I believe in the power of a good budget to turn people’s financial lives around. So I’ve decided to dedicate the next few posts to it.
Often, when people think about budgeting, they think of restriction.
To some people “Budget” can be a loaded word- a word that signifies that they did something wrong, that they are tight on cash, or that they are not successful in their careers.
But, a budget is just a plan. It can be as restrictive or as freeing as you want it to be.
Let’s look at it practically: Say you go to a store and ask yourself, “How much can I afford to spend?” You take a glance at your bank account, what do you see? Just a number. That number you see is just a picture in time. It doesn’t tell you whether you’ve spent that money on something else already like a mortgage or a credit card payment that’s due tomorrow.
So, you take that number and buy stuff at the store, and hope that you’ll have even money to cover this shopping trip, your other needs, and meet your saving goals by the end of the month.
When you have a budget, you know concretely how much you can afford to spend…. because you already planned for it. This knowledge brings peace of mind like none other.
And that’s the key: a budget simply helps you see the big picture of what your money needs to do and how much you have available to spend.
Taking that into consideration, it seems pretty silly to be walking around without a budget, doesn’t it?
Do I mean that everyone has to sit down and make a line item spreadsheet? No. While the spreadsheet works great for my family, it may not work for yours.
The goals of budgeting are:
Pay for all your needs
Pay for most of your wants
Help you meet your saving and investing goals.
That’s it.
So here are five ways you can budget like a boss.
We’ll go from least detailed to most detailed.
1. The Proportional Budget
This budgeting philosophy, made famous by now-Senator Elizabeth Warren. It is centered around the philosophy that 50% of your take-home income should go towards needs, 30% should go towards wants and 20% should go towards savings.
This method is good for those who only want to check in with their spending every once in a while, or who want an occasional judgment on whether they are spending reasonably.
It requires you to look at your monthly spending once. If your spending aligns with the above percentages, great. If your spending does not meet the above criteria, it will help you identify where you are overspending and how you might be able to fix it.
The proportional method is great for someone who wants to stay in the big picture and be less detailed.
However, this method doesn’t directly curb impulse spending.
As an aside, If you haven’t read Senator Warren and her daughter’s book, All Your Worth: The Ultimate Lifetime Money Plan, I’d highly recommend you do so. It’s full of very good information.
2. The Pay Yourself First Budget
This type of budget is also called the backward budget. First, you decide what your money goals are and how much money you want to send to each goal every month. For example, say you want to put a thousand dollars in your brokerage account, $300 in a 529, and $1000 towards your debt every month. Well, you set up those automatic transfers. Then you spend whatever is left as needed.
This method is good if you have a lot of income and want to prioritize meeting your money goals without having to track expenses.
It is not good for someone who needs insight into their problem spending areas or for someone who may be at risk of over-drafting their account.
3. The Spreadsheet Budget
The spreadsheet or line-item budget is my favorite. You can download a free template that Josh made for you at the top right of the page.
This type of budget can be as detailed or big picture as desired but does require you to go through each line item of your spending.
Here is how Josh and I do it: On that last day of each month, we go through our spending for last month and add them into our spreadsheet. This process is made simpler by the fact that our bank has a budgeting function where it breaks down our spending for us by category.
We basically go through and make sure everything was categorized correctly and that all the transactions were legitimate and not fraudulent.
Then, we compare how we spent to our goals for that month and have a conversation about what we want to change for the next month.
Then, we make our spending goals for the next month and get on with our lives.
At the end of the month, we’ll check in again and see how we did.
This method is good for spotting trends in spending and it’s safe in that there is no data sharing with third-party apps.
Also, we are able to track our paycheck withholdings and automatic savings on this spreadsheet.
A free spreadsheet is available for download when you subscribe to TFP. If you’re already a subscriber, look for the template in your inbox.
4. The Zero Based Budget
A zero-based budget is centered on the idea that every dollar that comes home to you needs a job.
Income – Expenses= 0.
The incoming paychecks are assigned to different categories. Then, as the month goes along, you execute your plan and adjust as you go. This type of budgeting it more involved and requires you to check in frequently.
There are several apps out there like YNAB and Every dollar that help you do this on the go. This type of budgeting can be great for paying off debt.
The apps can be linked to banks and credit cards so that they can pull in your spending for you. However, you still need to go in and categorize your spending initially.
This method is great if both partners in a relationship are committed to doing it. It didn’t work for us because I found I was the only one going into the app and categorizing and tracking, etc.
5. The Envelope Budget
This is the type of strict budget that most people don’t want to think about. However, it can work well for those that really have a problem with impulse spending.
In the envelope budget, an envelope of cash is allotted for monthly categories where you tend to overspend. Some examples would be groceries, restaurants, gas, entertainment, etc.
You would allot a certain amount to each category and then take that money out of your checking account and put it in envelopes for these categories.
It is a very tactile and tangible way to help curb discretionary spending.
However, it doesn’t really address overspending on big fixed expenses or subscriptions that might be draining your account.
Also, it doesn’t address saving or investing goals and be quite cumbersome.
There is an app called Mvelopes that tries to make this process easier.
Next week, we’ll talk about how to pick one that might be right for you.
Stay frugal, y’all!
Disha
Standard Disclaimer: Not meant as individualized financial or medical advice.