Personal Finance Friday - The Automatic Budget

In the US only about 1/3 of people follow a budget and only about 40% can afford a $400 emergency payment if it came up without going further into debt. Both of these figures are pretty sad to say the least. But there is something to be said for not fighting human nature. I was thinking about how budgeting can be made easier for people. Is there some method or tool for those who desire to take some control of their financial life but also don't want to be accountants each month going through all their transactions with a fine tooth comb? So here is my idea, let me know your thoughts...

I'm calling it “the automatic budget.” First, you split your life into two different checking accounts. One checking account is all the “needs” in your life: rent/mortgage, car insurance, utilities, gas, groceries, a minimum amount of savings etc... You set it up so that all of your payments come out of this account for those items, and once a year you review it to make sure you don't need to change any of the amounts. The second account is your “wants,“ things like funds for going out to eat, vacations, your hobbies, clothes, furniture, etc. All the stuff that you have some choice in how and how much you spend on things. That second account is the one you watch, if you are spending too much the balance is going down, if you are keeping control of yourself the balance should be staying the same or going up. Easy right? For almost everyone all their money is one big pot, and it feels like “Wow! Look how much money I have right now!” each time you get paid, and you proceed to have lots fun. Then all the needs come due and you realize, “Oh man! I spent too much!“

I think one of the negatives to this plan is you would need to sit and actually think about your expenses at least once a year. For many people, that might be just too much to deal with, and honestly if so, they are probably doomed to a life full of money stress. I feel bad for them. But if you can work up the energy to give it a good look at once a year, like spring cleaning, this process should work reasonably well.

Another item would be using a credit card with this process. If you had a credit line much higher than your monthly budget for stuff you might get in trouble again. It might be best just to go with a debit card, unless you want to do a little more monitoring of where you are during the month.

Even if you didn't implement this idea, at least thinking about a budget is a good practice. The only reason I write these posts is just to remind people I'm around and willing to help. I've talked with some of you in the past about different things, and this is one I'd love to help any of you with. Do you need someone to bug you and get you to do this? Let me know I can do that for you :) In the end doing these type of things will actually make you feel better about yourself and your life. Having the sense of some control over things, feels really good (whether its true or not ;).