I am all about easy, particularly easy budgeting. Let's face it; people often fail at budgeting because budgets are usually about detail and denial. In other words, many people will tell you that it is necessary to track every penny you spend and then make a budget that ensures you never spend any more than allowed by your budget. Seriously, where is the fun in that?
There is a better way and it is the "Pay Yourself First" approach made popular in the best selling book by David Chilton called "The Wealthy Barber". Here is how it works.
Take 10% of your pay right off the top and put it in an investment account. Click here for more information on what to do with the investments.
If your company has a pension plan of some sort, make sure that is fully subscribed, i.e. put in as much as you can. Often pension plans will be set up so that the company with "match" what you put in. In essence, just putting in a dollar will double your investment - a 100% return! Very hard to beat.
Pay your debts such as your mortgage and car payments and any regular bills like property taxes. All credit cards should be paid off every month before you incur interest. If you can't pay them off every month, do so as soon as possible.
Spend whatever is left over and no more, on whatever you need and/or want to.
Really? Is that it? Yes...and here is why this works where other budgets fail so miserably.
First of all, this budget (or "unbudget" as I like to call it) forces you to invest in your future first by carving off 10% of your pay right when you get your pay check and not waiting until the end of the month when there is nothing left.
By putting this money aside first, there is no guilt or worry about not saving enough for the future. This is really about giving yourself permission to live for today, knowing that your future will be well looked after by your "10% fund".
It also works, because as your pay goes up over time, so will the contributions you make to your 10% fund. Keep in mind, this isn't a retirement fund or a "save for a house" fund. This is your I am going to be a millionaire someday fund.
The second reason this works so well is that you pay yourself first, but you also put money into a company retirement fund, 501(K) or RRSP or whatever is available so your retirement is looked after as well. This is the "security" part of the budgeting process. These retirement vehicles are all different of course, but they usually offer some tax benefit and often a company will match your contribution giving you an immediate 100% return on your investment. You can't beat that!
Think about how practical this approach is for a second:
Now is carving off 10% easy? Well the truth is that the first few months of doing this "unbudget" are very difficult indeed but stick with it and soon you will not even notice that you are automatically saving 10% every month. It will not take very much time until you have a nice little nest egg of investments to fall back on or better yet to retire early on!
Again - the key here is to set it up so the 10% withdrawal is as automatic as possible. If you try to make this as a commitment to yourself, the odds are that you will fail. Stuff happens during the month and if you haven't already put that money aside, I can almost guarantee that you'll be using it to get the car fixed or to buy a new kettle. I know these things are important, but so is your future! Have your bank carve it out of your pay check or your bank account every month and you will have a very bright financial future indeed.
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