The Per-Diem System Is a Seriously Easy Budget to Follow [Budgeting]

via Lifehacker by Adam Pash on 4/15/09

If you've ever taken a work-related trip, chances are you're familiar with the concept of the per diem (Latin for "per day")—a daily cash stipend intended to cover your expenses.

Photo by chrisdlugosz.

Weblog Get Rich Slowly details how to apply this concept to your monthly budget, creating a per-diem budget for all your spending cash.

As a guy who just finished paying off $14,000 in credit card debt, I wanted to share one tip that helped me get over the bad debt hump. I allocate my spending money on a per diem system. At the beginning of each cycle of my monthly budget, I set aside funds for:
  • Every fixed expense that I have (rent, cable/internet, groceries, power)
  • Any unique expenses (a plane ticket, for example)
  • And, of course, my savings (about 8 percent of my after-tax, after-401k income)

After allocating this money, I go to the bank, withdraw the remaining funds in cash, and divide it among envelopes for each day of the month. Each day, I open an envelope and add the day's cash to my wallet. For me, the physical parceling of the cash is an important psychological step.

Granted, using this method does mean a lot more cash transactions, which can be difficult to track and don't have any benefits (of the credit card rewards ilk), but since most of the spending you need to track will have been paid before you set aside your per diem cash, it's not a bad method—especially for folks who have a hard time sticking to a budget when there's no physical limit.

In college, I went on a similar (but decidedly more insane) budget in which $1 per day was all I allowed myself. Extreme, yes, but I saved some serious cash over that summer. With a more reasonable approach, I can imagine a per-diem budget could be very effective.