This post originally appeared on The Simple Dollar and is reposted here with permission. If you’ve had trouble making and keeping a budget before, you need to read this.

by Trent Hamm

When I reached my financial bottom in April 2006, one of my first responses was to simply start reading a lot about personal finance. I checked out a pile of books from the library on personal finance and tackled a lot of different suggestions from those books, along with some of my own ideas that I came up with as I went along.

One idea that was repeated over and over was how incredibly important and valuable having a budget was. I tried several different budgeting approaches and stuck with them for short periods, but the idea of a budget just never really stuck with me. The constant recording of expenses and estimates of spending in the future and so on always seemed like a bunch of busy work that never really went anywhere at all for me.

What did I do instead, then? I focused mostly on just watching what I spent. I did find a lot of value in simply jotting down every dime that I spent in a pocket notebook and, soon, I began to resist spending because I didn’t want to write it in that notebook any more. I began to really focus on how I spent my money in a few key categories – books being the big one. I set up some automatic transfers to take care of specific bills and to start saving for specific goals. Perhaps most importantly, though, I began to really change my behaviors and how I spent my time.

There are two big things to recognize from this story.

First of all, the actual personal finance choices I made were budgeting. Writing down my expenses, setting up automatic payments and savings, focusing on problem categories – those are exactly the type of things that make up budgeting.

More importantly, however, they led me to the same theoretical goal that budgeting has – a more responsible relationship with my money. That’s the destination of budgeting – a relationship with your money that enables you to have the freedom to effectively not worry about the money too much and just get on with your life.

If that’s the case, then why do so many people fail at budgeting – and why is it still recommended so often in personal finance books and on personal finance sites? I think the answer to that question explains why budgets are so often described in personal finance books – and also explains how people can get real value from “budgeting” their own way.

Budgets, Budgets, Budgets: Why?
Take a look at the people who are typically authoring personal finance books. They’re CPAs, CFAs, and other folks who deal with finances for a living. They’ve likely always been strong with math and never been afraid of dealing with large chunks of numbers – it always came natural to them.

I’ve always enjoyed math – in fact, I was just a few credits shy of a minor in mathematics in college – but I’ve never been much of a fan of business or accounting math. Large rows of financial figures have always caused my eyes to glass over. I enjoy chasing down a problem, but adding up figures and making estimates is not something I enjoy or naturally want to do with my time. I can do it, but it doesn’t feel natural to me.

The important distinction here is that the traditional way of doing a budget is something that comes from people who are financial planners and accountants – people who are naturally gifted with working with lots of numbers and spreadsheets. That’s great, but it doesn’t accommodate how many people look at the world.

Not everyone is as comfortable with numbers as a CPA or a CFA. That’s not to say they can’t do it, but numerical analysis isn’t as easy or natural for many people as it is for a person naturally drawn to accounting and financial fields. The advice given on budgeting in personal finance books often comes from those folks who are naturally gifted with numbers and thus their budgeting advice is often challenging for others to follow.

A Better Solution: Focus on the Goals
Instead of focusing so intently on the exact process of budgeting as shown in a personal finance book – and, even worse, viewing yourself as a failure if you can’t keep it up – focus instead on the goals of all of this.

Why are you thinking about budgeting in the first place?

Most of us try budgeting because we simply need more breathng room in our monthly and yearly finances, for various reasons: repaying debt, saving for a big goal, building an emergency fund, or something else entirely. We know that the route to this is getting our spending in check.

The solution, of course, is to trim a little spending out of a lot of areas in our life.

The usual way of doing this is to sit down, sort our spending into a lot of different categories, and make estimates and targets for monthly spending – a very number-heavy process.

But, really, all that budgeting is doing is saying “I need to cut spending in these specific areas.” It’s difficult to cut spending in a lot of areas, but those are great areas to cut back in.

Because of this, I wound up with a solution that worked really, really well for me. I like to call it zero-sum budgeting.

Let’s say, for example, that I have $200 a month set aside for our energy bill. I’m on the “budgeted” energy plan that averages out the energy costs for the year. I also have $100 a month budgeted to spend on whatever I want, so one month I use $50 of that to install a programmable thermostat and also on some caulk. I program the thermostat to turn off the heating and cooling when I’m asleep or at work and I use the caulk to air-seal my home. Next year, the energy bill gets reduced because you’re using less energy – now it’s just $165 a month.

Here’s the key part. Instead of just spending that extra $35 a month, I start putting $35 a month automatically into savings. Since I was already making ends meet with the $200 energy bill, It makes no difference in my day-to-day life if I just put $165 towards the bill and $35 into savings instead of just $200 into the bill.

You can do the same thing with any category of spending once you have a good estimate of how much you spend in that area. Let’s say, for example, you spend $50 on media purchases a month – DVDs, books, and so on. If you decide to “budget” just $25 a month for that, start off the month by automatically putting $25 into that account.

You can also do the same thing with “found money.” If you come into a small windfall, just stick some or all of it into the account. If you find a great way to save some cash as a one-time opportunity, put that saved money into the account.

