You hear the importance of getting on a budget all the time.  Credit counselors and finance people always talk about budgeting your money.  Politicians say they will balance the budget.

But what does it really mean to live on a budget?  How exactly does one make the budget actually happen?

We write budgets all the time.  Mostly in our heads, and sometimes on paper and napkins.  We have a good idea of what a budget should look like.  But at the end of the month we look back and we see that we actually spent more than we budgeted.

What is the point of writing a budget if it doesn’t get followed?  How do we make a budget actually work?

To make budgets work you need to understand that to budget means to divide.  To budget money is to divide money.  Not just on paper, but in a physical way.

How do you divide money?

The simplest way is to divide money into envelopes each payday.  This is probably the oldest and most effective way to budget money.  The key is to figure out how much you must put in each envelope to pay rent, groceries, fuel, utilities, etc. Put every last dollar in an envelope.  Label each envelope with it’s purpose.

And by the way, one of those envelopes should be labeled “Fun” or “Future Big Screen TV” or “Vacation” or  “Second Honeymoon.” Nobody is going to stick to a budget (or a diet) that does not reward good behavior.  It is important to have short term and long term rewards.  A budget should not be viewed as a punishment or a short-term penalty for bad behavior. The whole purpose of living on a budget is to live a better life, not a bitter one.

BUDGETING FOR UNPLANNED EXPENSES

Some envelopes should be used for expenses such as future car repairs or emergency expenses.  We don’t know when the car will break, but we do know that at some point repairs will be required.  Doesn’t it make sense to save for those future expenses now?  Use an envelope that you fund each payday for these future expenses.

USING MULTIPLE BANK ACCOUNTS AS ENVELOPES

The key to budgeting is to divide money.  To put a wall between your money is to budget.  One way to get the same result as using cash stuffed in multiple envelopes is to open up several bank accounts with specific spending purposes. In a way, a bank account is like an envelope. The key practice is to fund each account on payday.  Most payroll departments can directly deposit your paycheck into 3 or 4 bank accounts.  You just have to tell payroll how much you want deposited into each account.

What are your top 10 spending priorities each month?  This is an easy list to write.  I’m sure it includes rent, utilities, car payments, telephones, insurance, etc.  How much do these critical expenses add up to each month?  How much do you have to save each paycheck to automatically pay these bills each month?  If you can figure out how much of each paycheck you must set aside to pay these top 10 critical bills, consider having that amount deposited into a separate bank account so that the money is there when bills are due.  Put a wall between your money.  Divide your money on payday.  Then, have your bank automatically pay the top 10 critical bills automatically from this new account.

COMMUNICATION IS THE KEY

Want to fight with your spouse tonight?  Just say “Honey, we need to work on our budget tonight.”  Yeah, fight’s on.  That is why you avoid talking about money.  Avoiding conflict is why we avoid money talks.  So we push it off for another month, then another, knowing all the while that at some point the bubble will burst and things will have to change.

Budgeting is not about fighting.  You budget to avoid fights in the future.  This takes time. It takes patience.  Avoiding money headaches means talking about how every dime of the next paycheck will be spent before it arrives.  You need a Payday Action Plan.  Envelopes help create concrete spending plans.  Multiple bank accounts work too.  Keep it simple. Use reward systems.

Divide that money.  Don’t let money sit in a single bank account.  It will be gone before you know it.