Money

How to Actually Live By Your Budget

Photo by Sharon McCutcheon on Unsplash

Looking for a way to put walls around your spending? Trying to build up a savings buffer faster? Have you tried budgeting apps and “envelope” methods but still find yourself ignoring budgeting goals? Try this. I call it Cascade Budgeting:

1. Set up these FIVE Bank Accounts
2. Budget mandatory expenses
3. Immediately partition your paycheck
4. Make spending less imaginary
5. Pay bills & credit cards strategically
6. Adapt for what you need

Every single financial expert (who doesn’t have their name attached to an app) recommends creating and managing your own budget manually instead of using any app. — Wirecutter

Bank Accounts

If you don’t already have a checking and savings account somewhere, do that now. Not necessary that your checking and savings accounts be under the same bank account, but it makes this method easier.

Now that you have a bank account, open the following accounts:

1. Core Checking (checking account): Connect your direct deposit, or income payments here.
2. Emergency Savings (savings account)
3. Mandatory Expenses (savings account)
4. Accruals (savings account): Not necessary if you don’t use any credit cards.
5. Processing (checking account): Keep this padded with $50 as a buffer.

I know, I know. Just trust me. Each of these will make sense.

Calculate Mandatory Expenses

Find the following amounts:

• Monthly rent/mortgage
• Monthly Utilities: Gas, water, electric, internet, trash, sewer, etc.
• Monthly Car Payment
• Car Insurance as monthly amount: For example, $300 every 6 months divides out to $50 per month.
• Credit Card Membership Fees as monthly amount: Usually these are annual fees. Just divide by 12.
• Any other expenses you plan for and that you consider mandatory or previously committed, such as tuition, renters insurance, membership fees at gyms, Spotify, Netflix, news sites, etc. Calculate these as monthly amounts if they’re not that already.

Take all this and add it up to one monthly number. Then, based on how frequently you get paid, divide it out to a per paycheck amount:

• Weekly paychecks: Multiply monthly expenses by 12 and divide by 52 to get to how much of your weekly paycheck is obligated to mandatory expenses.
• Paychecks every two weeks: Multiply monthly mandatory expenses by 12 and divide by 26 to get to how much of your bi-weekly paycheck is obligated to mandatory expenses.
• Paid twice a month: Divide monthly mandatory expenses by 2 to get to how much of your semi-monthly paycheck is obligated to mandatory expenses.

If you get paid more sporadically than this, go with a percentage route instead:

1. Calculate your average monthly income.
2. Divide the monthly mandatory expenses total by this monthly income amount.

Whether you now have a per paycheck amount or a percentage, hold onto this. You’ll need it in a sec.

I Just Got a Paycheck. Now What?

As soon as income hits your Core Checking, immediately do the following. Don’t fight it. Make it a habit:

1. 20% goes to Emergency Savings.
2. If you got to a per paycheck amount for Mandatory Expenses above, move this amount into your Mandatory Expenses savings account. If you used the percentage route, multiply this against your income amount and move that into Mandatory Expenses.
3. What’s left stays in your Core Checking account for groceries, restaurants, movies, gas, etc.

Okay, But How Do I Track Spending?

If you pay with a debit card, associate this with your Processing account. See below about how to manage this account.

If you pay with credit cards — I recommend this over debit spending whenever possible to maximize point rewards, so long as you are vigilant about the next steps — every time you spend money on a credit card, move that same amount from your Core Checking account for discretionary spending or Mandatory Expenses account for … mandatory expenses … into your Accruals account.

Your goal should be to make sure the amount in your Accruals account always equals the total balance of all your credit cards.

What If I Run Out of Money In Core Checking?

Stop spending money. Sorry. You ran out. Try again next month. Watch this from SNL to lessen the crushing blow of actually living by a budget.

What If I Can’t Make Ends Meet?

Increase income or decrease spending. Start there. If that’s a no go, decreasing your savings goal from 20% to 15% or 10%, or decreasing how much gets skimmed off your paycheck for investments are last resorts. Sometimes there’s no way around it.

But This Means I’m Constantly Checking My Bank Account!

Yes… Yes it does.

Oh, also… Mobile apps are a must.

How Do I Pay Off My Credit Cards?

All payments out should come from your Processing account.

So if you’re paying off a credit card, move from Accruals into Processing, then pay from there. If you’re paying with a debit card, associate this card with your Processing account and move from either your Core Checking account for discretionary expenses or Mandatory Expenses accounts for mandatory expenses, then still pay from Processing.

Check your credit card and bill due dates, but it’s usually possible to pay them all off at once at the very end or very beginning of every month. This maximizes savings interest yields and minimizes the chance you trip the limit of only six withdrawal transactions from a savings account each month.

Do everything you can to never let credit card balances carry over from one month to the next.

Variations

What If I Share Accounts With a Partner?

If you and your significant other, partner, or spouse share accounts, adapt the above in the following ways:

1. Instead of one Core Checking account, set up one for each of you.
2. Income continues to go to your respective Core Checking accounts.
3. Calculate your individual average monthly incomes, add these together, then divide each of your individual averages by the monthly total to get a monthly income percentage for each of you. Multiply this income percentage against the monthly mandatory expenses total you found above, then move this amount into Mandatory Expenses from your individual Core Checking accounts after each paycheck comes in.
4. Same process for paying credit cards and other bills.

If you’d rather share discretionary spending more evenly, you can also go the route of keeping a single Core Checking account, but set up an additional checking account for each of you, decide together what your monthly “allowance” should be, and then move this amount into each account at the start of each month.

What About Accounts For My Kids?

If you want your kids to have their own checking accounts, add the following:

1. Determine monthly “allowance” for each kid.
2. Move this amount into the kid checking accounts at the start of every month.
3. If you want them spending money using their own card, simplest just to use a debit card and associate it with their checking account. Teach them to manage their own money to never hit zero.

What About Depositing in My Retirement Savings Accounts?

If you can, use your payroll system to move money here directly, before it ever touches your Core Checking. Out of sight, out of mind. If not, move this money first then follow all the same steps above.

What If I Have Too Much Leftover for Discretionary Spending?

If this happens to you, good job. If this becomes a regular thing, I’d recommend investing it, committing to donate to a charity on a regular basis, increasing how much you pay on outstanding debts or loans each month, or upping how much you skim for savings from 20% to 30% or 40%.

You can also open another savings account for specific savings goals, like for a new dishwasher, a vacation, or a new car.

You Can Do This

It may seem more complicated than a budgeting app at first, but trust me, it’s not. No need to tag every transaction with a category, no imaginary budget goals, no connection issues with your bank accounts, plus it lets you plan and save for future expenses a lot more simply. Just follow these same steps every paycheck, every month.

And for those of you who have tried budgeting apps with no success, you’ll notice one huge difference: This works.

Why? Well, because of:

1. Loss aversion
2. Stated vs. revealed preferences
3. Greater sense of ownership over your own budgeting process