Automated Budget System

  • March 11, 2007

Over the past 2 years or so I've told many of my friends about how I organize my finances. I've finally decided to put it down in writing, to share with the world. It may not be perfect for everyone, but it works well for me. I hope you like it too. Basically, I combine the concept of Richard Jenkin's "60% Rule" (here) with an automated savings system, which links my Checking Account with my Savings Account.

In a very brief summary, the "60% Rule" explains:

  1. 60% of your income should be spent on committed expenses ("living expenses"), such as (housing, food, transportation, etc.)
  2. 10% of your income should be spent on Retirement savings, such as an IRA and a Roth IRA.
  3. 10% of your income should be spent on Long-Term savings, such as an investment that has a difficult to liquidate anytime soon.
  4. 10% of your income should be spent on Short-Term savings, such as an emergency fund.
  5. 10% of your income should be spent on fun stuff! (I don't think you need an example here)
This article will only really touch upon how to better organize the 60% that you should commit to expenses. However, you could easily use the ideas described below to apply to the other categories of the 60% Rule. Before we look into the Savings system, we should organize our budget. I simply track all of my expenses (yes, ALL expenses) for a period of 3 months. This gives me a rough idea of where my money is being spent. I then use a spreadsheet program, such as Microsoft Excel, to build a list of my expenses and how much each item costs. After the budget is built, we're not done with budgeting, but we do have a starting point. Every few months or so I revisit the budget and adjust as necessary. So, we now have an idea of how much is spent on expenses, and we can better organize our money to try and align with the 60% Rule. Now that we have our budget arranged, we want our money to benefit us as much as possible. It's not enough to simply earn money, you need the money you've saved to keep earning more money. Due to inflation, if you're not making money, then you're losing money. Below are some ideas on how to make your money work for your advantage.

And then comes the Automated Savings System:

I've chosen to have an account with INGDirect.com because their Savings Account returns a high rate. Even though I only have one technical account with INGDirect, they allow me to divide my account into sub-accounts. This allows me to dedicate some money under the name "Savings Account A", and I can dedicate some other money under the name "Savings Account B".

Adding in some automated stuff:

Many online banking systems permit you to make automated payments. Bank of America even allows you to make payments to non-online entities. If you need to mail your sister a check to repay her for the table that you broke this past weekend while showing off your karate skills, you could use Bank of America's payment system to send her a check in the mail. As the customer of Bank of America, you don't need to pay postage or even close an envelope. Simply sign into your online banking account, fill in the payment info (amount to pay, whom to pay, when to pay), and the bank mails the check for you!

Putting it all together:

Let's use an example to demonstrate the concept of the Automated Budgeting System. Our example will describe John and how is using the Automated Budgeting System. Let's consider John's basic expenses. John is renting an apartment for $1,000 per month, pays $30 per month for cable television, and has a telephone with unlimited calls for $50 per month. Well, John could set up his Bank of America account to automatically pay the appropriate amounts to each company (landlord, cable company, telephone company) on the correct day each month. John will never have to worry about being late in payments! Since his payments are the same each time, he won't need to watch each incoming bill. Along with paying the rent and the utilities, John will also need to pay renters insurance. If he pays $120 per year for renters insurance, then he could use INGdirect to automatically take $10 per month out of his Bank of America checking account put it into your . INGdirect will then return him 4.5% interest each month on the $10 that he stashes away each month. This reduces John's worries about pulling together $120 at the end of the year, and he'll earn interest while preparing of the payment. Here are the numbers...
  • if John does NOT use a savings account, then he needs to pay $120 at the end of the year in one bulk sum. This payment may cause him to need to cut back on his other savings or fun stuff for a month or two, in order to accommodate the $120 payment to insurance.
  • if John does use the automated budgeting system, he'll automatically put $10 per month into a savings account. After 12 months, the money will be transfered back to his checking account, just in time for the bank to automatically mail a payment to the insurance company. Depositing $10 per month, with 4.5% interest added each month (compounded), then at the end of the year John's savings account would have approximately $161.60. He would pay $120 for the insurance, and he'd have a profit of $41.60, for doing nothing but using his savings account!

using INGdirect.com sub-accounts:

John has opened an INGdirect savings account. He can now sub-divide that account for him to better track his savings. By creating a sub-account called "renters insurance", he can keep track of how he's progressing towards the final goal of $120 per year for paying his renters insurance. John can create multiple sub-accounts to help him track his various investments and savings.

The big picture:

  1. Open an online checking account with a large company, such as Bank of America.
  2. Open an online savings account, such as the ones offered by INGdirect.com
  3. Link the checking and savings account
  4. Calculate your monthly budget, and automate monthly transfer back and forth between your checking and savings account
  5. The key: have as much money as possible in your savings account for as long as possible, so that your money "works for you" while you spend your time doing other things. Your money will grow and earn more money!
I hope you find the Automated Budgeting System to be helpful. Please contact me if you have any questions or suggestions.