why budgets fail part one–an alternative to the traditional budget that works

A better way to budgetIt’s no secret that I’m a fan of making a budget. I’ve been keeping a budget now since 2006.

But here’s a hard truth that even I admit to: budgets rarely work.

The problem with budgets is that they are all about good intentions.

Good intentions give you nice warm and fluffy feelings, but they don’t give you actual results.

A budget (and tracking your expenses) will show you where you are overspending, but it won’t stop you from overspending in the first place.

Budget’s aren’t that much fun either.

Which is probably why only about 30% of people actually have a budget.

And no wonder when you read articles on how to create a budget and they start like this:

“Budgets are a necessary evil” [source]

“Creating [a budget] can be extremely overwhelming”   [source]

Today I’m going to share with you an easier, smarter alternative to the traditional budget that we’ve been using for the last couple of years.

It’s called the Payday Plan.

Rather than creating a budget for the year and hoping that you stick to it, a Payday Plan is a proactive and automated weekly or fortnightly plan for your money.

No tracking expenses and no nasty surprises at the end of the month when you compare your actual spending to what you have budgeted.

Instead, you allocate your money for the week and you automate most of it, spending what’s left.

Today’s post outlines how the Payday Plan works.

a plan for your pay

A Payday Plan is a plan for how you’re going to spend your money each time you get paid. It’s much easier to control your spending over the course of a week than it is over the course of a month or year.

Most of your plan will be automated, so you can get on with other things in life while your finances take care of themselves!

Here are the steps for organising your money each pay.

1. Pay yourself first

Pay yourself first is the number one tip for better financial management.

But how many of us actually do it?

More often than not, we pay the expenses we have to and spend what’s left. We might put aside some money for long term financial goals, but not regularly.

The first step of your Payday Plan is to pay yourself first, before you spend money everyday expenses.

You won’t miss the money you don’t see. And paying yourself first means you will actually reach your goals.

2. Never worry about paying a bill again

Paying the bills is one of the most stressful parts of money management.

Instead of stressing about how you’re going to find money to pay the next bill, the next step is to put money aside each payday to cover upcoming bills.

That way, when the bills come in, you’ve got them covered!

3. Weekly expenses

Now that you’ve paid yourself first and put money aside for the bills, the next step is to use an envelope type system for the weekly expenses like groceries and entertainment.

Your envelope system doesn’t have to be cash.

Fixed expenses like public transport can be easily accounted for and left in the bank. Because they are fixed (and all your other expenses are transferred out of your account on payday), you know you’re going to have enough in the bank to cover them.

4. Factor in fun

Fun money is essential for keeping on track with your financial goals. Just like dieting, if you’re too strict with your money, you’re more likely to binge spend.

As part of your Payday Plan, allow for some fun money each pay.

5. plan for emergencies

An emergency fund is one of the pillars of stress-free financial management. If something happens, you know you’ve got money to get back on your feet.

Each payday, put money aside for emergencies. Your emergency fund will grow each week without you even having to monitor it!

6. Eliminate debt for life

There’s a reason we’ve left debt until after we’ve saved money for bills.

While it may make sense to throw as much money as possible at reducing debt, it’s actually only a band aid solution.

How do you pay the bills or pay for emergencies if you’ve been putting all your money towards debt?

That’s right. With more debt.

By first building a system that will meet your everyday financial needs, you will no longer need to rely on debt.

In this step use a debt snowball  as part of your Payday Plan to eliminate your debts for good!

7. Build long-term financial security

The last step of the Payday Plan is to put money aside for long term investments (but only after you’ve paid off your debts)!

Investing in income producing assets will contribute to your income as well as provide a buffer against future adversity.

 

Today’s article is only half the story of why budgets fail (and an alternative way that to manage your money that works). I’ll cover the other reason why budgets don’t work (and what to do about it) next week.

The Plan Save Thrive Online Workshop goes into further details about how to set up a Payday Plan as well as cover ways to save on household expenses so that you can make the most of your money. Check out the details of the workshop here.

Comments

  1. says

    As far as budgeting goes we generally avoid credit or debit cards for personal expenses. Every week we get my ‘Spending Money’, in cash, for day to day expenses. Any left over goes into our ‘Stash’ for unexpected things or a fun meal out.

    When we lived in the UK, where monthly pay is more common, we used to divide the monthly money up into 4.5 weeks. This meant twice a year we had gained a spare weeks money!

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