The secret for me has been simple budgeting success with automation. The key words being SIMPLE and AUTOMATION. In a previous post I discussed the cash envelope system for budgeting. Today I am going to go through how I run a digital version of this using a basic spread sheet for expense calculation and internet banking for envelope management.
Determining Your Expenses
Download a copy of my excel Expense Calculator. The spreadsheet allows you to enter a list of your regular expenses. It will then calculate the weekly amount you need to put aside to cover the expenses. Feel free to modify or use this calculator as you wish.
I use this spreadsheet to calculate how much money I need to put aside each week to cover my fixed expenses.
The Frequency calculation uses the above table to break the expenses down into the weekly amount. I use a 4 week month for the calculations to allow a little buffer for variations in the expenses. Reviewing the expenses every 6 months or when ever you make any significant change will keep it accurate. The calculator is also a good way to see an overview of your expenses if you are looking at making cost reductions in any areas such as mortgage expenses or subscriptions.
NOTE. Putting aside this amount each week will only start to cover your expenses after they start a new billing cycle. If you pay mortgage insurance annually and it has been 6 months since you last payed it you need to have accumulated 50 percent of the annual bill already.
Digital version of the envelope system
If you are not familiar with the envelope system read my previous post.
With my financial institution I have opened a transaction account and around 7 or so online savings accounts. 1 online savings account for each of the categories that I have. I use internet banking scheduled transfers to move my money a day after my pay check hits the transaction account. This means for every online savings account there is a scheduled transfer to move the money from my transaction account to the online savings account.
Below is a digram to give you a rough idea of the Cash Flow. This is only intended as an example but is similar to the process I follow.
Online Saving Expense Account
In the expense account the weekly amount is transferred from the transaction to the expense savings account and accumulates. When a bill comes in I transfer the amount from the expense account to the transaction account and pay the bill. I use the description field in the transfer for the type or name of the expense for easier tracking.
Online Savings Category Accounts
It is entirely up to you how many categories you want, what they are and how much to allocate. Work this in with your financial plan, your priorities and savings goals. I have included some examples in the diagram such as saving an emergency fund, debt reduction and investment.
Leftover Funds in Transaction Account
Any funds left in the transaction account after the scheduled transfers have occurred is treated as discretionary spending money. Some of this is also variable expenses I do not wish to track.
To automate this system further you could have your bills directly debited from the online expense account to avoid the manual transfers. Personally I like to keep a little bit of a hands on approach but that is probably just my stubborn side taking control. I have found that a number of banks and financial institutions have the above mentioned facilities. As always look out for fees as these accounts should be free. Try to get the best possible interest rate for accounts that hold a reasonable balance.
I hope my process of simple budgeting success with automation helps you to achieve your financial goals. I would like to know if you have a system like this or any suggestions on how to improve it. Comment below or flick me an email.