Budgeting 101: Simple Set-up to Streamline Your Budgeting

Part 1: Setting up a system to make budgeting a breeze

I like to have fun with the budget maximalists.

If you are unaware, there is a huge swath of the personal finance world and twitter that lives and breathes for budgets. (Unfortunately, they are typically being lead by gooroos selling elaborate looking spreadsheets for $40 a pop…more on why that is ridiculous later in the post.)

Is budgeting important? Yes

I’ll say that again so I don’t get accused of budget shaming or encouraging irresponsible behavior. For most people a budget is important.

“For most everyone, having a budget framework in place is important”

-F’er

Should you be spending 5 hours a month updating your elaborate budget? No.

Should you be tracking your $69,420.69 net worth down to the penny to post about your progress online? …You know the answer to that….

Don’t be a Virgin Budgetoooor.

The more income you make, the easier budgeting becomes. If you can earn more than you can fathom spending, you haave the easiest budget ever…Is it easier to save $40k a year when you make $300 or $50k? Budgeting is great, but budgeting as a replacement for making more money is wrong.

So why is budgeting important and is there an easy way to do it like a Chad?…

Why You Need A Budget…

…Cuz you spend too much money.

Seriously, that is why.

We all suffer from mental accounting bias. This is the bias where you keep track of different finances separate in your head to get the wrong answer.

You spend a few dollars on this card here. Go grab an extra appetizer at lunch there. Your wife is nursing a baby as 2 am and spends $300 on stickers, balloons, a bike pump, and cat food on Amazon Prime while in a state of delirium. Next thing you know, you are overdrawn on your accounts again…Each purchase alone is small and since they were all isolated in your head you didn’t mentally account for them all.

[F’er note - Does anyone need cat food? This totally made up hypothetical purchase was totally not done by a family that doesn’t even have cats]

In short, mental accounting bias is our brains separating purchases and doing a poor job actually accounting for them all.

Additionally, people love to buy the newest thing and consume.

Combine your consumerism and your inability to properly track how much you are spending and you get in trouble fast. A budget helps you by planning where money goes and putting limits on the amount of money you have to spend.

Strict Budgets

“O boy, here comes the system of cash in envelopes and never having any fun”.

Nope.

Cash is great for when you have enough money points don’t matter. If you at 8-figures, you can walk around with cash so you don’t have to wait for people to run a card and bring it back to you.

If you are at the point you are still budgeting, getting 2% return on every dollar spent makes a difference. Most credit cards also have spending analysis you can use to help track where you are spending, for free.

So be an adult, use a credit card, and cut down on your spending.

Budgeting Simplified

Here is the trade-off…You get to use this streamlined budgeting method, BUT, you need to be an adult.

Like the fat co-worker in the office kitchen at 9am who is telling me about their “green juice fast” diet while simultaneously double fisting cupcakes that someone brought in because “I did good this week, I deserve a reward”…If you can’t be an adult and have self-control, you need to go to one of the stricter systems.

I assume since you are reading Chad Personal Finance you are above the average irresponsible Soys. So here is the way F’er has run a budget system for a decade+.

First, you need 4 different Checking/Savings Accounts and at least 1 credit card. Your Checking accounts are tagged as the following:

1. Essentials Account

2. Investables Account

3. Emergency Account

4. Spending Account

Essentials Account:

Essentials are the things that are needs. You have to be pay these essentials and have almost no room to adjust the spending. Mortgage/Rent, minimum payments on loans & debt, utilities, any insurance premiums, etc.

These are going to be reoccuring bills that are very consistent month-to-month. Which is great because it makes it very easy to automate how much goes into your essentials account each month to cover the costs.

If your total expenses on essentials is $1,500 mortgage + $250 car loan + $150 student loan + $100 utilities, then you know you need about $2,000 to be deposited into your essentials account every month.

I’d probably deposit $2,100 to be safe, or keep a minimum $2,500 balance with my $2,000 deposits..

Note - food may seem like a ‘need’ and ‘phone/tv/etc’ may be a consistent charge, but these are not essentials. You may ‘need’ food, but you can always skip restaurant meals and buy cheaper alternatives to lower your food spending. You don’t need cable/netflix/expensive phones.

Saving Accounts = Emergency & Investables:

The Emergecy & Investables Accounts can be thought of as your ‘savings’. You need to choose a savings rate (for example 25%). Then you allocate that savings rate amount into the emergency or investables account - depending on if you have adequate emergency savings in place.

These are 2 separate accounts. If you don’t have some emergency savings, you need to allocate a portion of this money into the emergency account. Emergency accounts are there for emergencies only. Typical advice is 6-12 months of expenses in the account.

Once you hit your target (6-12 months savings), you then put all the ‘savings’ allocation into your investables. This account gets used to fund all your different investments in stocks, ETFs, crypto, etc.

401k & HSAs are listed under the investment account. Technically this money comes directly out of your paycheck for most people. So it wont actually touch your investables account. Howerver, when you are splitting your salary up, you want to consider these amounts for this sleeve, so they are there for completeness.