What can I use the money in that account for? If I’m building up an emergency fund, I just let it keep building until it’s an amount I’m happy with – a few months’ worth of living expenses. If I’m paying off debt, I clean out the account each month and use it as an extra debt payment. If I’m saving for a goal, I just put that money towards whatever goal I’m saving for.

Two points.

First, this doesn’t work if you’re already spending more than you make. That type of behavior is not sustainable. If your credit card balance is going up each month, no amount of budgeting or planning matters until you’ve reached a point where that credit card bill goes down each month.

Second, it works best if you focus in on a specific area or two. Budgeting is a lot like dieting. If you go cold-turkey crazy, you’re going to have a very high likelihood of rebounding and undoing all of your good work. Instead, focus on one or two areas for conscious spending cutting and, at the same time, look for “one shot” opportunities to save money now or reduce ongoing expenses.

Any time you commit to financial change, willpower is required. However, it doesn’t require an accountant’s head for numbers. It requires a focus on goals, a willingness to actually make some behavior changes (one step at a time), and a desire for real change in your life.

From Get Rich Slowly today, a synopsis of a USA today article: 8 Financial Deadly Sins

14 ideals to help you live a better financial life.

The Get Rich Slowly Philosophy

You don’t don’t keep a budget? Here’s a thought as to why:

 If Budgeting Isn’t Fun, You’re Doing It Wrong

This article originally appeared on The Simple Dollar, and is reprinted here with permission.

Also, this is good advice when any change is overwhelming, not just financial change.

by Trent Hamm

Mark writes in:

I’ve been reading The Simple Dollar for a year or so and I’ve found it really inspirational. My problem is that I can’t get past the “inspirational” part.

Several times, I’ve started to try to implement your tips. I’ll make grocery lists and try out lots of free activities and give up my morning coffee and start watching less television and reading more. What I find, though, after a week or so is that I just get frustrated with all of it and I quit all of it and go back to doing exactly what I was doing before. How do you start changing if you can’t even tackle a handful of simple changes like this?

In order for change in your personal life to succeed, you need several elements. From what I can tell from your description here, Mark, you’re missing several of them.

First and foremost, you need a goal. Why are you doing this? Where do you want to be in five years? Will you be out of debt? What will you do with debt freedom? Will you have a family? A home? A better career?

Don’t spend your time worrying about specific money-saving tactics right now. Spend a week or so really thinking about your future and what you really want from it. Where do you want to be in a year? In five years? In ten years? What do you aspire to?

Flesh these goals out. Add lots of detail to them so that you can really get a sense of what it might take to get there.

Most importantly, write them down. Record these goals somewhere, along with all of the details you come up with.

Think of it this way: if you’re not working towards something better than where you’re at right now, why make sacrifices at all?

Once you have that goal in mind, you need a plan. What exactly needs to be done to get to the goal (or goals) that you’ve set for yourself?

One big part of this is often a debt repayment plan. A debt repayment plan basically organizes and orders your debts to maximize the effectiveness of your debt payments.

You might also want to come up with an educational plan or an exercise plan or a plan for improving yourself in some other fashion, whatever that might be.

Make the plan realistic. Never forget that the perfect is the enemy of the good. Your plan should be one that’s easily achievable, even if it means putting off your goal for a little bit longer. It should also allow you to go beyond the plan if you so choose on any given day.

Once you’ve done that, do a lot of “one and done” financial changes. Fill your spare time with these things. Install a programmable thermostat. Air seal your home. Clean out your closets and sell off the stuff that you don’t use that has value. Trim down your DVD collection.

Spend your spare energy doing these things for a few days. Better yet, as you do them, calculate the results. How much will they reduce your energy bill? When you sell off that stuff and throw the cash straight into your debt repayment plan, how muh is that plan accelerated? Do you pay things off a few months faster now?

This is the first taste of success, and it’s usually an inspiring one. You’ve got goals and plans for getting there. You’ve done something that directly helps your plan along and it wasn’t all that hard, either. You’ve reached some success.

Once you’ve done this, now’s the time to start with the behavior changes. However, I’m going to suggest that you not just do a bunch at once. Instead, pick out one change and focus on maintaining only that one change for thirty days. If you decide to switch to “office coffee” instead of stops at the coffee shop, do that, but don’t force other changes.

Again, figure up how much you’re saving from that one behavior change and roll that savings into one of your plans for the future. If you’ve simply made a change that saves $10 over the course of a month, that’s just fine – add $10 more to your next debt payment or put $10 into a savings account.

Take it slow. Every step you take is a real improvement, and it’s far better than taking thirty steps at once, stumbling, falling down, and rolling back down the hill.

Good luck.

Over at Bargaineering today: Consider Self Insurance Against Calamities

My feelings about most insurance are thus: Quite often, we allow fear to make poor financial decisions for us. We’re afraid of an accident or the worst case, so we let the agent sell us the most coverage with the lowest deductable.

My question is, would you pay somebody $125 a month for them to pay your $100 utility bill for you? With most insurances, this is what you end up doing. You end up paying much more to the insurance company than you ever get back in payouts.

