This blog is a way for me to share hard learned lessons about money with those who are just starting out on their own. I hope it's a way for you to avoid making the mistakes I made, and to benefit from my experiences

Monday, July 17, 2006

Lesson 5: Don't Budget! Automate Instead.

I've briefly covered this in earlier posts. When doing strategic things like saving for retirement or building an emergency savings, it is incredibly helpful if you automate it.

Many advisors say you should track all your expenses, then build a budget and try and live within it. They even go so far as to actually put cash in envelopes marked groceries, clothes, etc., and you pull money out for those items as you buy them. Unless you are one of those anal types who love doing this kind of stuff, this is a recipe for failure. It is a recipe that few will follow. Screw that!

My approach is much quicker and easier. Take a few minutes and write down what you think your expenses are, including weekly pocket money, then subtract that from your take home pay. With this, you can guess at what you can put away for your retirement and savings. If the answer is zero or close to it, then start with a small savings plan, like 5% of your total pay for savings. Instruct your employer or financial institution to deposit that percent of your pay directly to the 401(k), your savings account, college fund, or whatever it is. In my case right now it's 15% going into my 401(k) and 5% into a high interest rate online savings account.

Then live with that for a couple of months. Were things too tight and you had to raid your savings? Then dial your amounts back a little. Did you easily adapt? Then maybe try and increase your savings a little. Did it feel about right? You weren't deprived, but didn't have much money left over? Perfect!

The beauty of this system is that it's quick and painless, and once you've made 1 or 2 adjustments, it's automatic. After that, you don't have to think about it again unless your circumstances change.

Again, start now, no matter how little it is. Some savings is better than no savings. And automate it so it happens before your spend your money, not after. This is called "Paying Yourself First."

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