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What System Do I Use?

March 13, 2017

by — Posted in Finances

Let’s say you’ve recognized that you need a budget. And you’ve even written one out on paper (or an excel spreadsheet). But now how do you practically live it out? There are a couple of schools of thought. The big two are forecasting and the envelope system.

Forecasting is when you figure out your total income and expenses for the whole month at the beginning of the month and plan everything out according to that.

Pros: Forecasting allows you to see exactly where your money is going all month long. It gives you a big picture view. If you have a buffer built up, this system is pretty easy to maintain and can be forgiving when you overspend in a category by allowing you to roll that over into the next month. If you’re pretty self-disciplined already, the heightened awareness forecasting provides may be enough to keep you on track to meet your goals.

Cons: The problem with forecasting is that the cash you’re budgeting at the beginning of the month may not actually be in your hand at the beginning of the month. It relies heavily on having a buffer and being at least one paycheck, if not a whole month (or even more) ahead. If you’re currently living paycheck to paycheck, this system is probably not going to work well for you…yet. You may budget $500 in groceries for the whole month, but you only have 1 week’s pay available. You aren’t going to be able to spend all $500 and still cover your other costs as effectively. A work around for this would be to budget per paycheck until you could create a buffer and get a paycheck ahead.

Systems that use this approach:
Paper and Pen
Mint.com
An excel or Google Doc
Quicken

The Envelope System can be either virtual or physical, but the concept is that you cash your paycheck and literally (or virtually) split it into envelopes of money to be used for specific line items.

Pros: You are literally only spending the money you have on hand. When it runs out, you either have to “borrow” from another envelop, or go without! This is a really good method to use when beginning, especially if you have no buffer and/or no savings. If you’re trying to get out of the paycheck to paycheck cycle and need self discipline in the area of finances, this is going to build that. It’s just like how repeatedly exercising a muscle makes you stronger!

Cons: All systems require you to engage for them to be successful, but the envelope system in particular requires even more intentional micro-management. Again, if you’re goal is to build self-discipline, this may actually be a positive! If you’re not, you may find it overly tedious. Using an old-fashioned physical envelope system where you don’t even keep receipts can actually be relatively simple to manage outside of regular trips to the bank. But if you’re having to re-enter or re-adjust as each paycheck is deposited, it can seem like one more thing on the to-do list. You might even be tempted to quit. Please don’t! Trust me, the process is definitely worth it. The goal is to get ahead enough that your finances become boring and you don’t have to pay as much attention every single day. Eventually you can just do a weekly check-in. Of course, there are always seasons when you have to watch it a little closer or reign things in.

Systems that use this approach:
Literal Envelops
YNAB.com
EveryDollar.com

No matter the approach you take, it’s important to remember that there will be a learning curve. Not only for the technical aspects of your chosen software or method, but for learning to live on a budget at all if this is your first time! There will be bumps in the road whenever you try to form a new habit, but it does get easier with time. If after a couple of months your system is just not clicking for you, try another. Some systems work better for certain types of people.

You may need to make difficult choices like curbing certain spending habits or setting rules for yourself. But keep it up! As I said before, the goal is that your finances will become boring. Then the excitement will come from knowing that you’re meeting your financial goals rather than the stress of not knowing what’s going on with your money.

Next up… What now? Best Practices.