This post originally appeared on the simple dollar and is reprinted here with permission.

by Trent Hamm

On the conference call I had last night with Vicki Robin, one of the listeners (I believe his name was Crispin) brought up an interesting topic of conversation. In a world where globalization is a fact and many jobs can easily be moved anywhere in the world thanks to the power of the internet and the information economy, we’re gradually going to see a global marketplace. In other words, all of the nations of the world will gradually see their average standard of living even out, as many of the workers are competing for jobs with everyone else in the world.

My belief is that, for the most part, the standards of living everywhere else in the world will rise rapidly to meet the standard of living in the United States. However, I also feel that our standard of living here will probably never grow at the same rate as it did in the twentieth century. In short, I think our growth rate will be much lower than that of the rest of the world and may in fact be a slow reduction over a long period of time.

I don’t really think it’s anything to panic about, though. This decline has been happening already for a long time, starting in roughly 1970. Real wages – meaning the amount that people get paid when you get rid of inflation – have essentially remained unchanged since then.

The real change in our financial lives has been the big increase in costs. There are countless services we have today that many of us consider essential – and that we pay for every month like clockwork – that simply didn’t exist thirty five years ago. Cell phones. Home computers. VCRs and DVD players. The energy required to run all of these devices. Internet access. Non-extortionary long distance telephone access. The vast majority of Americans consider these expenses a requirement – and they didn’texist in 1970.

My prediction for the future is that these trends continue. Real wages won’t go up, but our expenses will go up.

So what do we do? As always, there are two key solutions for this – and they’re solutions anyone can follow. Plus, they’ll benefit everyone regardless of whether they believe such change is happening or not. And these two key solutions are summed up in one phrase: spend less and/or earn more.

We can spend less by recognizing that we don’t need every service or tool that comes down the pipe.

On a regular basis, step back from your life and look at how you spend your money. Keep track of all of your spending for a month. Then, sit down and honestly evaluate it. Where are you spending money on things that really don’t add value to your life?Then, cut them hard.

Five years ago, I was a cell phone addict. I never went anywhere without it. I was constantly calling and texting people. Over the last two years, I have essentially weaned myself from cell phone usage. Now, I rarely pick it up and, when my contract expires, I’m going to simply cancel the phone and get a pay-by-the-minute el cheapo phone. Why? I realized I didn’t actually need what it provided. What I wanted was connection to the important people in my life – and cell phones didn’t really provide that. The only actual need it fulfilled in my life was additional security while traveling and, on rare occasion, contacting a friend to make sure we were meeting up at the correct time and place. I can do that for a lot cheaper with a prepaid cell phone, so I’m going to make that switch in the very near future.

On the flip side of that coin, we can earn more by improving our soft skills.

What do I mean by that? Think about it this way. There are two very competent mechanics in your town that charge roughly the same price for the same quality of work. One of them is very gruff with customers, doesn’t explain repairs well, and doesn’t provide documentation or assistance. The other one is very friendly with customers, explains the repairs in common terms, and gives documentation to his customers. Which mechanic will eventually have most of the business?

This is true in any field. Everyone has hard skills that they can provide to the world.We’re all good at something – and some of us are good at several different things. When you have your choice among people who are good at a particular task, you don’t choose because of the hard skills. You choose because of the soft skills. Do they communicate well? Do they listen well? Are they organized? Are they responsive? Do they spend their time improving themselves or improving the community?

Those soft skills and attributes pay off regardless of what the economy is doing – if anything, they pay off better in a down economy. That directly means employment for you. That means raises. That means job opportunities.

If you really focus on these two things regardless of where the economy is right now, you can handle almost anything that the future economic situation will throw at you. You’re prepared for it.

We can all have a brighter future no matter what happens if we spend some time today preparing for it. The future is an opportunity, not a place of fear.

Ok, so I harp on this a lot, I know, but the truth is if you have no control over your money, you will never be able to prepare for anything. Getting yourself in debt just makes you less prepared for the uncertain future.

The Simple Dollor had a fantastic post today on the #1 rule. I would highly encourage you to read it.

Rule #1: Spend Less Than You Earn.

There’s an awful lot of talk about how you need to prepare for this emergency, that crisis, and the other calamity. One thing a lot of preppers skip over is preparing for their own passing. Which I think it odd, because while those other may be good things to prepare for, death is the one thing you know is going to happen to everybody. You can save your family a lot of heartache and headache if you’ll just take some simple steps right now.

Probate is what happens to everything you own when you die. The court gets control of it all until it can decide who will get what, and how things are going to be distributed. This process can be expensive and it can take a long time. The good news is you can usually avoid probate altogether by preparing your financial estate.

The folks at ScanSafeData recently released a free report that teaches the steps you can take to avoid probate. You can download the report (no signups or anything, just right click ‘save as’) over at www.AvoidingProbate.com.

For some more ideas on estate planning, check out this recent article over at get rich slowly: Estate Planning 101: Preparing for the Possible — and the Inevitable

Today over at get rich slowly, J.D. posted a list of online banks you can use to get a (usually much) better rate. Remember, if you don’t take care of yourself financially, you’ll never be able to become self reliant.

Online Banking: 13 Choices for Higher Interest Rates and Increased Security