Budgeting 101: Your Budget doesn’t Need to be Fancy
Most of us know the importance of a budget. We know we should watch our spending, track where our dollars go, and we know that when we do it properly it is easier to save money. But too often budgets get ignored, and we forget about trying to keep track anyway. So how do we make a budget that we know we will actually keep? It’s a whole lot easier than you think; your accountant in Billings, Montana explains how it can be done.
Two Different Budget Systems
There are two primary forms of budgeting, each one has its merits, and each one will help different people.
The Cash Envelope Budgeting System – This is Dave Ramsey’s favorite way to budget. The reason is that it’s highly controlled, and it works well. It’s hard to cheat this budget, so for those who want more structure, this is the way to go.
First, you must understand all of your bills. There are some that fluctuate, like utilities, but for the most part they are all pretty set bills. These should be set up to come out of your account automatically. For those who want to use the envelope method, you withdraw the cash needed to pay each bill, and you put it in an envelope. So you will have a dozen envelopes each marked with different items such as “cell phone bill” or “gas bill.”
Next you set up your savings and investments to come out of your account automatically. This should be seen as another bill, and not as something you do if you have the money left over. If you need more structure, you can make a “savings and investment” envelope as well. But there is little need to put money in an envelope if it is immediately going to go into your savings or investment accounts.
Now for the fun stuff. Let’s suppose you like to buy new clothes. You have an envelope that says “new clothes” on it, and every month you put a portion of your budget into that envelope. If you are planning a vacation, you make a vacation envelope. If you like to eat out, you have an eating out envelope. And so on and so forth.
The idea behind the envelope system is that when the envelope is empty, then you can’t spend any more on yourself. So if you give yourself $100 to eat out each month, if you deplete your eating out envelope, you can’t rob other envelopes.
There is another method for those who don’t need quite so much structure.
The Automatic Budgeting System – Rather than take the time to build the envelope system, and rather than keep that much cash on hand, many people choose an automated system. This one is very simple.
You have a good idea of how much you will make every month. Schedule your bills, savings, and investments around your paydays. This means that when you are paid a few days later a portion of that money goes to paying for your mortgage, some to your utilities, some to your savings and investments, and others to wherever else you might owe money. This is all built to go on behind your back. You don’t have to think about it at all.
The way this system works is that shortly after everything has come out, you will have the leftovers in your checking account. Obviously you will want to keep a few hundred in there to make sure you have a buffer, but for the most part that is all spending money. You can spend it on new clothes, travel, eating out, or whatever else you want. All of your needs have been met, so this is what you use to play with.
The automatic budgeting system is much easier than playing with envelopes, it allows for more freedom, and it still takes care of all your living expenses.
Your Accountant in Billings, Montana Can Help
When it comes time to prepare your taxes, an accountant can often get you a bigger refund than if you try to go it alone. This means that your savings and investments have a bigger buffer early in the year, and you can dedicate more to other areas of your life.
Practical Taxes can help you prepare your taxes, consult with you on all of your business needs, set up payroll services for your business and much more. We are a full service accounting firm in Billings, Montana; if you have a question or want to set up an appointment to get started, just give us a call at 406-894-2050.