One of the most common resolutions is to make a budget and stick to it. I have some advice for you: Don’t bother.
Budgets are like diets: they are hard to do, and after a week, or a month, you give up, because it’s too difficult. Think about it: are you really going to carry a pencil and paper with you and write down every penny you spend? Will you write down each cup of coffee you buy at the coffee shop? Will you go home every night and punch the numbers into your computer, and then create graphs and spreadsheets to analyze everything? Perhaps you will but many won’t.
To successfully manage a budget you need to be very disciplined. You need to stick to it. If you are very disciplined and love that phone app that helps you manage your budget, great. But what if you are not highly disciplined? What if you don’t know how to work a spreadsheet, or if you don’t have time to record every penny you spend? I have a solution:
THE SECRET TO BUDGETING:
Instead of budgeting, pay your bills as often as you get paid.
That’s it. That’s the system. If you get paid bi-weekly, pay your bills every two weeks, on payday.
Here’s an example of how you might pay your hydro bill.
You get paid on January 13 and January 27, and your hydro bill is due on the 30th of every month. Normally your plan would be to use $100 from your January 27 paycheque to pay your hydro bill. That makes sense, but your rent is due on February 1, and your car insurance is due on February 2, so you know your paycheque won’t last that long.
Here’s a better plan:
- Use internet banking to pre-program a $50 payment, every payday, to hydro. If you send $50 on January 13 and $50 on January 27, by January 30 you hydro bill is paid. No worries.
- Even better, in May you might get three paycheques, on June 1, 15 and 29, so in June hydro will get three payments from you. By the end of June you will be $50 ahead with hydro.
Think about that: You will be ahead on your bills. Instead of always “playing catch up”, you can get ahead and stay ahead.
Why paying your bills every payday works better than a budget.
No worries: You get paid on Friday, and all of your bills automatically get paid on Friday, so when you go to the bank on Saturday you know exactly how much money you’ve got to live on for the week.
No budgeting: You don’t have to set money aside for your hydro bill in two weeks, because it’s already paid!
You are always ahead on your bills, never behind: In an extra pay month, you pay extra. If you get paid weekly, four times a year you get five paycheques in a month. Great! That means you’re making an extra weekly payment to hydro that month, and you won’t even miss it. A year from now, if you don’t miss any payments, you’ll be a month ahead with hydro, and everyone else! So now, if you get laid off, or need to skip a payment, no problem! You’re a month ahead!
What about bills I can’t pay every payday?
Paying your bills every week is easy if you can pay your bills online, but what about bills you can’t pay on line? You probably pay your rent by giving your landlord post-dated cheques each month. Your landlord probably doesn’t want a cheque every week, because it’s a lot more work for them to deposit a cheque each week. And what about expenses like your car insurance or holidays that come up once a year?
The secret to monthly bills: The PLAN account
For bills that you can’t pay monthly, open a second bank account for your monthly planned payments.
For monthly bills, deposit the money each payday in your PLAN account.
If your rent is $1,000 per month, and you get paid every week, have your bank automatically transfer $250, on payday, from your main bank account to your second or PLAN bank account. You then give your landlord post dated cheques from your PLAN account, dated for whatever day they want to get paid. Your landlord is happy because they’re getting their rent cheque once a month, and you’re happy because you are paying your rent every payday. This PLAN system works for every bill that you don’t pay every payday.
Use your PLAN account for annual bills
The PLAN account works great for annual bills. You renew your car license sticker once a year, so instead of trying to find $120 on your birthday when your sticker renews, put $10 per month, or $2.50 per week, in your PLAN account on payday.
This works great for other annual expenses, like Christmas, birthdays, and your annual vacation.
What about saving for the future?
Your PLAN account works for savings and emergencies. You know you’ll have some car repairs in the future, so start putting $10, or whatever, in your PLAN account each payday for future car repairs.
You want to save for you children’s education? Or retirement? No problem, put what you can afford in your PLAN account each payday. Even better, start an RRSP or RESP and contribute to it every payday. The money will be invested before you see it, so you won’t be tempted to spend it.
And if you really like the traditional method of budgeting we’ve go something for you too. Download our free Excel Spreadsheet Budget Planning Worksheet. It can help you budget your way out of debt or to more savings.
What if your paycheque just doesn’t go far enough?
But what can you do if there isn’t enough money to pay your bills and save? If your cash flow problem is caused by too much debt, we need to talk. At Hoyes Michalos we can help with budgeting, but we can also explain all of your debt relief options to help you deal with debt and get back on track.