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If you know you will never, ever budget

July 01, 2014

By Jean Chatzky, powered by

Jean Chatzky Photo

For some people, budgets work. For others, they don’t. If you fall into the latter category, fortunately there’s another way – an alternate system that can get you the same result.

The accounts method
Instead of tracking your expenses out of a single account, use the accounts method. Set up three separate accounts for major categories of cash outlays and one account for savings.

1. Mandatory expenses. Use this account to fund and make payments that you can’t avoid, such as rent, taxes, insurance, child care and alimony.
2. Discretionary expenses. Put all your miscellaneous and optional items in this account, including payments for cable TV, cell phones and wardrobe refreshers.
3. Debt payments. This account is for paying credit card balances, auto loans, student loans and other debts you want to pay off.
4. Savings. The money in this self-described account is hands off.

Step one: Save first

Before you start putting money into buckets, take some off the top to save. I like the idea of saving 10% to 15% a month, including your 401(k) contributions. If you can’t save that much to start, begin with as much as you can and inch your way up. When you get a pay raise, for instance, increase the amount you earmark for savings.

Step two: Decide how much money goes into each account

How do you figure out how much to put into each account? On a legal pad, make a column for each account. Then start adding numbers. Start with your mandatory expenses, the fixed expenses you must pay each month, such as rent, child support and insurance. Then add in your debt repayments. Start with your minimum payments for all your debts such as credit cards, auto loans, student loan debt and your mortgage. This is simply your minimum requirement. You can – and should – aim to pay more. Finally, add your discretionary expenses, the money left over after calculating your mandatory expenses and payments. It’s a good idea to check your past spending to determine how much money you can expect to have available after your mandatory expenses and debt payments.

Step three: Put it into practice

To put this system into practice, simply set up paycheck direct deposits or online banking recurring transfers to fund each account to the appropriate level each month. To make sure this plan works, be careful about overspending with your credit cards. This is obvious, but the whole point of an account dedicated to discretionary spending is to help you spend only what you have. If you don’t control your credit card spending, you break this critical link. Use online banking text or email alerts to monitor your account balance so you know how much you have available. Have them sent daily to monitor your balances. You’ll find that, with this feedback, it’s easy to keep from spending beyond your means. And make sure to keep your spouse or others with access to the account in the loop. You’ll find that if you talk about your progress and your spending, it’s much easier to manage. If you don’t discuss and plan, you’re relying on luck. And that’s no recipe for success.