It happens every time we look at our checkbooks.
We see the balance and assume that if the money is there, then it can be spent. Not later. Now. Never mind that at least some portion of the current balance should be reserved for future bills that we know are coming. Any available balance is fair game at the moment.
We do it every month.
Then Christmas rolls around or a big bill like auto insurance comes due and we act shocked that there isn't enough money to cover it! So we scramble like mad or take the easy way out -- use a credit card. Bad decision. We pay the price for the next few months.
Does this sound familiar?
It's a psychological trap that we fall into very easily. So how do we combat this tendency? Fight fire with fire! A psychological trap calls for a psychological trick to keep us in line and ease our budget pressures.
Here's how.
1. Identify Key Bills
There are certain bills that we know are coming every month, once a year, or at various intervals in-between. It shouldn't surprise us when they come due. But often we are caught off guard because we didn't prepare.
For the most part, these are bills that are essential. If they don't get paid on time, then bad things can happen. Good candidates to include in this category are the following regular bills:
Electric, Gas, Phone, Mortgage/Rent, Vehicle Payment, Water/Sewer, Property Taxes (if not escrowed by the mortgage company), Homeowner's/Renter's Insurance, Vehicle Insurance, Life Insurance.
We might also consider a few other sizable bills that are not on the critical list. These bills tend to creep up on us and catch us by surprise, such as:
Homeschooling Books/Supplies, Christmas, Vehicle Repairs.
You decide what fits best for you. The important thing is to determine which are your key bills.
2. Estimate Each Bill's Expense
Some of these expenses are very easy to predict. The mortgage/rent or vehicle loans are usually a set amount every month. No problem. Others can vary significantly each month or change with the seasons. However, we should be able to make a reasonable estimate as to how much we spend on these items over the course of one year.
Then divide the annual costs into monthly amounts. For example, if you know that you typically spend around $1,000 on Christmas each year, then your budget calls for $83 per month to meet this expense -- even though the money is all spent in December.
3. Establish a "Budget Management Account" for Your Key Bills
That's right. Open a second checking account strictly for your key bills.
Let's say that you've determined your key bills run about $2,400 per month on average throughout the year. That means you are going to deposit $2,400 into this new account every month of the year. This money is only to be spent on the key bills that you have identified. Some months you'll spend more than $2,400 and other months less, but over the course of the year you will come in right on target.
So how does this help you stick to your budget? Two ways.
First, you guarantee that your key bills are covered. In fact, they won't stress you anymore because you've socked away the money each month to cover them. The bill comes in, you calmly write a check, and it's done. No sweat. No hassle. No worry. Doesn't that sound nice?
Second, your regular checking account balance is going to carry -- sorry to do this to you -- a much lower balance throughout the year. On average it will be $2,400 lower because that money is now sitting in your new budget managment account. But it's a realistic balance. It represents what you really have available to cover all your day-to-day expenses -- things like gasoline, groceries, entertainment, eating out, etc.
As long as you stay inside that balance, you're doing ok. Of course, that requires self-discipline. You supply the character. I've supplied the psychological trick.
It really works! Give it a try and let me know how it's going.
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