How to master the budgeting process without an app or fancy spreadsheet
So, you’re allergic to spreadsheets, calculators and trackers.
It’s OK. Plenty of people find these tools intimidating and don’t budget at all.
But, it doesn’t need to be that way. You can still budget effectively following the 50/30/20 Rule.
The rule has been around in various forms for years, but U.S. Sen. Elizabeth Warren popularized it in her book, “All Your Worth: The Ultimate Lifetime Money Plan.”
The rule says to divide up your after-tax income into three categories; spending, saving and wants, and then allocate like this:
50 per cent towards needs
30 per cent towards wants
20 per cent towards savings
And, of course, spending within your means is key to success.
To implement this system with ease, and to stick to it, I recommend three specific steps.
Step 1: Review and trim what’s not serving you
This is the part where you look at every regular and one-off cost and find opportunities to save. For example, you may be better off bundling your television and internet bills with your cellphone provider or bundling your home and auto insurance. You might have multiple fitness services when you really only need one. If you’re subscribed to five streaming services, trim back to two. If you’re paying high banking or investment fees, consider switching to lower-fee alternatives.
For the bigger costs like car payments and rent, determine if it’s the right thing for you to keep your car or pay higher rent if a less expensive option is available.
And, for all debts, working through a fairly methodical process to consolidate any high interest balances (anything over 10 per cent) into a lower rate loan or line of credit will help to reduce interest costs and speed up repayments.
Once you’ve done this initial work of trimming, you can shift into annual review mode.
Step 2: Automate everything you can
The idea is to create a “system” that helps you stay on top of your new budget. So, sign up for pre-authorized debits from your account for your bills so that they get paid in full and on time. If you prefer to pay for things using your credit card, that’s fine, so long as you’re not carrying a balance. Then, set up an automatic pay-in-full payment for your credit card from your bank account.
For the third category of saving, automate contributions into your rainy day fund, retirement accounts and RESPs for your kids. That way you won’t ever miss these contributions. Once this is in place, you can better focus on investment growth.
Once your system is set up, it works while you sleep. Check in on it monthly or quarterly.
Step 3: Measure your progress
How will you know if your new simpler budgeting system is working? Net worth progress. If this number is going up, you’re doing the right things with your budget. If it’s decreasing, your budget is broken or your financial behaviours are broken. You can hone in on those two factors and try to make some changes.
It’s important to note that current financial volatility is impacting investment values (which are a part of your net worth). So, it’s helpful to look longer term at your net worth progress, and investment growth.
Once you start budgeting, even in a more simplified way, you should see the benefits of having more money within about 90 days.
This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.
