My Budgeting Method

Today I'll walk you through a budgeting system that will make your life so much easier. It is based off of the "envelope system", yet uses multiple checking accounts and debit cards to automate it and make it less cumbersome.

What Didn't Work
First, let me tell you what didn't work. For me. See if you experience the same frustrations.

I used to use Quicken to reconcile my actuals with my budget. This, I found, was fun at first but became very cumbersome over time. Quicken would "remember" categories for many of the transactions, but I found that I had to go through them one-by-one to catch the 20% or so that it got wrong. Then there were the "split" transactions I had to divide up.

"This purchase was at Target, take $36.42 out of the kids clothing category, and then $14.32 out of household. Also, I bought a gift for Aunt Edna so take $19.07 out of Gifts. Then the rest, take out of groceries."

Uhg. I found myself dreading the reconcile button. What's worse, the more time that elapsed, the more painful the reconcile process would be. This wasn't so painful at first. Somehow, after getting married and having kids, life just got busier. We had more transactions...more "split" transactions, more wierdness in the budget, etc.

The Problem
Somewhere along the way, I realized that I just needed to simplify the categorization process. The typical process everyone goes something like this:

1. Buy something
2. (time elapses...)
3. You try to reconcile your account
   

Now, here's the problem. The longer the time is between "Buying Something" and "You try to reconcile your account" the more painful it is. This is because we tend to forget exactly what we did and it takes time and effort to remember. What's worse, if you make several purchases between the "Buying" and the "Reconciling", you might begin to make small mistakes because you don't really know what your remaining budget will be whenever it is you will get around to reconciling.

The Solution
The solution is to minimize the gap beween buying and categorizing your transaction into the right budget categories. Ideally, we would be able to eliminate that gap. There is no better time than the exact instant you purchase to categorize your purchase. The problem is, you don't have Quicken with you. Even if you did, what a nightmare.

The "envelopes" method has been taught for a long time. It has some merit in that it removes the pain of categorizing your transactions after-the-fact:

1. You get a paycheck.
2. You cash it.
3. You put the appropriate amount of money in each of the envelopes (one per budget category).
4. You take money out of the appropriate budget category when you spend.
5. Goto 1.
   

The only issue I have with the envelopes method is that you end up having a lot of cash. It gets wierd when you need to pay a mortgage, or a phone bill, or buy something on amazon.com.

Enter My Method
We need to automate this process. First of all, you should notice that many of your financial transactions can be automated:

• Your paycheck - should be direct deposited into your checking account
• Your fixed amount bills - like your gym membership, these should be paid with online billpay on a recurring basis.
• Your variable bills - like gas (for your home), electricity, phone. How do you automate these? I use paytrust. It will allow you to set rules, like pay-this-bill-unless-it's-over-X-then-just-email-me.
  

This leaves your walking-around-purchases. Groceries, lunch money, clothing, gas (for the car), movies, etc. But, before I explain how to handle these, you should put a little mental wall around your Primary Checking account and deem it out-of-bounds for everything except these automated bills.

Now, for the walking-around-accounts, I created a handfull of budget categories. My categories were:

• My allowance
• Wife's allowance
• My lunch money
• Dining/entertainment
• Kid's money (clothing, haircuts, toys)
• Medical (medicine, doctors appointments, etc)
• Groceries
• Household (home repair, maintenance, and improvement)

Then I called up my bank (Chase) and asked how many checking accounts I could open. You'd be suprised to know that you can open as many as you want. There is no minimum balance per account. And (here's the kicker) you get a debit card for each account.

Plus, you can log on to their website and create Repeating Account Transfers.

So, I crafted a perfect little automated system:

• Twice a month my paycheck is direct-deposited into my primary checking account
• My walking-around-accounts are filled up with the appropriate levels as my budget dictates with automated repeating transfers. I get $30/week for my lunch money,$100/month for my allowance, etc.
• We only carry around the cards for our walking-around-acounts.
• When we spend, we use the right card. If we have a "split" transaction, we just ask the cashier to put X on this card and Y on that card.
• Every couple of weeks I log onto the bank website and check to see no wierd-o transactions are being logged.

Now, this is essentially an envelopes system brought into the internet age. You can further extend it by openning up online savings accounts for your once-per-year purchases, like Christmas, Vacation, etc. Atleast earn some interest on these suckers.

Things I Have Learned So Far

• When you go out, you will want to check your account balance online. You don't have to put a lot of effort into trying to remember this. What will happen is, you'll go out, you'll get a purchase declined. You'll put something back and try again or go home in a huff and you'll see you were $2 short in the account. Next time, you'll check.
  
• When you go out to eat, the waitress will check your credit for about 20% more than the check. This is their little way of making sure they can get a tip. You need to make sure you have enough to cover this.
• When you get gas (pay at the pump), same thing. It "clears" you for an approximate max, like $40 or something.
• Do NOT carry around a debit card for your primary checking account. You don't want to touch your primary account as it is for automated bills and funds get transferred out of here for walking-around-accounts. Force yourself to use the debit cards for the walking-around-accounts.
• One thing you will begin to miss is seeing your accounts all summed up together to show you your networth. I'll go into a good way of doing this in another article.
• You can do this all with excel and your online banking. You don't need Quicken, Money, or Mvelopes.