Automatic Budgeting the Squirrel Way

Following from my last post, today I’m going to enlighten ya’ll about our budgeting techniques in the Squirrel household. It’s nothing fancy, it’s quite simple in fact, but most important is that it works for us. I first set up our budget this way about four years ago, and it’s been chugging along with only minor tweaks ever since.

To budget this way, you need to know the following:

  • How much you earn every pay period
  • How many bills you have, how often they need paying, and how much they are
  • A few hours to do some basic mathematics and then set up the necessary bank transfers

First thing to do is sit down with paper and pencil (or a spreadsheet if you’re like me), all your bills, and a large coffee. Write down all your regular expenses – how often they have to be paid, and how much the bill normally comes to. I also include how I normally pay for things (eg BPAY, cash, on the credit card).

Here's an example of what I mean.
Here’s an example of what I mean.

Divide these into two separate lists – one for large bills you have to pay in one lump sum (these are usually annual bills – insurance, car registration, and so on), and one for monthly bills (internet, phones, rent) and bills you can pay off over time (electricity, gas and water bills and so on).

Now here comes the mathematics. Don’t worry, it’s pretty simple stuff. Take your list of annual/lump sum bills, add them all together, and divide by the number of times you get paid in a year. That’s 26 times if you get paid fortnightly, 52 for weekly, and 12 for monthly.

The SUM function in Excel makes this a breeze!
Add them up, and divide by the number of times you get paid every year.

Now you know how much money you have to put aside each pay to cover your big, regular bills! I’ve found it’s easiest to open a separate account to put the “big bill” money into each pay period. Set yourself up an automatic withdrawal from your working account, scheduled for the day you get paid, and you won’t have to worry about these bills until you get the reminder notice in the mail. And when that happens? It’s a simple task to transfer the amount owing to your working account, then onto the outstanding bill. No muss, no fuss.

Next up, do the same thing with the smaller bills. But first, make sure everything is being referenced over the same period of time. I’ve turned everything into a fortnightly equivalent:

All the regularly occurring bills, totalled by their fortnightly amounts.
All the regularly occurring bills, totalled by their fortnightly amounts.

There, that wasn’t too bad, was it? Now you know how much you need to set aside each pay for all your bills!

Now, when it comes to paying these smaller bills, you have two choices. The first one is what I do, as it smooths the lumps between pay-cheque and bill-payment nicely. I’ve set up all our bills so that they’re automatically debited off a credit card whenever they fall due. Then I set up an automatic transfer from our working account to the credit card, for the amount totalled above ($613.35 in the example).

I ONLY recommend this option if you have an iron-clad grip on your spending. Credit cards are very useful tools, but turn into ravening debt-beasts in the blink of a 40% off sale. So if you’re prone to overspending, or don’t want to take the chance, option two is the better one.

Option two is slightly more work, but has a similar outcome. What you want to do is set up a second working account that you can have bills direct debited from. You’re basically setting up the same system as above, but with a “pre-paid” account instead of a credit card. Make this account a real pain in the backside to take money out of manually – keep it separate from your debit card, hold it at another bank, require co-signing to take anything other than the automatic debits out – whatever will make sure you can’t spend the cash that’s sitting there. That cash is for BILLS ONLY. Besides, all the money left in your working account is now yours to do with as you will. Congratulations! You’ve just automated most of your finances AND set up a budget!

Budgeting aficionados will look at this and (quite rightly) point out that I’ve missed a few important details. What about groceries, or bus tickets, or fuel for the car?

Those sorts of things are a bit harder to automate, especially if you’ve never thought about budgeting before. Most people are pretty good at realising they need to eat and get around, so it’s not as critical to get them nailed down. That being said, the Squirrel household does budget for those variables:

  • Keep all your receipts for a month or two.
  • Averaged out spending in each category you want money set aside for.
  • Add 5-10% just in case, or round up to the nearest $10 – whichever makes more sense.
  • Keep that money aside from the rest to spend as needed. I prefer to buy groceries and take-out with cash, so I withdraw the budgeted amount every fortnight. That means whatever’s left in the account is effectively Fun Money, and can be spent on whatever.

Is this system perfect? Probably not. Have I covered in detail every line item in the Squirrel budget? Definitely not! But this should give you the gist of how we manage our finances. And as systems go, it’s pretty fool-proof. So if you have trouble making your dollars go as far as they need to, give this a go and see if it helps.