Hi y’all! I’m so glad you came back today to see this budget thing through to the end! I know a lot of you had to make some hard decisions after the last step but this next part is sooooo much easier, I promise.
If you’re new to the Kitschy Budget project, this is a REAL LIFE approach to finances. I created it so you can set your budget and not budge it. I’m gonna tell you this budget may seem weird. Like, super kitschy. That’s why we call it the Kitschy Budget! I’m also going to go ahead and tell you this budget is super effective. Like, ridiculously effective. But you’ll want to go back and complete Part 1: Setup and Part 2: Execution before continuing. Go do that, we’ll see you again soon. The rest of you… Let’s get to work!
(Psssst… y’all see what I did there… Budget… Budge it. I STILL crack myself up. Alright now, y’all, let’s wrap this up!)
Read MorePrep & Debt
Now, if you recall, using the 60/40 Method, once you have your monthly expenses at 60% you split the remaining 40% equally into retirement, irregular expenses, long-term savings, and fun money. The 60/40 plan doesn’t really take into account debt repayment but debt is a huge burden on so many people. So here we borrow again from Dave Ramsey’s plan. The first “Baby Step” in Dave’s plan is to save $1000 emergency savings.
Once you have that emergency savings you’ll want to pay off your debt as quickly as possible… If you don’t have debt you’re ahead of the curve, move on down to the next paragraph. If you have debt we’re going to leave the retirement and long term savings categories merged to fund debt repayment. (See Dave’s site for more info on debt repayment) Your goal right now is to make debt disappear. Fast. Throwing a minimum of 20% of your income into debt repayment makes stuff happen. Putting any extra money toward that debt makes it happen faster!
Cash vs. Debit
A key component to this plan is organizing yourself to maintain the categories of the 60/40 Method. Our goal here is to pay off the debt so don’t use credit cards. You have two options: debit accounts or cash. Whether you use cash or debit is purely up to you.
For some, there is a benefit to having your money in cash. Cash is a visual and tangible thing. You see it leaving your hand each time you purchase something. And see the overall amount you have decreases!
For others, there is a benefit to having your money in accounts and using debit cards. You can log into your account and see the amount of cash available, plus it can seem not so readily available which can help avoid impulse buys. For instance, I am much less likely to run my card for a buck or two than I am to just fork over the same amount in cash. Also, you are more protected if you lose debit cards than if you lose cash. If you are using debit cards make sure the accounts are fee free. This absolutely needs to happen. It may mean changing banks.
Whether you choose to use cash or debit cards, the BIG thing to remember is once the money is gone, STOP SPENDING!
Budget Categories
I’ll briefly cover the categories/accounts needed as well as the pros and cons of cash vs. debit. Category setup is the key to your ongoing budget maintenance. Cash or debit is mostly your preference. You may prefer cash because it is more visual, you can see how much you have. Know using cash does take some getting used to, especially if you have been using cards.
You may prefer debit cards for the months when the money goes too fast you can log into your account and see exactly where your money went, no keeping receipts. Of course, if you are using cards make sure your account is set up to decline at $0, not overdraft.
Whichever you use, make sure you keep the categories separate. For cash, this would mean an envelope system or sorter (like the ones used for coupons) in your home. For debit, this would require a separate account for each category. Yes, an account for each category. Let’s go through the categories, you’ll likely see what I mean.
Category 1: Housing Expenses
Your housing expenses are all those monthly reoccurring bills we made an average of in Step 1. For this category, I can’t imagine not using a checking account. I have a checkbook on mine because the daycare only accepts checks. I pay all my other monthly bills online, using auto-draft. Because I auto-draft there is no fee for paying online and I don’t have to worry about due dates. It’s great because it’s really effortless. Put the average per paycheck into the housing account and the money is there to pay the bill, end of story.
The key is to not use the housing account for ANYTHING else or take ANY money out, even if there appears to be excess. There isn’t. Remember how we averaged all the bills- this means that the account is collecting money when the bills are low to make sure there is enough when the bill is high. The housing money goes in every payday and the bills come out. Leave it alone.
Category 2: Gas & Groceries
Ah, gas and groceries… Hard to predict, difficult to fit in and uncomfortable to deal with in public. Gas and groceries are like the awkward cousin of the household expenses! But with a plan and some practice gas and groceries can fit seamlessly into your budget.
Both expenses can be managed with either cash or debit. I actually counseled one couple who came up with the idea of using cash to purchase a gas gift card so they could use cash and not have to open another bank account yet they could also fill up at the pump without going inside. (Why have they not invented pay at the pump for cash already?!? Someone needs to get on that!) As an added bonus they got a $.10 per gallon discount!
I personally find cash easier for groceries and I use a calculator to tabulate as I go along. A lot of items we buy repeatedly so I actually know how much it will be before I even get to the store. If you are using a debit card for groceries make sure to check into grocery pickup services in your area. They are a great way to control how much you are spending as well as avoid impulse buys.
