an estimate of income and expenditure for a set period of time.
That's not bad, right?
Unfortunately, many think of budgeting in terms of another word whose connotation has given it a bad rap; "diet," which has two common usages (we're talking about the second when we talk in terms of a negative reputation):
- the kinds of food that a person, animal, or community habitually eats
- a special course of food to which one restricts oneself, either to lose weight or for medical reasons
Budget means restricting the spending, not estimating income and expenses in a given period. I don't do restriction well. Hell, I barely do delayed gratification well.
Now, budget as a verb means to allow a certain amount of money to be allocated toward something in a budget (noun).
Just like you have a diet (the food you habitually eat), you have a budget. The question here is how intentional is that budget (diet)? How mindful are you of that budget (diet)?
The following describes my current method.
Traditional bank accounts
I consolidated down from my previous method (that ran from around 2005 to 2021). I'm still rocking the same credit union I've had since around 1992. I'm essentially doing fund accounting and the method described in Profit First.
There are six sub-accounts:
- Income: A spending account (checking) where all money received from third-parties goes; this starts the flow before money is transferred to the other accounts.
- Profit: A savings account where a certain percentage of the money coming in goes; this is for emergencies and extended runway.
- Taxes: A savings account where a certain percentage of the money coming in goes; this is to prepare for possibly owing taxes each year.
- Operating Expenses: A spending account where a percentage of money goes; this is for paying bills.
- Runway: A savings account where a percentage of money goes; this is used to prepare for future expenses and emergencies.
- Investing Pass-through: A spending account where a percentage of money goes; this is used by brokerage accounts.
Money deposited to the Income account is moved to the other accounts on the date the money is received to ensure the average daily balance of the other accounts (specifically the various savings accounts) is as high as possible for as long as possible; interest is based on the average daily balance.
The Operating Expenses and Investing Pass-through accounts don't earn dividends, therefore, the balance will typically be held relatively close to a zero balance.