Most people will tell you a budget is the key to financial success. They’re wrong.
Without a system to manage your budget, you are forced to rely on willpower and self-discipline, which are like muscles that get exhausted quickly.
The key to financial success is a money management system that is driven by a budget. The budget is your spending plan and the system provides the tools to guide your behavior. This way, success becomes automatic.
With your budget complete from the last column, you’re ready to create a system to manage your money.
There are five elements to my Momentum system; each plays a specific role.
1. A primary checking account to deposit your income, pay bills and move money to various accounts.
2. Cash envelopes to prevent overspending.
3. Your Momentum account to accumulate money for less-than-monthly expenses. This can eliminate financial chaos when you encounter unexpected or occasional bills.
4. An emergency fund to provide security and reduce stress.
5. An investment account to grow your wealth.
If you are like most people, you have a checking account, savings account and a rarely funded IRA. All of that is about to change as you implement these actions steps:
Stop using your debit card to pay for things out of your primary checking account. Limit your spending from this account to paying bills.Twice a month, withdraw cash for your envelopes. Cash is for groceries and all of your discretionary spending detailed in Level 4 of your budget. Open a second checking account, if you don’t already have one, to serve as your Momentum account. At the end of each month, transfer your budgeted total from Level 3 (less-than-monthly expenses) into this account, which will be used to pay bills that occur on an irregular basis, such as car repairs, medication and gifts.Use your savings account to hold your emergency fund. Start with $1,000. It might take a few months of squeezing your budget to save that much. Do this before you start paying off debt. Your emergency fund will allow you to weather minor crises with confidence.Make investing automatic. Once you’ve paid off your non-mortgage debt and built up your emergency fund to cover three to six months of living expenses, it’s time to start investing. Automate your financial success by establishing an automatic monthly transfer from your primary checking account to your investment account.These five simple action steps can change the state of your financial life from chaos to confidence.
I’d love to hear your financial questions. Drop me an email at firstname.lastname@example.org. I’ll try to answer them in future columns.
Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. Visit his website, www.personalfinancecoaching.com.