The main idea is that we ‘pay ourselves’ each month by setting aside money for upcoming expenses. The amount of money that we set aside each month is the total annual amount needed, divided by 12.
For example, let’s say that we know that we need to pay $600 annually for car insurance. If we divide $600 by 12 months, that equals $50 a month that we need to set aside so that it is available when car insurance comes due. By setting it aside monthly, we know that the money will be there when it is needed. (For an idea of how much should be spent annually in each category, you can download Crown.org’s free percentage guides and other helpful budgeting tools here.)
The method that we use to set this money aside is a mixture of the envelope system and our own system. We’ve discovered that envelopes work well for groceries and our own personal allowances. The rest of our budgeting is done through online banking.
How about you? What’s your method of budgeting? What has and has not worked for you?
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