For instance, I contribute to my 401k, HSA, and stock purchase plan. Then I deposit the remaining savings rate into a checking account. That checking account I use to make IRA contributions and transfer money to my stock brokerage. It is also the checking account I DCA into crypto from.

Again, once you set a savings rate, you know how much money is going into your investables account and can set up a DCA that is less than the contribution. 100% automated.

Spending Account:

The Spending Account is for all your other spending. All your wants or discretionary spending is done from this 1 account.

Since you have all your essentials & savings already coming out of your check and going into your 3 other accounts, whatever is left goes here for you to spend on things you want to have.

And here is the best part of this system. If you are allocating the correct amount of money to the essentials & savings accounts and have auto-pay/deposit on those accounts, then the spending account is the only one to monitor. All your core expenses and savings are on 100% autopilot.

How I handle my spending account is to set a buffer threshold amount I want to maintain in there. Let’s say $3k minimum. I put all my spending on at least 1 credit card and when I pay off my credit card I make sure I never drop below $3,000 in the account.

If I drop below $3k, then I know I spent more than I deposited into the spending account, aka I over spent that month.

The power of credit cards allows you to open up your spend tracking (pretty standard on cards) and compare it month to month to see where you overspent. You need to curtail the overspending and get back on track.

Sample of Discover’s Spend Analyzer…This is why I get upset seeing gooroos peddling their poorly designed ‘excel budget’ tools for $$. They don’t do half of what you get for free on credit cards…You can see your month to month spending history in top right, a nice pie chart of where you spent…if you go over budget this makes it so easy to see what changed month-to-month.

However, if you pay your credit cards and the spending account balance is still over the buffer threshold you set, then you are within your budget. Job is well done.

Streamlined Budget

That is a lot of words on the purpose of the accounts, but if you are following up to this point, you should immediately see the efficiency in this.

You have everything on auto-pilot and only have 1 account to monitor.

My credit card is the only bill I don’t autopay so I have to log-in and look at my spending account when I pay it.

1-2 times a month I take 2 mins to pay a credit card, say ‘yup stayed within budget’ and get to move on.

If I am over budget, it is usually 5 mins more to look at the credit card analyzer to see why. No ugly excel files. No envelopes of cash. No absurd rules and systems. Just being a little bit of an adult and looking at 1 account after setting it up.

[Note-What happens if you spend all the cash in the envelope too soon? The problem with cash is once its gone, its hard to remember where. So unless you are writing down every cash purchase in a book, you can’t analyze where you went off course. Yea, I guess you don’t go ‘over’ budget, but if you blow your money half way thru, you are now out of luck and have no idea how to do better next time]

Segregating Your Income

The last piece Part 1 will cover is segregating your income into the 4 accounts. This is all done through your payroll system at work or with auto reoccuring transfers in your accounts.

The illustration below uses a 50/25/25 allocation for essentials/savings/spendings. This is a good rule of thumb. In real life, you would use the actual essential amount in place of 50%. (side note, 50/25/25 is a better 50/30/20 rule, but that is a rant on a different day).

You should be saving 20-25%+ of your income.

That shouldn’t be negoitable. Then your spending account is funded with whatever is leftover.

Ideally your main source of income can be direct deposited to 4 different accounts. My wagecuck allows up to 6 different accounts for direct deposit and you get to elect the amounts. That makes set-up of the system very easy.

Have your employer automatically deposit your budget amounts into your 4 accounts for you

If your employer only lets you deposit to one account, you just need to set up an automatic reoccuring transfer from your direct deposit account to the other 3. Use either your ‘essentials’ or ‘savings’ accounts for the direct deposit. That way you don’t run the risk of seeing more money than you have to spend in your spending account.

Same exat result as the picture above, but the direct deposit needs to make a stop in one of your accounts before being passed on to the others. I don’t know of a bank that chares for reoccuring transfers to different acounts

Summary: Budgeting 101 Streamlined

I know, the post title says streamlined budgeting and then this long post went up. I try to fit as much helpful tips as possible around a subject. But once you set a system like this up, you have almost no work to do.

The summary of the streamlined budget:

• You auto deposit your paycheck into 4 accounts: 1) Essentials, 2) Investments, 3) Emergency, 4) Spending.

  • Essentials is your reoccurring non-discretionary (mortgage/rent, utilities, minimum loan payments, term)

  • Emergency is for your emergency fund

  • Investables is the money that will go to your investments

  • The remaining aount goes to be spent on all discretionary items

• Since the monthly expenses in the essential bucket is known (rent, debt, insurance, etc are all the same every month), you deposit enough into your essential account to cover the expenses

• You set a savings target and deposit that into your emergency & investables account

  • Use the investables account as a staging area before allocating to your stock accounts, IRAs, and crypto

• The leftover salary gets deposited into your spending account. Set a minimum balance you want to keep (ie-$3,000).

  • When you pay your credit card monthly, if you dip below your buffer threshold you are spending too much and need to take time to figure out where you are overspending.

  • As long as you remain over the buffer, you are within budget

• Put all your spending expenses on a credit card and it makes expense tracking a breeze to see what category went up month-over-month.

When done correctly, you are only looking at 1 account once a month, and as long as you aren’t being irresponsible, you are hitting all your budget goals.