Many accounting systems work on the basis of accounting for every single cent you ever spend. I used to read about all those blogs who encouraged people to keep their accounts to the nearest cent. You know what. I tried that for two months and while it was instructive, I didn’t find it that productive a use of my time for three reasons:
- I hated looking for money I couldn’t account for, especially when it was 50c or some such small amount.
- Such detailed accounting seriously wasted my time. I have spent two hours looking for sums as small as $2.
- My wife didn’t have the personality for such detailed accounting, either. She could never remember how much she spent exactly. Moreover, it caused the occasional fight when she lost a receipt or forgot how much she spent. Of course, I did this, too.
So, instead, I created my own way to manage my money by setting up money pools and limits. I used them to macro-manage my spending and my wife’s (she hated accounting with a passion). The system basically worked best when combined with pay yourself first … Once you got down to your last $10, that was it!
Here are the steps.
1. Figure out your total monthly income.
2. Figure out your general expenses, category by category, expense by expense.
3. Decide how much you want to save regularly as a fixed amount or percentage of your income. Then allocate the rest to other categories. Don’t forget to include ‘play money’ for your discretionary expenses.
4. Reconcile the numbers in 1, 2 and 3 to make things work balance.
5. Set limits on your spending, real limits are better than artificial ones. So, make sure that the limits you impose are pretty rigid overall. For example, you can put budgeted money in one bank account and use that for your essential expenses. Put the rest in another place. This act of creating reservoirs makes things much more difficult for you to overspend.
6. Put your savings money away somewhere without an ATM card or credit card. Lock it up. Forget about it. Oh, and pay yourself first EVERY month. Don’t be tempted not to.
7. Put some money in an EMERGENCY account, for real issues, too.
8. Then put the discretionary cash where you CAN use it. Monitor your cash, but make sure you have enough.
9. The first few months will be difficult towards the latter part of the salary period, but your behavior will adjust slowly. Soon you will find that you have extra money at the end of the month.
10. And, stick to the plan. Once it becomes a habit, you won’t need to keep detailed accounts. But do monitor your expenses from time to time to make sure that you aren’t facing rising bills or expenses on some aspect of your accounting.
Tip: Oh, and quit using your credit card for discretionary items as that really screws your balanced budgeting up! I know! I made that mistake!