How I Budget My Year Using Cash and Automation

Some of you may be familiar with Dave Ramsey's Envelope System for budgeting, while others may have their own system. I have followed a cash budget and still do to a degree, but I have since evolved to meet my own needs. Having tested out various methods for managing money, I will share with you here how I currently plan our finances and why. I have also outlined what I believe the pros and cons are for both the cash envelope system vs. a more digital approach.

How I Plan My Finances

Annually

I love December, not just because it's the holiday season but because it's time to look ahead and build my annual budget spreadsheet!!!!!! Yes, I actually get that excited about it (nerd alert!). I'm thankful for this blog because there are others out there that like me, enjoy spreadsheets like a hobby. ;)

I build out what I call the big picture....Months are columns and budget lines are the rows. After I create our annual plan, I hold a brief (30 min max) meeting with my husband to make sure we're on the same page with how I've planned our finances for the year. We sometimes make tweaks, or maybe second guess a plan or two we had for the upcoming year.

From there, I figure out how much money needs to be automatically transferred each pay period or month and to which account. I then, go into my bank account online and set up all the automated transfers for the year (you can always modify the scheduling later). As I live in Canada, I have the opportunity to bank with a credit union, which offers free day-to-day banking accounts as well as the ability to open multiple segment accounts. The following are the accounts in my day-to-day banking portfolio and how/why I use them:

• Household Bills: all groceries, gas and anything else I need to pay the credit card with comes out of this account. I automated everything I can possibly can to be paid with by credit card so we can maximize our travel rewards. Then I pay the credit card out of this account. Our pay checks go into our personal accounts but my husband and I each transfer what we need to into this account to cover the bills.

• Savings: This is our emergency fund only. All real savings (ie. investments), automatically gets transferred to our RRSP (Canada's equivalent to a 401K).

• Travel: I have an automatic monthly transfer from the Household Bills account that funds this account.

• Mortgage Lump: One of my biggest struggles in the quest to financial independence (FI) is the juggling act between paying off the mortgage and building up a good retirement savings. Right now, I've landed on a goal of timing the mortgage to be paid off with our retirement goal date so we no longer have that expense, but using any bonus cash to throw on the mortgage. We also increase our payments by 10% annually which helps significantly.

• Home Insurance: We pay annually at once but I don't like surprises, so we save each month to cover the cost.

• Hydro (electricity): We get billed every 2 months and I can't pay with credit card without incurring added costs (from the vendor), so I average it out and tuck it away each month in this account.

• Donations: I love to give back and to be able to help support friends and family when they are passionate about a cause. I make sure we budget for this so we can do so.

• Gifts: Birthdays, weddings, Christmas...we save for that in this account.

• Property Tax: This bill is due twice annually so I give it my best guess prediction and save each month to cover the bill.

• Baby RESP: We have an RESP (a tax-sheltered education plan) for our son which is held externally from our bank, but I use this account to put gifts or any bonus cash (like a found $20 bill) into this and then make one transfer each year before tax time.

• Baby Stuff: Kids outgrow clothes, toys and equipment so quickly in the early years, so I use this account for buying and selling stuff I need for my son. For example, when he grows out of his clothes, if they are sellable, I put the cash in here. And then if we need something for him, like baby gates, it comes out of here.

Monthly

On my super cool spreadsheet that holds my annual budget, I create a tab for each month. I then align my expenses on each month‘s tab to the total annual budget. Naturally, there is always room to make changes each month as the year goes by. I re-evaluate at the beginning of each month because, as we all know, things change!

I don’t spend a lot of time on banking each month...I would estimate in the entire month, I spend about 30 minutes on planning and transactions . I do however, glance at all our accounts at least once a week to make sure all transactions are coming through as planned. I also check when the credit card bill is due because it changes ever month and I like to pay on the last day possible. If figure its better if I'm the one making money on my money than the bank!

My "entertainment money" is the allowance my husband and I give ourselves to spend at our leisure...like eating out, shopping, anything extra. That's the money I take out in cash each week. So for me, I do a little of both: some cash and a "digital envelope system". That said, I have broken my bad habits of getting into perpetual overspending with time and practice. When that was an issue for me, the cash envelope system certainly works.

Below are the pros and cons for each system - I can't wait to hear what you do!

Envelopes

Pros

• Excellent for those who chronically overspend on their budget to get into the habit of spending what you have

• Allows you to visually see what you have and pull back spending when running low

Cons

• Need to make a trip to the bank every pay check

• Might not have the right amount to divide into each envelope (you will have to go break your bills somewhere)

• If you are carrying around all your envelopes, it's risky from a loss standpoint

Automation

Pros

• Save time on trips to the bank

• Save space in your purse/wallet

Cons

• If you miss the timing of your automated transfers and needed to make a change, it's a little bit of legwork to reverse

• For bills that are variable, such as a cell phone bill, if they are automated, you send payment before reviewing the statement so you need to have trust in your vendor.

What tricks do you have that make your financial world more efficient and help you stay on track? Leave a comment or drop me a line - I'd love to hear from you.