Because a functional budget is actually connected to your money, it does more than help you understand your spending.
Even though budgeting can be a real pain, a budget can help in many ways. So, I thought I’d share a method that is simple to use, easy to set up, and it almost runs itself when you’re done.
A budget is more than knowing where you spend money. A budget should require you to think as you spend. It should have a real-time connection to your money. Because many budgets don’t have this connection, they often don’t help the way they should.
What is a functional budget?
When I was younger (pre-computer), the “envelope” budget was common. Each paycheck was cashed, and the appropriated amount of money was deposited into envelopes. There would be envelopes for transportation, entertainment, food, rent, Christmas, emergencies, and other things. As these various expenses needed to be paid, the money was removed from the appropriate envelope.
This is an example of a functional budget. At the beginning of the month, the envelopes were full of money, and I knew the bills could be paid. There were times, however, when certain envelopes, such as entertainment/eating out, were empty before the end of the month. If we wanted to go out to eat and we didn’t have enough money in the envelope, it was decision time. What do we do? Do we have a “slush” envelope to take it from? Do we “borrow” it from another envelope? Do we use a credit card? Do we stay home? Through the use of a functional budget, we were forced to confront our spending habits and make informed decisions.
Budgeting is painful for most
Here’s the problem – There are some who love the details of a complex budget. For many, however, it can feel overwhelming, time-sucking, and absolutely not fun. It’s often unworkable. So while there may be many budgeting tools available, I’d like to share a simple, functional budgeting approach that almost anyone can implement.
How does this budget work?
In its simplest form, this functional budget requires a few different checking accounts, all at the same bank, to hold and release your money. We’re using checking accounts instead of envelopes.
So, here’s an example of how this might work. Ben and Jill have separated their expenses into six different categories:
- Predictable monthly expenses (mortgage, utilities, giving, telephone, etc.)
- Transportation (fuel, car maintenance, insurance, car payment, etc.)
- Necessary but variable needs (groceries, clothing, dog food, toiletries, etc.)
- Medical Costs (deductibles, copays, etc.)
- Emergency Reserve. Gifts (Christmas, birthdays, anniversaries, etc.)
- Vacations. Discretionary Spending (eating out, entertainment, etc.)
They have also opened six checking accounts at their local bank.
Every time they get paid, they allocate a certain amount of money to each account in order to fund the expenses connected to that account. If done correctly, this means that all the bills get paid without worry. Through this budgeting strategy, you can also reserve the money you will need for a vacation or for Christmas.
This budget forces tough decisions
Because this is a functional budget, if Ben and Jill want to upgrade their furniture, they will need to find the money for it. In their current budget, all the money is allocated. So where will the money come from? Is there enough in the slush account? If not, they will need to talk about it and make a conscious, informed decision. Maybe they don’t buy now but instead accumulate the needed money in one of the checking accounts. Or maybe they have a separate checking account where they build the funds for future purchases.
You can learn about our budget spreadsheet and watch a demo HERE.