Budgeting is a little bit like flossing. Most people think it’s a good idea. Most people wish they’d been doing it all along. Unfortunately, few people actually do it regularly.
Like extreme couponing or keeping up with your HVAC filters, it takes a certain personality to care deeply about budgeting and be excited enough to keep up with it day in, day out.
Fortunately, there are tools that can make the process easy. Mint is a free service that pulls in data from various sources and aggregates them. You can make a budget and see your progress against it. YNAB (You Need a Budget) is a popular paid service that works in a similar way. Yet both systems require care and feeding to be meaningful.
The envelope system is a more manual way of budgeting. Adherents to this system have a number of envelopes labeled with spending categories like “groceries” or “dining out.” Each month, they replenish the envelopes with cash, making it obvious how much is left in the budget for various items. This can be a good system, though it requires you to use cash, which is inconvenient at best and impossible at worst.
What’s great about the envelope system, though, is that it’s a kanban-style system. Kanban is a Japanese term borrowed from the lean manufacturing world; most simply, it means “visual cues to communicate status.” You don’t have to log in to a device and update a database to check your money or budget situation. The amount of money in the envelope is both your source of funds and an indication of where you stand at any given time.
There is a way to get the experience of the envelope system with cash-free convenience. Rather than putting cash in envelopes each month, move a certain amount of money to a bank account (connected to a debit card) that is solely used for discretionary spending.
Sure, you don’t get to fine-tune the amount of money that goes to each category this way, but having to be aware of a bank balance is a sure way to be more cognizant with your spending and know where you stand, big-picture, during a budgeting period. Note: It’s important to connect this card to a bank account as a debit card. It’s just too easy to overspend on a credit card with a high limit, even if you pay it off every month.
The debit-card method has worked for me, but what’s most important is simply to have a plan. I had a professor at the Naval Academy, Col. James Kendrick, who offered a “gosh I’m really lost” guide for his students I’ll never forget. One of the items to consider was: “Have I deluded myself into believing I will be able to solve a slightly different problem on a test under pressure and time constraints even though I’ve never yet successfully solved this class of problem on my own?”
As you consider making a personal or household budget, I propose this corollary: “Have I deluded myself into thinking I can address excessive spending under the stress of everyday life over time even though there is no evidence I’ve ever done this successfully and I have no specific plan or tracking system in place to address it?”
The best plan in the world is no good if you don’t follow it. If you really are concerned about how much you spend, find any decent plan to address it — and stick to it.
Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.
