No, really. It’s true. You just have to spend smartly. And in a special way.

Over the course of your life, if you make what the average American does, more than a million dollars will flow through your hands.  And yet so many of us don’t feel rich.  That’s because money is like the Gingerbread Man.  Turn your back on it, and it’s out the door, rudely taunting everyone as it flies by.  And then it gets eaten by a fox. Such a waste.

But it doesn’t have to be.

Let me share with you THE best method I’ve found for managing my money.  It takes tons of anxiety out of spending and saving.  And, if you’re a Dave Ramsey fan, it is the one thing upon which everything else he teaches depends.  If you’re not a Ramsey fan, it doesn’t matter. After getting a job, this is the first thing you must do to get rich.

Here’s the big secret. It has three parts:

1)     Decide how much you’re going to spend on various things BEFORE you spend it

2)     Make what you have left in each spending category EASY to track

3)     Manage the things you can’t foresee

To do the first two parts, you’re going to create a special kind of spending plan. We won’t use the term “budgeting” because “spending” is so much more fun, and because that’s what we’re going to do anyway. To understand how to do this, you need to watch three videos.

Before you do, please know I earned a Masters degree in accounting.  I’ve used Quicken for more than twenty years.  Neither of those things has helped me manage my money like this simple method.  If you’re looking for a better way to manage your money, this is it.

First, watch this video to get an overall idea of how this method works.

Note: you can use actual envelopes and cash for everything if that makes you happy, but you really don’t need to.  The idea is to think of pre-allocating your monthly income to categories of expenses AND then having an easy way to track what’s left.

Now, watch this bubba explain how he does it.

But John, didn’t he say the same thing?

Basically, but he has a fun accent. Besides, it’s good to see another example. And please note again: you don’t have to use actual envelopes and cash, although many swear by them.

Finally, watch this one. No, it’s not just another repeat. There are some additional important ideas illustrated here.

This video brings up the idea of why simply tracking an overall account balance isn’t very helpful. It also shows you WHY envelope categories are–they make it immediately apparent how much money you have to spend for a thing.  If you just use Quicken to track what you spent (looking in the past), you’ll run into troubles.  Let me tell you, I know this from experience. We use Quicken, and have for years, and plan use it for some time to come because it makes taxes and bank reconciliation a snap.  But Quicken only tracks what you spent.  Tracking, as important as it is, is not the key to success.  The key is pre-allocating BEFORE you spend.  And then tracking so you know what you have left in that category.  And making that tracking EASY.

The final thing you have to do is manage the things you can’t foresee because things rarely go exactly to plan. Unexpected things ALWAYS come up. Your daughter will crash the car. Your husband will get appendicitis. You will forget that you had a $200 school sports expense.

Okay, fine. Things happen. But how do you manage them if you can’t foresee them?

If it’s really small, you simply adjust your plan. For example, if you need $30 more in food, you can transfer it from fuel if you have some extra there.

You manage larger things by building up an emergency fund. Ramsey suggests starting with a $1,000 emergency fund and then trying to get two to three months of living expenses—about $10,000 to $15,000 for most people. Unexpected things WILL happen and cost your money. So build up some cushion to take care of them.

Finally, you manage the really large things by getting proper insurance. This is what insurance is for. The types of insurance you need include (1) homeowner’s or renter’s, (2) auto, (3) medical, (4) long-term disability, (5) long-term care (for those 60 and older), and (6) life insurance. You may add true identity theft insurance as well.

Okay, so that’s the overview.  If you want to try this, here’s how you do it.  It’s fairly easy. 

STEP 1: get your head straight

Resolve that you will NOT use credit for anything. You will not spend any money you don’t have.  You will not put another dime on a credit card, and this despite the fact that the plastic devil companies are begging you with offers almost every day to sign up for their cards. (Hum, I wonder how they afford all that junk mail.) If your monthly bills are greater than your income, then we have to fix that first.  But the new law of the land is zero new debt.

Next, always remember to allocate your money to these categories first—shelter, food, adequate clothing, and adequate transportation.  This means if you have a crunch month, you would NOT pay credit card bills before food, even if you work for Visa.

STEP 2: get your blank sheet & pencil

Get out a piece of paper and pencil (not a pen) or open an Excel spreadsheet.  Whoa, that was an easy step.

