When I decided to get serious about reducing my debt, I knew I needed to find a money management system that would work for me. It had to be easy and one that I could manage daily. I read over a slew of articles about debt management, and one strategy that resonated with me was to assign cash for various spending categories. Dave Ramsey popularized this approach, the envelope system, and it works well for many, many people. I decided to tweak it a little to work better for me. Instead of putting money into envelopes, I opened up checking accounts for each of my spending categories.
When starting my budget, I went through all of my fixed and variable expenses and put them into categories. Each category has a checking account from which to pay those expenses. With this system, it’s been easy for me to stick to my budget because I consciously have to transfer money from one category to another if I want to spend more than the allotted amount for that month.
Here are my checking accounts and the expenses that are tied to them:
- Renters’ Insurance
- Cell phone
- Includes Pet Supplies
4) Car Expenses
- Insurance premium
- Routine Maintenance
- Gym membership
- Other recreational activities
9) Credit Card Payments
- Donations to charities and non-profits
11) Primary Account
You might be thinking, ‘Does he really carry around 11 debit cards?’ Not quite. I only use my fuel and primary debit cards. When I need to buy something, I use my primary debit card and then transfer the money from the corresponding account as soon as I can. For example, today I had lunch out with some colleagues. First, I checked to see that I had enough money in my entertainment account to cover lunch, which I did. When it came time to pay the bill, I used my primary debit card, and then when I got back to the office, I transferred the amount from my entertainment account to the primary account.
When it comes to buying gas, I use my fuel debit card because gas is a regular expense for me.
All of my student loans and credit cards are paid from my credit card checking account. A flat dollar amount of every paycheck gets deposited into this account: my minimum payments plus anything else I can afford to pay every month. If nothing else, this account prevents me from accidently spending money that is allocated to my credit cards on other things.
I have pre-determined amounts automatically deposited into these accounts on payday. Recurring expenses, like my gym membership and a donation to a charity I support, are taken out automatically from their respective accounts every month. This ensures my budget matches my spending. If my spending in one category needs to be adjusted, I simply change the amount of the direct deposit before the next payday.
In addition to my checking accounts, I have one savings account. I like the idea of having different savings accounts for various purposes i.e., vacation, college, house, new car/maintenance. Right now though, because my focus is to pay off debt, I’m not saving for a vacation or a house. I automatically deposit a flat dollar amount every month into my savings account and that money will be used if my car needs a costly repair or for an emergency plane ticket back home.
This system may appear cumbersome, always moving money between different accounts. I like knowing exactly how much I can spend on clothing, gifts, etc. by seeing how much is in the account. It also keeps me on track to getting out of debt sooner than later because it’s designed to keep me from accidently overspending.
There isn’t one budgeting system that is perfect for everyone. Mix and match until you have one that makes your life easier, not harder. You might be surprised by how much freedom it provides you.