The method below is how I manage my finances. I learned it through trial and a lot of error. I'm told I'm pretty good at it nowadays. Well, this is how I do it.
Benefits:
- No worries about daily living expenses.
- The math is simple.
- A buffer is built in to handle mistakes and emergencies.
Prerequisites
Before we really begin, you should know that this method won't work for everybody. Years ago, when I was making $300 a month, this method could not be done. However, if you meet the requirements listed below, it will work for you:
- Two weeks of pay should cover the roof over your head.
- Three weeks of pay should cover both the roof over your head and basic living expenses.
It's all about the budget
Worry about budget usage, not bank account balance. If I go out partying every night at the beginning of the week, that uses up my "partying budget." I still have money for food and rent, but I can't go out partying until the next month.
Never sacrifice one budget to pay for another. If my light bill this month is half of what I expected, I still can't go out partying if I've used that budget up. I feel like this is where a lot of people will get tripped up. Your budgets are hard monthly limits and can never be negotiated.
Always ignore extra money. Extra weeks in a month that give you more pay aren't considered in your budget. You can't spend it. Extra money goes into your bank account and is ignored until "a rainy day." (More on this later.)
All needed living expenses should be covered by week three. The fourth week can be divided up however you want after the goals (scroll down) are met.
Easy Math -- Pitted Against You
Round up for expenses and down for income. A $123.75 bill is considered to be $150. A $310.80 paycheck is considered to be $300. The bigger the number, the more you should round it. You'll get a feel for what works.
For income, every month has four weeks. For bills, every month has five weeks. If you make $300/week, then you actually make $1200/month. If you spend $10/week on gas, then you actually spend $50/month on gas.
Your bills that change every month are considered to be the maximum. An electric bill that ranges from $45 to $75 throughout the year is considered to be a steady $75.
By following the above rules, you end up with extra money.
Getting Comfy
Getting comfy doesn't happen overnight. Most people have debts, and few people seem to have money stashed away for emergencies. To get comfy, meet the goals below by using your fourth week's pay. I've listed the goals in order of priority.
Make Sacrifices
Until you meet all of the goals below, cut out as many extra expenses as you can. Actually, you may realize that you don't miss something after it's gone. I still don't own a TV even though I've been able to afford one for years! ;)
Debt payments should be no more than half a week's pay.
At first, you should pay down your debts if the minimum payment is more than half a week's pay. Pay them down as quickly as you can. You'll get there.
It is a good idea to have some debt to build credit, so don't worry about paying all of it. Just get it to a manageable state. Do not pay more than a week's paycheck to do this though. That money is needed elsewhere.
Have a buffer that covers the most important expenses.
A buffer comes in very handy for unexpected expenses or mistakes in budgeting. I've found that the best amount is just enough to cover rent, utilities, gas, and cheap food.
Put money into your checking account until you can cover this for a month. This is your buffer. Then keep putting money in until it never drops below that amount.
Lastly, save up three months of pay.
After your debts are paid down and you have your buffer, start a savings account. Put money in until you have a full three months of pay. If you lose your job, you have at least three months to find another good one.
Be Comfy
Now you are very financially stable. You have low debt, a good buffer, and a substantial savings account. Money is not a worry because you can cover all of your bills so long as your stick to your budget. But what do you do with that extra week and more of pay?
Ignore the fifth week.
If you make more money in months with five weeks, ignore that fifth week. It goes into your savings account. Don't try to budget it. If you do, you'll end up with nasty fractions in your math.
Budget the fourth week however you want.
It isn't all just extra money that you can throw around. You should budget this too. You decide what you want to spend it on. I budget $50 on visiting distant family and friends, $100 on stupid stuff, and the rest goes to my savings account. You may choose to budget some of it for a television service.
Prune your buffer.
Over time, you'll notice that the buffer in your checking account grows. Prune it down to the limit you set by transferring the extra money into your savings account. I tend to do this every three months or so.
Enjoy the rainy days.
Over time, your savings account will grow. Always keep three months of pay in there, but any extra can be used for a rainy day. I'm saving up for a vacation next summer. Alternatively, you can use it as an investment into a new business in the hope of making more money.
Hard Numbers
Well, not so hard numbers since I don't share my salary with anyone. I am fine with speaking in terms of budget, so here it is for your reference:
$100/week: food and going out
$50/month: visiting distant family and friends
$100/month: stupid stuff
$XX/month: savings account
And that, my friends, is all that I consider. I don't worry about rent, gas, and living expenses because I know that's covered. And if I have to buy new tires for my car, I don't worry about that either because it's covered in my buffer.