STEP 3: list your monthly income

List your expected monthly income at the top from all sources.

STEP 4: list your spending categories

List your spending categories. You’re going to split them into two groups.

The first group goes right below your income and includes all of your recurring monthly expense/spending categories. Not the amounts you spend. Just the categories. Things like mortgage, electricity, phone, groceries, dining, etc. Make sure you include some entertainment/fun money.

The second group goes below your recurring monthly expenses and includes all of your major annual periodic expense/spending categories. Things like Christmas, vacation, clothing, kids back to school stuff, etc. And things you want to save for—a couch, iPhone, car, etc. Your emergency fund goes here as well.

If you need help thinking up categories, use these Ramsey resources: Monthly cash flow plan forms and Monthly allocated spending plan form.

STEP 5: Fund your categories

Decide how much you will spend in each category this month.  You should have 0 dollars when you get to the bottom of the sheet.  Spend (allocate) every dime BEFORE you start the month.  You’re going to do this at the beginning of each month.  And you will probably have to adjust it a couple of times during the month.

You will probably have categories that don’t get any money this month.

You will also have categories that get money, but you won’t spend any of it this month.  These are your periodic expenses.  Your goal is to have the cash up front to pay for them, so you have to save for them.  Remember, you are NOT going to take on any new debt. 

For example, if you’re saving up for Christmas, you allocate some money for that out of this month’s funds and TRANSFER it to savings.  Then it will be there when you need it.  You could draw the cash out and put it in an actual envelope, but you don’t have to.  Just as long as you keep a record of the total amount in savings and what it’s all supposed to be for, i.e. total savings in July = $1,000: $500 for back to school, $200 for Christmas, and $300 for my trip with kids to Six Flags in 2013.

STEP 6: mark the “watch” categories

Some of the categories you need to watch closely, and some you don’t. The ones you need to watch closely will be your “envelope watch” categories. 

The categories you don’t need to watch as closely are those that are automatically taken out of your account each month.  And those you will write a check once a month for.  These things include mortgage, car payment, electricity, etc.  These are NOT categories you need to use actual envelopes for.  You can track it on paper or in the spreadsheet. Not much happens with these categories. 

But there are other categories that you’re going to be spending throughout the month, and it’s easy to over spend if you don’t track them.  Groceries, dining, entertainment, gasoline, a specific vacation, etc. are all categories that you make multiple purchases with each month and are flexible/discretionary and need to be watched closely.  So while everything is tracked in a category/envelope on paper or on the computer, you’ll track these with either a real envelope and cash or a virtual one using that free software you saw in the third video or a piece of paper with a running category balance in your wallet.

STEP 7: have fun and spend!

Now go out and spend!

Before spending, check your envelope.  Do you have enough money?  If you do, spend and be happy.  If not, save up for it or find a way to save money in another category and adjust so that you’re still spending the same total amount.  Never spend what you don’t have.

If you feel you need something not planned for, well, you have to get it later OR transfer something out of another envelope.  I just make myself wait a day or three, and usually the urge to buy, Buy, BUY! goes away, and I see I don’t “need” it right now.  Or maybe a more affordable option presents itself.

If the kids want something, and you feel guilty you can’t give it to them, just tell them what’s in the envelope/category, and tell them they can save for it or choose something else in that category that will fit with what you have left.

If you’re tracking envelopes virtually or using the paper balance in your wallet, you MUST update your envelope AFTER every purchase so you don’t spend more than you have. If you find you just can’t seem to remember to do this, go to the cash method.

That’s it! 

Of course, that’s not quite it because even though it’s easy, if you haven’t done this before, it might take some adjustment.  Give yourself a month or three to get it down.  Because when you do, it WILL produce great results and peace. It’s doing that for us. 

If you feel you need more info, I suggest you read Dave Ramsey’s Complete Guide to Money.  Here’s the first chapter to sample: Complete Guide To Money sample chapter.

Happy spending.

EDIT: here’s another video to watch: http://www.youneedabudget.com/.  Then read about the method: http://www.youneedabudget.com/method. This one highlights the idea that you need to make sure you realize that things will happen that you cannot foresee. No plan survives contact with the enemy.