Think about something really important to you – the college education within your reach. A passion you live to pursue. Your marriage. Your kids.
You’re actively engaged with whatever came to mind, right? You wouldn’t put raising your kids on autopilot. Instead, you’re purposeful and thoughtful about the choices you make. You don’t go to college and enroll in a random set of courses; you choose classes that keep you engaged, focused, and moving toward a bigger goal.
Your budget should be the same way. We want you to know exactly what your money is doing for you, and we want it to be doing the most important things – things that are moving you toward the life of your dreams (yes, life of your dreams always sounds a little cheesy to us, too … but it really is what your budget is all about).
To do this, you need to be actively engaged.
Let’s be clear, though. We’re not talking micro-management. We’re not talking tedious.
Taking control of your money is important. Sometimes we take things that are important to us and make them really complicated. We lose sight of why they are important.
There’s no need to make this complicated. Instead, you need to simplify.
Fewer Moving Parts Is Better.
The essence of keeping it simple in your financial life comes down to this:
Fewer moving parts is better. Less actually is more.
There’s a reason why photocopy machines break all the time. They have seven million moving parts. Something is bound to go wrong.
Not familiar with the inner workings of copy machines? How about this: there’s a reason why you struggle to turn on the TV. You have fourteen different remotes.
Think about any time in your life where you took on too many projects, said yes to everyone, or signed up for one too many responsibilities. Each of them individually might have been simple, but together? You can quickly cross the line into complicated, messy, and burdensome. Suddenly you can’t manage any of it.
You aren’t alone. We all take things that are important to us and overly complicate them. We forget why it was important to us in the first place. We don’t do this because we like complication (though some of us simply love organizing things, but that’s a different story); we do it because we want it to be just right. We’re trying our best.
So we open lots of savings accounts to keep track of our money. We use multiple credit cards to maximize the points and cash back rewards. We convince ourselves that reports and charts of our financial data need to look like the ones we read about in a trendy financial self-help book.
When we do this, we create unecessary decisions. The more decisions you have to make every day, the lower the quality of those decisions.
There’s a better way. Reduce your moving parts. Make and keep a simple budget, aligned with your priorities. Then go live your life.
Close One Account. Then Another.
You’ve got a lot of food in your house, and different food serves different purposes.
The eggs are for breakfast, and maybe for baking too. The milk gets used several times a day. The vegetables are for salads with dinner, and maybe for making soup or snacking. There is a secret stash of chocolate for after the kids go to bed. It’s okay. Really.
You store your food in a pantry or cabinets, and in a refrigerator. Imagine having different refrigerators for each job you wanted your food to do. You need to transfer some milk from one refrigerator to another just because you want it for dinner instead of breakfast. Eggs to a different refrigerator just for baking supplies, instead of sitting in your breakfast-food-refrigerator. Or what about one refrigerator for you and a different one for your partner?
You would drive yourself insane.
Think that sounds way over the top? You might be doing something very similar with your money.
How many accounts do you have? Checking accounts, savings accounts, money markets…how many accounts?
If you’re like most people, the number you answered is, well, too many. Because each account increases the number of moving parts involved.
Do you have individual checking accounts for each partner in your relationship, plus a joint account on top? Do you have separate savings accounts for vacations, holiday shopping, and an account for your emergency fund? And one more for generic savings you haven’t figured out yet?
Every time you move money from one of these accounts to another (and then back again, and then back again), you make your life more complicated. All for no added value.
You don’t just need a budget, you’re desperate for one. You’re craving a budget. Those accounts? They’re just different jobs for your money. If you have done this, your heart was in the right place! But it can be much simpler.
With a budget, you focus on your money’s jobs instead of being distracted by its location. Some dollars are for vacation, some are for holiday shopping. Your budget keeps track of that for you. Those dollars can sit in your checking account or in a bag full of nickels under your mattress. It doesn’t matter. You won’t spend them on the wrong thing because your budget guides your spending.
So close an account and make fewer decisions. Make fewer transfers. All you’ve done is change the location of some of your money. Your budget will just keep on keeping on, telling your dollars what job to do. No matter where they they live.
