On the way to work one morning I started playing with the speedometer button on the Mustang. One push of the button showed me the length of each trip. Another push revealed the current miles per gallon we were reaping (around 21 mpg). The final push of the button intrigued me the most: it made the screen look like a synthesizer that showed the immediate effects on gas consumption as I pressed and eased up on the gas pedal. If I pressed the pedal hard the synthesizer reached its breaking point. Letting go of the pedal completely, and it was as if I had muted the orchestra and all the bars had disappeared.
Left to my own devices I played around with this system for a few weeks. Having immediate feedback and tangible boundaries allowed me to slowly tweak the way I drove. Instead of riding too close to the traffic in front of me, I learned to hold back and glide for as long as possible a safe distance away. Instead of gunning the gas pedal when entering a merge ramp onto the highway, I slowly sped up until I was in sync with the pulse of traffic. I suddenly had an awareness of driving, the gas pedal, and all of its subtle nuances that I had never had before. I was still driving the same amount of distance with the same crowd of commuters, but I was now noticing a change. Simply by being aware and having immediate feedback to what I was doing, I was able to reduce my gas consumption. I went from averaging 21 mpg to averaging 24. How neat to see what I was able to accomplish with feedback and visual cues!
A budget gives focus to your finances. It keeps you from driving blindly. However, without proper implementation it doesn’t mean anything. There are different ways to disburse your budgeted funds that will give you varying degrees of feedback to ensure you are living by your budget. If you choose a method of money use that does not meet you and your family’s discipline level, then your budgeting will have been in vain. And this is a not about going with the more popular or cooler approach; finding a method that works for you can open the doors to financial success. Trying to use a method that does not mesh with you and your family’s lifestyle will put you back at square one.
Let’s take a look at the different methods (each of which I have used at one time or another in my life).
If you are very disciplined, you can take advantage of reward points by expressing your budgeted spending on a credit card. This means you will need to check your credit card statement every few days or so to make sure you are within your budgeted limits. Since credit card statements for the current month do not usually specify each transaction to designated categories, you may need to keep running totals of each category of spending (can also input this into excel automatically using programs such as mint.com).
Depending on your comfort level, you may give yourself even fewer guardrails by figuring out a number that you need to stay under for the month instead of breaking everything down into categories. Add up groceries, gas, and other expenses from your budget sheet and keep that figure in your head. As you check your credit card statement once a week or so, make a mental note of how much you have left for the month and adjust your spending accordingly.
Note that without any guardrails in place, and with a potential maximum credit limit of thousands of dollars, you need to be proactive about tracking how much you are spending. Nothing is in place to keep you on track with your excel sheet with this method except for yourself.
Perhaps having a credit card with no specific maximums that will trigger (except when you max out the credit line…yikes!) is not for you. After all, if you do not check up on your account balance throughout the month, you may be in for an unhappy surprise when the bill is due. Perhaps you also do not want to go to the other extreme either: cash only. If you are not disciplined enough with plastic but still want some of its convenience (i.e. at the gas pump), you can do a hybrid method of debit and cash. A debit card is tied to your bank account, and so overspending is usually not an option. If you don’t have the money in your bank account to cover the charge, you will get an overdraft fee (this is a type of feedback, as typically your bank will notify you) and will need to make other arrangements. Some banks even allow you to sign a statement saying that you will not allow overdrafts on your account. This means that the transaction will be denied (could lead to some sticky situations), but at least you will not go over your budget. After repeated instances you will need to decide if you have learned to not over withdraw, or if you need to move onto a cash-only money system.
If you need to be extremely tight with your budget and extremely sure of what you and your partner are spending, then you might think about using a cash-only method with immediate feedback. This is also the place to start if you need to learn some spending discipline. Each week, every other week, or once a month (depending on your comfort level; weekly budgeting can ensure that you have money left for that last week of the month by slowing your spending in the beginning) you can withdraw cash from your bank account and fill envelopes, jars, or anything else with the amount of money you planned in your budget. This means you will have jars/envelopes labeled “groceries”, “gas”, “kids”, etc. Budgeting is very tangible with this method, as when the money runs out so does your spending. The feedback is also immediate. If you have $100 left in the grocery budget for the month and it is mid-month, you need to adjust your meal plan accordingly and use the money that is left to supplement food in your freezer and pantry in order to make that category work. If you have extra gas money at the end of the month but are low on funds for a school field trip, then you can easily take the money from the gas jar/envelope and put it towards the trip. If you only spend what is in the jars, then your budget should balance each month.
How do you budget? What is your money system?