Things You’ll Need
- Lazy Budget Template – found under resources
- 3 bank accounts (at least one checking)
- Your yearly income figures: gross and net
- Your recurring expenses
- Estimate of your yearly variable expenses
- Direct deposit of your paycheck
- Expense tracking software (Personal Capital, Mint, etc.)
- Ability to have your payroll department split your paycheck
- A paycheck simulator such as the one at paycheckcity.com
Step One – Enter Fixed Expenses
This is pretty straightforward. Enter in all your expenses that fall monthly on the one side and yearly on the other. In the case of expenses that don’t fit such as quarterly or biennial ones, simply prorate the expense into the yearly column.
Step 2 – Enter Income
Enter your gross (before deductions) and net (after deductions) incomes into the boxes based off your paycheck. For number of pay periods, use 52 for weekly, 26 for bi-weekly, and 24 for semi-monthly.
Step 3 – Budget Variable Expenses
After inputting your income and fixed expenses, you now know how much money is left in your budget for variable expenses and savings. Here’s where having expense tracking software comes in handy. Since these apps categorize expenses for you, you should be able to see over time how much you tend to spend on necessities and discretionary stuff. If you don’t have that info available, sign up for one of the apps (or track it yourself on a spreadsheet).
Once you’ve got a few months worth of data, you should have a handle on how much money you tend to spend day to day. You might even find some stuff that can be cut! Use this data and extrapolate it out to make a yearly budget for variable expenses. Don’t worry about it being perfect, you can make adjustments later on.
Step 4 – Choose a Savings Rate
Now you that you how a good idea how much money you have coming in and going out in a year we can talk about savings. To start, look at your yearly budgets for fixed and variable expenses and think about them in terms of percentages of your total take home pay. What you’ll end up with is an equation that looks like this
A + B + C = 100%
Where A represents the percentage your fixed expenses take up, B is your variable expenses percentage, and C represents the percentage available to save, otherwise known as your savings rate. This number should give you good place to start from when coming up with realistic savings goals.
Take a look at the percentage you get for C as well as how much money per year that works out to. Will that work for what you want to do? If not, take stock of what your savings goals are and make cuts to your expenses so that you can get to the savings rate you want and makes sense. After all, if you’re someone who’s looking to get out of credit card debt, you might want to make more aggressive cuts than someone just paying down a mortgage or investing excess cash.
Additionally, it might make sense for you to increase your savings via payroll deductions to a qualified retirement plan. If you go that route, use a paycheck simulator to see how that affects your take home.
In any case, you’re not locked into the choice you make here. Just make a decision that makes sense for what your goals are now and you can change your savings rate in the future.
Step 5 – Prep Your Finances
As mentioned before, in order for this system to work properly, you’ll need 3 bank accounts. They are the following:
- Obligation Account
- Handles the payment of all fixed expenses
- Sends extra money (overages) toward savings goals such as debt payoff
- Requires at least a month’s expenses to act as a buffer
- Must be a checking account
- Slush Account
- Handles the payment of all variable expenses
- Goal is not to accumulate savings within account
- Can be either a checking or savings account depending on bank
- Savings/Emergency Account
- Handles cash savings from budget
- Acts as a buffer for the Slush account
- Should be a high yield savings account
Before you get to the next step, and put the budget into action, you need to do some prep work. This type of budget will essentially run itself when setup properly but in order to do that, you need to save money to act as account buffers.
Because expenses come at different rates depending on the time of the month and you don’t want to have so little an account that you risk an overdraw. So, the first thing you’ll need to do is accumulate at least a month’s worth of fixed expenses in your Obligation Account. Ideally, you’re going to want 2 months, but you can do that later.
Once you’ve finished that, you can then establish the other 2 accounts you’re going to use.
Step 6 – Split the Check
With all the groundwork laid, now it’s time to figure out how you want your paycheck to be split up and then call up payroll to make the split happen automatically for you. While the Slush account is just going to get the percentage you’ve settled on for your variable expenses, the amounts going to the other two accounts are going to depend on your goals.
Most notably, you may want extra going into the Obligation Account if your goal is to pay off debt. This is because this account is likely connected to all those debts anyway. Sending more money here rather than the savings account also has the benefit of eliminating some guesswork when you get paid since you’re essentially earmarking it for greater purpose.
That’s not to say you shouldn’t put some money in the savings account as well. Having a supply of cash in savings really helps in case of emergency and can/will act as a buffer for your variable expense account should you go over the budget you set for yourself.
For example, when we first started using this budget, I wanted to have more money going towards debt as opposed to savings so I chose a higher percentage to go toward the Obligation Account. Later on, once the credit card debt was gone, I wanted to have more savings so I relaxed a bit on the Obligation Account and put more to the Savings Account. In the end, our split was 70% Obligation, 20% Slush, and 10% Savings and that’s worked well for us over the years.
Using the Budget
Once the budget is put into action, money is automatically being split up according to your plan every time you get paid. On the second sheet of the template, you’ll put in those account percentages and the sheet will spit out some more numbers for you. The most important number though is the Obligation Account overage.
This is the amount you can send off toward your goals every time you get paid. Like I alluded to above, this money is essentially earmarked for whatever goal you have right now. Have debt? Send it towards the principal. Investing in an IRA? Send it there. The important thing is that you take action with it whenever you get paid. Do this, and you’ll see constant progress toward your financial goals and build net worth with incredible efficiency.
In terms of day to day management, there really isn’t any (hence, the lazy part). All you need to do is update your expenses with any changes on the spreadsheet as they come.
One word of warning though. This budget behaves kind of like a freight train. Like a freight train, it takes some effort to get going but once it does, it’s very efficient letting momentum carry it. That same momentum though, makes it difficult for a heavier train to slow down. For this analogy, added weight means added expenses. Since this budget relies on buffers within the accounts, additional expenses require additional buffers to keep you out of trouble, much the same way the heavier train needs more distance to slow down. If you want to do something like take out a mortgage or finance a car, just remember to inflate your Obligation Account accordingly to keep out of trouble.