Keep Your Savings Simple, Too.
Simpler sounds better, right? But does thinking about closing one or more of your savings accounts make you anxious? As if you’d be irresponsible? I mean, savings goes in savings accounts, right?
Banks have savings accounts. They want you to use them. So it makes sense that you’d think money you’re saving should go there. Maybe you use a savings account to keep your for-later-dollars from getting mixed up with your dollars for now. It makes sense. You want to put some money at arm’s length.
Or maybe you want to keep your holiday shopping money separate from your vacation money. Both of which you wanted to keep separate from the money for the kids’ summer camps. All of which you didn’t want mixed up with the money for your next car.
It’s a transfer circus. Dizzy yet?
With a budget, it doesn’t matter where your money is.
With a budget, when all your dollars have been given a job, you don’t need to worry about location. When you assign dollars for next summer’s vacation in your budget, that is far more powerful than putting those in a separate account (or hiding them in your sock drawer).
You’ve given them a job. The budget will hold you to that and make sure they don’t do anything different unless you actually, thoughtfully make that different decision.
So what to do with your money? While location shouldn’t be confused with job, there are some simple arrangements that can help manage your money and your budget.
- Keep your savings for non-monthly expenses in your checking (or other main) account. This includes things like non-monthly bills, savings for unpredictable expenses like car repairs, or your holiday shopping for next winter. You’ll reduce the number of moving parts. This type of savings also smooths out your cash flow, and your primary account is where cash flow is most important.
- Just can’t keep it all in one? If you want to keep medium-term savings, like your next car down-payment or tuition money, in a separate savings account, keep it all in one. You don’t need different savings accounts for different priorities, since the budget will keep track of what those dollars need to do.
- Go ahead and move long-term savings like college or retirement money to an account specific to that purpose. That money really has no bearing on your cash flow and, since you won’t need it for a long time, you can probably earn a better return in a different account.
When you simplify in this way, you’ll have more money sitting in your checking account, and a funny thing will happen. Your balance will grow. It’s okay. Those dollars have jobs, and they’ll just sit and wait to do them.
Time for the next step to make your financial life even simpler.
Put Your Bills On Autopilot.
A simpler financial life means you can actively engage with what is important. Important decisions about your financial life don’t belong on autopilot. It’s why budgeting by percentage almost never works. Those are someone else’s percentages and might not fit your life.
But paying your bills? Now that’s a process you want to set-and-forget.
So why haven’t you?
Take advantage of your bank’s online automated bill-pay and just have your bills paid and sent in the background. Or, if you don’t have that system, simply pay your bills the day they arrive, without a second thought. Think for a moment about how much simpler your life would be.
So why don’t you? You might be afraid that you won’t have the money.
Have you ever held onto a bill, not paying it, because you were waiting for the money you needed? Everyone has. Imagine, though, that instead of a pile of bills waiting for money to arrive, you had a pile of money…waiting for bills to arrive.
Your budget will do this for you. By focusing on prioritizing and improving your cash flow, you’ll change the balance of your financial life. You’ll be out of the paycheck-to-paycheck cycle completely. You will be financially stable and secure. You will be less stressed.
It will also make your life a whole lot simpler.
No more timing. No more dancing around due dates. No more forgetting to actually make the payment because you waited so long.
Pick a Card. Just One Card.
Here’s another unnecessary complication: juggling credit cards.
Do you have one credit card just for gas and groceries, because that one offers two percent back instead of one?
And then a separate card for travelling because you earn miles on that one?
And a third one for large purchases because you get one percent for your retirement fund, but only on purchases up to $2,000 with a fluctuating monthly limit depending on your annual spending?
Have you ever stood in line and texted your partner because you didn’t know which of your five credit cards to use on your $57 purchase?
You’ve got too many cards. Your life doesn’t need to be this complicated.
Every time you purchase something, you spend time deciding which card you’ll use. It doesn’t end there. You’ve got all those payments to make, each one on a different schedule. When you return something to the store, you can’t figure out what to do with that positive balance on your card; you wish that that money were simply back in your checking account.
Complicated. Energy draining. Not simple.
