Excel spreadsheets work great for many people, but you can also use Quicken to track your accounts and expenses with less effort. The least expensive place to get Quicken is probably at Costco. You and your spouse need to agree on how much you will spend on each category after all your recurring bills are paid, including savings and investments. If there’s nothing left over, then you need to look for way to cut expenses you don’t really need. Budgeting can be progressive; people tend to rebel over drastic changes and adapt to minor changes easily. All budgets should be based on a percentage of your net income and be flexible enough to account for unexpected expenses. I usually budget 5-10% as a buffer to prevent having to make major changes.
There are three common ways to stick to your budget.
- The Self Disciplined Method
If you and your spouse are very disciplined and check your accounts often, then decide how much you want to spend in each category and don’t go over. There are also some helpful apps on the iPhone that can help you track your spending. I recommend breaking down expenses into categories like clothes, shopping, groceries and eating out into daily amounts. If you mess up, you can spend a couple weekends at home, or don’t go anywhere during the week outside of work. This makes you save up your daily amount until you have enough instead of making impulse purchases.
- The Envelope Method
Many financial counselors suggest putting money in envelopes on a weekly basis that are labeled by category. It would be a good idea to not leave them out in the open, and keep them locked up in a safe when they aren’t on you. Set up all your regular bills in bill pay to improve your credit and simplify your finances. Try to automate as much as you can, but do it through your bank just in case you need to make a change at the last minute. I don’t recommend allowing outside companies to take money out of your account or paying fees for making payments.
- The Automatic Transfer Method
First, you figure out your expense categories, then you get a checking account or prepaid debit card for each category. Setup automatic transfers to each debit card on a daily or weekly basis for a portion of your budget. Write gas, groceries, eating out, etc. on each card with a black permanent marker or use a sticker. Once you’re out of money your card will stop working. Just make sure your bank won’t pay it anyway and charge you an NSF fee.
Another option for those who are very responsible is using your credit cards to do the same thing to get cash back or free flights. However, you must pay off your balances daily or weekly using bill pay using the automatic transfer method. This will avoid finance charges after 21 days and keep your spending in check. If you want to use this method and protect your credit, make sure your balance is close to zero on the last day of the statement period. American Express and Discover are great with cash back. Southwest is probably the lowest cost airfare if you’re looking for free flights. Do some research if you want to use your miles internationally to see if they transfer and at the same rate. Be careful of using credit cards to manage your expenses. Typically, people spend more than they would if they were paying cash. This is why most financial counselors prefer the envelope method. Plus you run the risk of going into debt when unexpected things happen to your income or impulse purchases for emotion reasons.
Can I use my credit card or line of credit as an emergency fund?
Never use your credit cards or line of credit as a replacement for an emergency fund. Instead you should save money for things like your car wearing out, a new air conditioner for your rental, etc. This is called a sinking fund. Money saved to cover these things can be invested as long as you can replace your emergency funds within about a week.
Managing your personal finances
You should avoid paying ATM fees whenever possible. Bill pay through your bank is usually free. It would also be smart to link your checking and savings for overdraft protection just in case you overspend or forget to make a transfer. NSF fees can be very expensive. I recommend keeping 5K in your savings and $1,400 in your checking at all times. Credit unions are almost always better than banks about not charging fees and offering lower interest rates on loans and lines of credit. I prefer Kern Schools FCU for banking, auto loans and bill pay. Kern Federal is the best for low interest rates on lines of credit. Guild Mortgage is the best for getting people approved for home loans. I don’t recommend going to Bank of America, Wells Fargo or Chase unless you want to pay higher interest rates and fees.
What can I do if we overspend or want to save money?
If you normally spend money when you’re driving around, then stay home for the weekend and cook at home. Beans, rice and fresh vegetables are a cheap and healthy way to eat if you’re looking to save money. Streaming on Netflix is only $8 per month; Red Box is also inexpensive for movies as long as you return them. If it’s not too hot or cold in your home, then turn off your heater / air conditioner. Make your lunch the night before work if you normally spend a lot on eating out. It also doesn’t hurt to split a large lunch with your spouse or get the Venti at Starbucks and pour half of it into an empty cup. However, you don’t want to go overboard and upset your spouse or kids, so try staying home two weekends out of the month and having fun the other two weekends. If your family spends a lot on clothes, then introduce them to Forever 21, TJ Maxx, Marshals or the outlets in Tulare. If you spend a lot on groceries, then try Smart and Final, WinCo or Costco (just for the things you use a lot). Costco can save you a lot on gas if you have their American Express with Cash Back. It always helps to make a list of what you need and stick to it to avoid emotional or entertainment shopping. It’s usually better for the most disciplined person to buy the groceries. Never go to the grocery store hungry.
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