The word “budget” is not a cozy and exciting word.  In fact, it conjures up a painful image of entering numbers into a green ledger with a quill.  Because of this negative association with budgeting, I don’t enjoy making budgets and have had to fool myself into saving money.

Here is the process I use to budget for retirement.  Admittedly I am only tricking myself, but this process does work.

1.     First I estimate the money needed for the necessary monthly bills:  Mortgage/rent, utilities, insurance, car payment, loans and property taxes.  I then put these bills on auto pay.

2.     Then I add 10% to my monthly budget to cover unexpected costs.

3.     Next I determine how much to deposit into my IRA or 401k for the coming year.

4.     Because it’s easier for me to pay a bill than to put money aside, I create a fictitious loan that I have to pay back in monthly installments based upon what I determined in step #3

5.     This next step is important: I have my employer automatically deduct the monthly “loan payment” amount from my paycheck and put it directly into my retirement account.

6.      Next I decide how much to spend on food and gas.

7.      The remainder is what I have available for discretionary spending and regular savings.  I get to choose how much to spend and how much to save.

8.       Now I get three envelopes and label the first “food”, the next “gas”, the last one “fun”.   I then go to the bank each month and pull out the allocated funds for each category and put the associated cash into the envelopes.   I further divide the cash by 4 or 5 depending on how many weeks are in the month and note the amount on the front of the envelope.  This is what I take out each week.  It’s my personal allowance.  I carry my weekly fun money with me but I only take out the food and gas money when I’m heading out for those activities.

9.       I spend the fun money without guilt but stop when I have no cash left.

10.     This is key: pay everything in cash. I don’t touch my ATM card or credit card.  If I do use either of these, I remove the same amount of cash and deposit it into my checking account to cover the payments.

11.       At the end of the month, whatever that has not been spent or is left over in one of the envelopes; I put it into a non touchable investment account.  If you have credit cards or other loans outstanding that are non deductible, this money should go to pay it down first.

12.       If I feel like splurging in the coming month or have a big ticket item, I sometimes move the extra money forward and add it to next month’s spending allowance.

For an extra zing on savings – I actually choose to allocate my 401K allowance into 6 equal payments, not 12 payments.  This means that in July, after the 401K has been maxed out, I suddenly have a large amount of money each month that has no allocation.  I typically put these excess funds into investments.

It takes me ten minutes to set everything up including the paperwork.  My priorities are set up front and I am on auto pilot for the entire year.   It’s amazing how well I live within my means and the decisions I make about spending when I see the cash in my wallet and know that this is all I have to spend.

Does this mean that I live without any luxuries?  No, far from it.  Luxuries are important but I define what it is to me.  My decisions on spending are now conscious ones.  I can look at my weekly fun money and say “I’ll carry this forward until next week because I want to eat at my favorite sushi restaurant or because I want a pair of gorgeous shoes.”   What do I give up in return?  It might be that I choose not to go to any fast food takeouts for the week or buy that random $20 blouse.

The process gives me the ability to spend money freely and without guilt or self doubt.   In return, I found that the freedom to spend actually reduces my spending dramatically.  The option to indulge at any time made me discriminating.   My internal dialogue tends to go like this.

Oooh I like that.  That’s how much it costs?  Do I really need this or do I just want it?   I want it!   Hmm, is it worth it? or do I want to go to San Francisco next week more?

There have been weeks at a stretch where I keep accumulating the fun money because I never found anything worthwhile to buy.  I used to be a big shopper.  I rarely shop now except for food or specific needs and wants.

I have used this process for years to stay within budget and achieve my financial goals.  It’s financial budgeting without the hassle of finding a green eye shade to match my ledger.

What are the tricks you use to build your savings?

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