The solution isn’t to go to an all-cash system. No need to resort to envelopes. Sure, all your credit card purchases should be backed up by money in the bank, but spending literal cash for everything isn’t workable in our world. You don’t want to carry all that cash. It’s not simple. You don’t want to pay for large purchases with cash, and there’s something to be said for the protection of purchases made with a credit card. So use a card if you’d like.
But pick one.
If you spend $10,000 a year on groceries and get one percent back by using a certain card, you’ll get an extra $100. That’s not a trivial amount of money. But it also may not be worth the headache, the complexity, and the hassle of juggling multiple cards, especially if you are just learning to manage your money and decision-making. That complexity may cost you more than $100 in decisions you shouldn’t have made.
When you use multiple payment methods in the real world, you’ve got to replicate them somewhere when you manage your money. You’ve got to manage more transfers, more due dates.
How much would you pay to never have to do the mental gymnastics of which-card-am-I-supposed-to-use-now-and-when-do-I-pay-it-off?
Take some time and decide which card best meets your needs. Be satisfied with it. And then tuck away the other ones, knowing you just saved yourself about fifty decisions a month.
Learn from Data. Don’t Live for it.
Aligned with your priorities, your money can move you closer to your dreams and aspirations.
Based on the way some people manage their money, you might think the most important thing about money is creating reports, charts, and graphs.
All that data? Backward looking. It’s a great visual description of what has already happened. Sometimes even a glorious record of your overspending. All the things you can no longer influence and change. And all your other data, from things like investment accounts? It might be great, but don’t get it mixed up with your budget.
While obsessing over data will not solve all your problems, there are two important insights you can gain from your budget data:
You really want to believe you can spend $500 a month on groceries. You might budget that amount every month, but then find that you need to make adjustments. Every month. You’re fooling yourself with wishful thinking.
Your spending record won’t fool you though. Look at your average grocery spending for the last twelve months. If it’s $540, that’s honest. That’s your starting point for your grocery budget. Does it mean you can’t still work on lowering it? No, but it means you have a track record of spending $540. And that’s what your budget should reflect. Simple.
Putting money aside now for an expense you’ll have later is just good business. But how much to put aside in the summer for winter heating bills that are six months away? This is where averages are your best friend again. Look back at last year. What did you spend on heating? Break that number up into a monthly figure and budget that much over the course of the year. Then forget about it. Simple.
The rest of your data? It’s nice. It’s good to know your net worth is moving in the right direction (and it will!). It’s good to have income and expense information to give your tax accountant if you’re running a business. It’s good to see a particular area of spending jump so you can address the cause.
But your data isn’t your money. It isn’t your goals. It’s a record. It’s not always going to look like you expect or want it to. So learn what you can to inform future decisions. The ones you can still influence. The ones that really matter. Then move on.
Keep Moving Forward.
What does all of this have to do with budgeting?
If a budget is nothing more or less than a representation of your priorities, shouldn’t that work no matter how many accounts or moving pieces you have?
Technically? Sure. In fact, since the location of your money is not important, you could store each dollar in its own location. But why would you do that? You would spend countless hours tracking them all down, moving them around, and deciding which ones to use from which locations, every time you spent money.
Of course you wouldn’t do that.
Even with just a handful of accounts, though, the same things happen. Time spent making transfers is time you don’t spend talking with your partner about your goals.
Suddenly, you’re expending all sorts of energy deciding which card to use. You’ve forgotten all about deciding whether this purchase helps you meet your long-range goals or not.
Add it all up and you’re stuck in the mechanics. You’re losing out on opportunities to really move the needle.
You’re not actively engaged at that point. You’re a hamster on a wheel. That’s not the same. (Unless you actually are a hamster.)
The bottom line? It’s far too easy to spend time and effort on activities that don’t add value to your financial life. Shuffling papers and due dates, changing the location of your money (over and over again), juggling payment methods, and obsessing over past spending – it all has the same effect.
It distracts you from making the decisions that keep your money aligned with your priorities. It distracts you from decision-making that moves you toward achieving your financial goals.
Keep it simple and you will keep moving forward.