went. It’s easy to fall into a trap thinking that a budget is all about denying yourself, but that is not true. Everyone has limits on what they can spend, dictated by their income. A budget is about intelligently deciding where you will spend your money. To create a budget, we first need to know where we are, financially.
Know what you don’t know
Time to figure out where your money is going.
Identify your fixed expenses: These are thing like rent or mortgage, insurance, car payments, etc. They don’t really change from month to month so you always know what they are. You can even average things like electricity, water, etc.
Identify your variable expenses: These are things like grocery, eating out, etc. Generally anything you go out and buy, or order online.
Get a 3 month average: Your expenses might vary from one month to the next, so taking an average over 3 months will help smooth out the changes. If you want to expand that beyond 3 months, that is great, but use at least 3 months.
You can choose to spend these months capturing all of your expenses, or sit down and look at all of your bank and credit card statements for the past months. When you do this, you should be able to create a basic income statement for yourself which shows how much money you brought in, and how much went out. This may be your first wake-up call if your outgo is more than your income!
Today’s the Day!
Now is the time to make some adjustments. Perhaps there are some subscriptions that you really don’t need, or you are spending more than you thought in a particular category. Don’t berate yourself for your mistakes. Use this as an opportunity to re-orient yourself for your future. Then congratulate yourself for taking the first step!
Switch on auto-pilot and sip that coffee
After you’ve established the baseline and set off on a journey in the right direction, budgeting becomes a monthly, weekly, and daily activity and this is where most people get tired and give up.
To reduce our fatigue, we don’t have to look at everything all the time. Remember, our fixed expenses don’t really change all that much. We can give ourselves permission to set them aside and perhaps look at them every few months just to make sure something has not altered the general trend. If it has, then we adjust our total fixed expenses.
Let’s focus on only our daily spending on things like groceries, dining out, shopping and entertainment. These are the areas that we have immediate day to day influence and our daily decisions have the most impact. There is one more step to make this even simpler.
Make the banks work for you
Open multiple bank accounts with the same financial institution. One for your fixed expenses, and one for your variable expenses. Once you’ve figured out your average monthly fixed expenses, make sure you are funding that account every month to cover those expenses. If you have direct-deposit, it may support multiple destinations, allowing you to fund both accounts automatically. If not, then you should be able to set up an automatic transfer to fund one account from the other, after your deposit arrives.
Automate, automate, automate
Then, automate as much as you can. Many vendors offer auto-pay where they will debit your account, or if your account offers bill-pay (it should), then you can schedule recurring payments. At first, you can monitor this account more closely but in time, you can give yourself the freedom to look it over every few months or so
Now, you are narrowing your regular focus on your variable expenses. These are cash withdrawals, payments to credit cards (current monthly spending), gifts, etc. These all come out of your variable expenses account.
You may wonder, why two accounts? This sets aside a large portion of your monthly financial expenses and allows you to focus on them less often. When buying groceries, you won’t wonder “will this cause my rent/mortgage check to bounce?”. That removes some of the mental burden and enables you to recapture some of your headspace!
My budget is pretty simple, for me it is a spreadsheet. I know what my fixed expenses are. For example, my water bill is roughly $75-85 per month. When the bill notice comes in, I glance at it and if it is in that range, I don’t give it a second thought. I know that my water utility will automatically debit my fixed expenses account. My power bill varies throughout the year, but I know the general range and I’ve worked out an average so again it is just a momentary glance and then on with life.
Once every quarter or so, I’ll look at my fixed expenses to determine if anything has changed and then make an adjustment. Following this method, I’ve taken a large portion of my expenses and moved them from a daily to a quarterly focus.
My ongoing mental focus is spent only on daily spending which comes from the money I have in my variable expenses account.
Slay the money demons
Before we go, let’s cover a few important points. First, your bank accounts should be free and you should be able to open multiple accounts with the same bank. You should have free bill-pay and the ability to transfer money between your accounts. If your bank does not allow this, then move banks! Check out Schwab or Fidelity as non-traditional bank options. They offer free accounts, all the features, and even cover ATM withdrawal fees! In a later post, I’ll cover more of the benefits.
Second, I did not address credit-card debt but, if you are carrying a balance on your credit card, attack that with a vengeance. Credit card debt is the worst. I know, because I’ve done it in the past. Remember, having credit-card debt does not make you a bad person. Credit-card debt is one of the most harmful financial mistakes and we need to escape it as soon as possible. Figure out how much you can afford to pay on your credit cards and include that amount on your fixed expenses. You can set up a recurring bill-payment to your credit card issuer(s) to chip away at that burden.
Let’s add it all up
As we are managing our money, we need to be aware and take control over how it is spent. There are so many other topics we will cover, but for now, let’s make sure that we have a budget. Next, let’s automate what we can, to give ourselves the opportunity to focus on faith, family and community.
I hope this helps you take the next steps to your financial freedom!