Category 3: 20% Debt Repayment (read this part even if you DON’T have debt)
Debt repayment is also best managed with a bank account. From there you can make the necessary payments via online draft or check. So this would be at least two bank accounts. That’s right, to make sure you keep these funds separate you will need a second checking account. Make sure this is a free account because you’ll put a couple paychecks in before you make a payment so the balance will vary wildly.
Once you have paid off your debt you can use this same account to save 10% for long term savings (we use this for major house expenses like when we put in new windows and eventually to open our restaurant) and send off the other 10% to your retirement fund, like a Roth IRA.
If you are able to contribute to a 401k through your work and they match up to a certain percentage use that as free money and either accelerate your retirement savings or send the same percent of the match to a 529 plan for your kids’ college! So if they match 3% you just scored 3% of your income to save for kids college! DO keep in mind a 401k would be taken out of your check before you see it so you would not need to account for it when you receive your check. Do NOT use the match percentage as an excuse to not be saving 10% of your income!
Category 4: 10% Irregular Spending
What is Irregular Spending? Well, it’s going to be different depending on your particular situation and how you’ve arranged your budget. For our family, Irregular spending is essential toiletries, birthday gifts, house & yard cleaning and maintenance supplies, unexpected school expenses for our elementary aged child- pretty much everything that isn’t our monthly expenses, fun money, gas or groceries.
This category could be managed as cash or debit.
Category 5: 10% Fun Money
Fun money is simply that! For our family fun money covers my new clothes (except when necessary like due to pregnancy) or non-essential toiletries (like me wanting a new hair product or nail polish or something). It also covers my husband’s energy drinks and book buying habit. For our family, eating out or other family outings are covered by fun money.
This category could be managed as cash or debit. When my husband worked out of town we managed his with a debit account so I could deposit his funds. I kept mine in a debit account as well because I tended to like to save my spending money up for dinner out with the girls, a new handbag or other items that took a bit of time to save up.
To keep things “fair” (ie- so one of us didn’t blow all the fun money on something the other didn’t agree on!) we split the fun money 3 ways: 2.5% his, 2.5% mine and 5% family. Obviously some paychecks this didn’t add up to much, but having to make choices made me appreciate luxuries so much more… and seeing our debt get knocked down made it totally worth it!
Bonus Points
Of course, if you really want to put some power behind your debt repayment you could certainly reduce the percentage of this category, especially if you have a high income and massive amounts of debt… But I don’t recommend you do away with it completely. Maybe it’s just me but if my budget is overly restrictive I tend to fail. However, I can diligently save money where I need to if I know I have a little to have fun with… think of it as a cheat day in a diet plan! We all gotta have a little wiggle room!
The CRITICAL thing to remember is, regardless if you keep your funds in cash or debit, once the money is gone, stop spending!
It will likely take a few months to learn to live comfortably on your new budget but living within your means is essential! Budgeting has taught me some interesting lessons along the way, the two biggest of which have been the power of scheduling and inventory. That’s right, I have become a person who loves to schedule things as far in advance as possible so I can make sure I reserve the funds. And I regularly do a loose inventory of our basic household items which allows me plenty of time to purchase BEFORE running out… I’m telling y’all, these are skills that have served my family well, especially as we have had more children.
Of course, the difficult side of budgeting is exactly what you think it is: being responsible enough to make tough decisions and sometimes do without. Remember, if your budget is too tight for comfort you can always look for additional means of income!
Payday!!!
Now that we covered all our categories let’s go through what happens when you get paid! Each paycheck you will need to calculate and distribute your money. If you get paid more often than bi-weekly or you are in a two income household I recommend you wait and do this step bi-weekly. It can just become too burdensome to do weekly, this plan is all about ease. Make sure you get to the bank ASAP to withdraw money for your cash categories.
Now the easiest part- maintenance. I know setting up this budget may have been a beast for some of you but now you can take a breath! My favorite part of this budget is how easy it is to maintain on a long term basis. No sitting down and guessing how much to allow for all the little categories every month. Maintaining this budget is three easy steps:
1- Distribute your paycheck biweekly into the proper categories. (Make a trip to the ATM or bank to withdraw money for the cash categories.)
2- Log into the bank account you use for your housing category. Record the amounts of the bills in your expenses spreadsheet, keeping an eye on the monthly average amounts and make sure they remain within the amount budgeted. NOTE: If there is an overcharge on your bill make sure you call the company and inquire! You work too hard to give away that money!
3- Prepare and send off any payments due in the next THREE weeks that are being made by check. Don’t wait till their late and give away all that money on ridiculous late fees!!
That’s it. It’s simple.
The maintenance on our Kitschy budget is so easy it’s kinda anti-climatic. All your bills are auto-drafting. The money is in your account to pay everything in full and on time. No drama trying to figure out how the bills will get paid. If you want some excitement, wait a few months into the plan compare what your debt was to what it is, watching that debt melt away is super freaking exciting!
NEED MORE HELP? I’m a Dave Ramsey Financial Counselor so I’m happy to help! Click here to contact me for private financial counseling services.