The very first, most important step in creating a personal financial plan is to have a firm understanding of your income and your expenses. In order to do that you need to have as much detailed information about both as possible.
If you’ve tried tracking your expenses and haven’t had very much success, the 2 Systems below will help you to do that and give you a little bit of self-knowledge about how you handle finances. Enjoy.
System 1 – The cash system
This is one of the most simple ways to budget, using cash for every single transaction that you make. Two of the easiest ways to do this is to either cash your entire paycheck and keep that cash on hand during the week or deposit your paycheck into your bank account and take out enough cash every couple of days to cover all of your purchases. (Frankly, having all of that cash around or, even worse, carrying it on you all the time isn’t the best idea, so we would suggest option 2.)
Now, truth be told, it’s almost impossible for anyone to use cash to pay for every transaction these days. Banks, utility companies and others don’t accept cash for certain payments. That being said, if you want to go with this method you should do your best to pay off the bulk of your transactions in cash.
Then, at the end of the month, you can simply see how much cash you have left over (if any). The simple and straightforward method will tell you whether your expenses have matched your income and, although you will get a lot of detail out of the system, it does include all of the very small transactions that you make and thus gives you a better picture of how much you’re spending.
System 2 – The envelope system
This second method, basically a variant on the cash method, requires a little bit more planning to accomplish. First, just like with the cash method, you cash your paycheck completely, but that’s where the similarities end. The next thing you do is divide your cash into specific categories and put the money you need for those categories separately into their own envelopes.
For example, if you have an $800 mortgage, you should put $800 in an envelope with the word “mortgage” on it. (If you pay rent, the envelope would say “rent”.) Do the same for your utilities, groceries, cable service, cell phone bill and so forth. You can divide your cash into as many categories as you like.
At the end of the month you simply need to take a look in each envelope to see if you stayed within budget for that particular category (i.e. there’s money left in the envelope) or you didn’t (i.e. it’s empty). If you notice that every month your “entertainment” envelope is empty, it’s a good bet that your breaking the budget on things like restaurants, movies and other forms of entertainment. In other words, this is a great method to find out where the “holes” in your budget happen to be.
Now, truth be told, both of these systems are extremely simplistic and don’t rely on technology of any kind. If you make a lot of money and have a lot of monthly expenses they might also get a little bit burdensome.
Until you figure out how to stay on a strict budget however, they will work and are definitely better than nothing.