Jean Chatzky
For some people, budgets work. For others, they don’t. If you fall into the latter category, here’s another system that can get you the same result.
The Accounts Method
Instead of tracking your expenses out of a single account, simply set up three different bank accounts for major categories of cash outlays and one for saving.
- Mandatory expenses. Use this account to fund and pay payments that you can’t avoid like rent, child support, alimony, taxes, insurance, child care, etc.
- Discretionary expenses. Put everything else in this account. Include payments for cable TV, cell phones, wardrobe refreshers, etc.
- Debt payments. This account is for payments such as credit card balances, auto loans, student loans, and other debts you want to focus on paying off with DebtGoal.
- Saving. The money in this self-described account is hands off.
Step One: Save First
Before you start putting money into buckets take some off the top and save it. I like the idea of saving 10% to 15% a month including your 401(k) contributions. If you can’t save that much to start, start with less and inch your way up.
Step Two: Decide How Much Money Goes Into Each
How do you figure out how much to put into each account? On a legal pad, make a column for each account. Then start adding numbers. Start with your mandatory expenses: These should be easy to identify. Simply define those fixed expenses that you have to pay each month like rent, child support, insurance, etc. Then add in your debt repayments. Start with your minimum payments for all your debts such as credit cards, auto loans, student debt, and your mortgage. This is simply your minimum requirement; you can – and should – aim to pay more. Finally, add your discretionary expenses, the money left over after calculating your mandatory expenses and payments. It’s a good idea to check your past spending and compare to the amount available after your mandatory expenses and debt payments.
Step Three: Put It Into Practice
To put this system into practice, simply set up paycheck direct deposits or recurring transfers to fund each account to the appropriate level each month. To make sure it works, don’t spend on credit cards: This is obvious, but the whole point of an account dedicated to discretionary spending is to help you spend what you have. If you spend on credit cards, you break this critical link. Use text or email alerts to monitor your account balance so you know how much you have available. Have them sent daily to monitor your balances. You’ll find that, with this feedback, it’s easy to keep from spending beyond your means. And make sure to keep your spouse or others with access to the account in the loop. You’ll find that if you talk about your progress and plan your spending, it’s much easier to manage. If you don’t discuss and plan, you’re relying on luck, and that’s an accident, not a recipe for success.
