Budgeting and Saving: How They Work Together
One of the hardest parts of getting rolling with a budget is understanding where to put money that you've saved during a particular timeframe once that timeframe is over. We didn't spend the money, but need it to be accounted for later. Budgeting and saving should go hand-in-hand, but can be confusing at times. For example, you saved $300 for Vacation this month, but now it's time to start the next budget and you're not sure what to do with that money to ensure it goes toward Vacation and doesn't get spent at the grocery store before it's needed.
And if you're doing this for multiple categories and have a few different savings accounts it can get very confusing quickly. Which sucks, because budgeting is very simple, but can be complicated by banks who try to make you think you're budgeting, when in reality, you're just looking in the rear view mirror and seeing your spending history.
Let's start with why a budget is better than just looking at your bank statement...
Why Use a Budget and Not My Bank Account
Your budget is your spending plan. You're planning what you want your money to do, while your bank account shows you what your money did. Some online banking systems have things like "savings goals" which might be good for categories like Christmas, but are limited in their ability to maintain a budget.
The budget should be separate from your bank account so that you can keep track of your growing savings categories and know exactly how much you have saved in a particular category. Because, there is trouble lurking in your savings account when the balance shows a big number, like $5,000. You want to buy a $500 item, see the $5,000 in your account, make the purchase without thinking about what you saved that money for in the first place.
The next month the vehicle license fees are due, and now you have to pull even more from savings and you're not sure if you'll have enough for Christmas. You get frustrated with budgeting and decide winging it is the best option.
Keep track of Savings within the Budget
The better way to ensure you're savings are doing what they are supposed to is to keep track of them on a budget.
Practically speaking, if you're using an excel spreadsheet for a budget, or doing your budget on paper every month, you'll need another sheet where you can keep a tally of the total amount you've saved in each of your saving's categories. Then, when something comes up and you need to spend that money, you can see how much you have saved for that particular thing.
Some budgeting tools may have this sort of running total built-in. We use YNAB and it's one of the best features of the software. If we don't spend money out of a particular category that month, it carries over to the next month.
You no longer need to look at the big savings account balance and wonder which funds you are shorting when you pull from your savings. Refer to the budget instead of the bank account.
How Our Bank Accounts are Set Up
We switched banks about a year and a half ago, and when we did that, we just opened up a checking account, and no savings account. We did that because our checking account earns 3% interest, and a savings account could not compete. So, we keep all of our savings in our checking account.
Which is why it's so important to keep a budget and know what all of the money in our checking account is supposed to be doing. Some of that is our emergency fund, property taxes, Christmas, other gifts, vacation, etc.
If we didn't keep track of our savings within our budget, I'm sure we'd be spending all that money without a purpose very, very quickly. Hello, new lawnmower, computer, finished basement, and new car... (that's just my short list)
All that to say that it doesn't matter how your bank accounts are set up, it matters how you keep track within your budget. That's your plan of attack. It's what you intentionally want your money to do. Use your bank accounts for verification that your money is behaving how you intended.
It's like the Offspring says.... You gotta keep em separated... If you're starting to think ahead and save for things, it's a great step in the right direction. You're setting a foundation for winning financially, and it would be a shame if your budget fell apart, because you were confused on what all the money in your savings account was set aside for.
Do you use a budget to keep track of your savings? Do you have trouble keeping track of your savings?