By Leo Babauta
I haven’t written about finances in awhile, because these days I barely think about them.
That’s because for several years, I focused on getting out of debt — and these days, I live completely debt-free and worry little about finances. It’s a beautiful thing.
However, recently a reader asked me to write about Simple Budgeting, and so I thought I’d revisit the topic. I’ll talk about how I deal with finances these days, and then a Simple Budgeting method for those who aren’t exactly debt-free yet.
How I Deal with Finances
As I said, these days my finances barely register on my brain. Now that I’m out of debt, it’s not a major issue for me, and I’ve automated most of my finances.
Here’s what I do:
1. Income is streamed into my checking account automatically. My income is all electronic, so I never deal with checks. In a couple cases I’ve purposely set up electronic payments when previously I was sent checks.
2. Savings & investments are automatically taken from the checking. If it’s not automatic, I might forget about it. Forgetting about it is a good thing when it’s automatic though — I will check every few months and see how my savings and investments have grown.
3. I often make major payments all at once in the beginning of the year. Because I’ve been able to grow my savings account, now that I have zero debt payments, I have a good cushion so that I can pay things like rent or other major expenses all at once in the beginning of the year. This way I don’t worry about the payments each month, and I don’t spend money I might need for these payments.
4. Other bill payments are made automatically. If I don’t pay in one big lump sum, I’ll set up automatic monthly payments. I never worry about paying bills. I just make sure there is enough in my checking account at all times to cover the total amount of my bills.
5. I leave a cushion in the checking for unexpected expenses. And once the bills, savings and investments are taken care of, what’s left is basically groceries and other living expenses. I don’t spend all of what’s left, because other things will inevitably come up, and having a cushion means I don’t have to worry about these things. Building up a cushion took me time — after I eliminated debt, I just continued to spend little so that I could build up savings and a cushion in my checking account.
And that’s about it. I don’t budget anymore, because everything is automatic. I am not quite as frugal as I was when I was getting out of debt, but that’s the freedom of living debt-free — you don’t worry about that stuff as much.
If you’re a bit lost when it comes to budgeting, it’s not that hard. You just need to sit down and do it, and not put it off. Here are the steps I’d recommend:
1. First make a few lists. Lists are easy. The lists you need: list all your monthly income amounts (estimate an average if you have irregular income); list all your mandatory payments (like rent, auto, power, groceries); list debt payments. See how much (if any) you have left over — if there isn’t much, see the next step.
2. Simplify. See what “mandatory” payments you can eliminate. This might take time, but many things are optional. For example, I eliminated cable TV, magazine subscriptions, a car payment (going from two cars to one), and more. Also, see what discretionary spending you can eliminate while you’re trying to reduce debt — Starbucks coffee, eating out a lot, buying magazines or comics, etc.
3. Make savings and debt payments first, each payday. Make that mandatory, even if they’re small at first ($50 each maybe). Try to increase them as you continue to simplify.
4. Make mandatory payments next. Rent, car, utilities, etc. Make them automatic if possible, but if not go online and pay them right away each payday.
5. What’s left over is spending cash. Maybe it’s for groceries, gas, and fun money (eating out, etc.). If you have difficulty not spending your grocery and gas money so that they last for two weeks, put the amounts you think you’ll need in separate envelopes — one for gas, one for groceries, one for fun money.
6. Long-term moves. Over the long term, you want to decrease and even eliminate debt, one debt at a time. This will free up a lot of your money. You also want to start saving for an emergency fund immediately, and build it up over time. This is crucial, as without even a small emergency fund you’ll never smooth out the bumps that inevitably come up. Increase income if possible while you’re getting out of debt. And when you’re out of debt, start investing in index mutual funds (Vanguard 500, for example) to grow your money over the long term.