When I first started tracking our spending, it was mostly to determine where our money was going.
Although we had spending targets set for each category, we weren’t really sticking to the numbers — just aiming to be around them.
While that system works for us, you may need something like the envelope system to control your spending.
In either case, don’t miss out on a crucial part of having a balanced budget: ensuring that every penny has a purpose.
Every Month, What Goes in Must Come Out
Each month, you know your income — the amount of money coming in to your budget. But you don’t always know the exact amount going out.
(Freelancers and other workers with variable incomes, see how to manage your expected monthly income in the book.)
When you set a budget, you need to ensure that at the end of the month, these two numbers — your income and your outgo — are equal.
Treat Savings as a Bill: Pay Yourself First
Don’t wait until the end of the month to see what money you have “left over” to set aside for spending.
The best thing you can do for your future is to treat savings as a bill that you need to pay each month (“paying yourself first”). Whether it’s your emergency fund, your retirement, or your short-term goals, this savings bill is just as important as any other.
Of course, the easiest way is to set up automated savings transfers to make it happen without you even needing to get involved.
Transfer Excess Money into a High-Yield Online Savings Account
Inevitably, when you do calculate your final income and outgo at the end of the month, there will be a discrepancy. Hopefully it’s that you brought in more than you spent (if it’s the other way around, you’re spending too much).
But instead of letting the excess money you have sit in your central checking account, transfer the difference into a high-yield online savings account like ING Direct. If your checking account yields no interest, you shouldn’t leave extra money in there. Only keep enough for your spending and your financial cushion.
It’s up to you to decide your savings priority/where to put the money. But don’t let it sit around doing nothing. By giving every penny a purpose, you’re making your money work for you. And that’s the way it should be.
About the author: Jason is the author of Automatic Finances: 17 Days to Your Financial Freedom, a guide to automated money management. He started investing thanks to a free lunch, and after finding out how he was getting the short end of the stick, he sought out how to do it right. More »