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The secret to setting up a budget you’ll actually follow
If nothing else, remember this one simple budgeting rule: Spend less money than you make.

Now that you’ve memorized that line, let’s fine-tune that advice.

Procrastinators, you can rejoice: There is such a thing as a budget that you can stick to. What’s the secret? Take every shortcut possible.

Since money advice is our full-time jobs, we’ve been through the budgeting process enough to spot the corners that can be cut and the steps that can be skipped.

The purpose of this budget is to come up with a system to govern everyday spending. I’m leaving out housing, insurance, and the all-important savings categories for now.

So let’s start corralling your cash flow…

Step 1: Take a snapshot of your spending
Every budget starts with sniffing out your spending habits and determining exactly where your money goes on a day-to-day basis. Don’t skip this step: After all, if you don’t know how much you’re spending and on what right now, you can’t decide where you want to spend and on what from now on.

For those who do most of your spending on one credit card (paid off in full each month, right?) or with a debit card, review the raw data your bank provides on your monthly statement, and come up with general categories for spending areas in which the amounts you shell out make you shudder. It’s even better if your financial institution provides a year-end spending summary, with your weak spots fully graphed in four-color bar charts.

If most of your spending is done with old-fashioned cash, go about your business as usual for one week — just write down all of your expenditures. Then project the results over four weeks. Now you have a rough idea of where your dough goes. As stated above, pinpoint the big categories where your overspending occurs.

Step 2: Plan your next shopping spree
After you get over the horror of your daily spending, the next step is to go on a virtual shopping spree.

  • Grab a piece of paper, a pencil, and a snack. 🙂
  • Make a list of what you need to buy or do over the next three to six months. These could be physical purchases (like new tires for the car, airfare for the family vacation) or financial plans (such as paying off a credit card, maxing out this year’s IRA or adding to your emergency fund).
  • Do the same for planned long-term (one to five years) purchases.

Yay! You have a “spending plan” (so much nicer than the word “budget,” don’t you think?).
Meaning every time you whip out your wallet, you have a tangible list of money goals to help drive your spending decisions and propel you financially forward. Bonus points to those who make a laminated wallet-sized version of the list for everyone in the family.

Extra credit: If you’ve got time, repeat the same exercise, only focus on the emotional uses of your money: List five uses of your money that will positively affect your life in the near-term and the long-term. Then, list five uses of your money that will add little to your quality of life in a decade or more. This touchy-feely step may seem odd, but thinking about what you really want to do with your money can greatly affect your plans for spending and saving it.

Step 3: Do some simple division
With your money goals in hand, pencil in how much each item on your “wish list” is going to run you on a monthly basis. Simply divide the total amount for those new tires by the number of months until you need them.

Step 4: Set up a no-brainer savings system
With your targeted spending plan in place, it’s time to direct your money towards your goals. If, in the past, you’ve been derailed by daily expenditures or surprise “can’t-live-without” purchases (ahem), here’s an instant fix: Hide your money from yourself.

That’s right: The best way to save your money is to keep your cash out of spending reach by diverting it to a separate savings account — one different from the checking account you use for everyday expenditures.

You’ve already figured out the monthly amounts you need to sock away, but, don’t worry — there’s no need to bother remembering to move your money from your checking to your savings account month after month. Tell your bank to do the work for you.

Set up automatic recurring cash transfers from your main checking account into your separate savings account. (Though you can set it and forget it, we do recommend checking in to make things are kosher every once in a while.)

With your savings on autopilot, all that’s left to do is stay out of your own way. Ah, but that can be much easier said than done, which means going into spending triage mode…

Step 5: Stop mindless overspending
Life is full of temptations.  The “envelope” method of budgeting will instantly structure your everyday spending. It’s simple:

  • Come up with a reasonable weekly amount you’ll allow yourself to spend in your biggest categories. (Those are typically “food” (or, depending on your lifestyle, get more specific such as “lunch,” “family dinners out”), “entertainment” (e.g. happy hours, movies, tabloids to pass the time), “transportation” (gas, parking, taxis, public transportation), “apparel/services” (dry cleaning, bangs trim, cute shoes.)

    For guidance, consider that the four biggest budget categories for typical American household are housing (34%), transportation (18%), food (13%) and entertainment (4%). Of course we encourage everyone to be better than average, so if you can spend less of your budget on these big categories.

  • Create envelopes for each of those categories.
  • Put the allotted amount of cash to cover a week’s worth of expenses into each envelope. (You don’t have to carry the entire wad with you every day, but do make sure you don’t cheat with extra visits to the ATM.)
  • Once the cash is gone, so is your weekly stipend.

As with all of our lazy budget shortcuts, feel free to add or subtract layers of complexity, depending on how much detail you can stand. But don’t tax yourself too much: Remember that in dollars-and-cents (and sanity) terms, sweating the big stuff before all else will save you the most coin. Plus, it will leave you plenty of time to procrastinate about stuff besides your finances.

So….do you think this method will work for you? Try it out and let us know……we would love to get some feedback.

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