Budgeting is a powerful tool that can help you reach your goals and live life to the fullest. Instead if limiting and negative, budgeting is actually empowering and positive.
This is the third in a series of posts about budgeting and how to use it to get the most from your money and your life. This post discusses different budgeting methods you can use to gain control of your money and track your progress toward your goals. In the first post we discussed some myths about budgeting, what budgeting is and why budgeting is important. The second post discussed how to build your money awareness, allowing you to do a better job of managing your cash-flow and make better budget decisions. I recommend you read all of the posts in order.
According to a survey by the National Foundation For Credit Counseling, only 41% of us have a budget and keep track of our spending. That’s a problem because as we’ve seen, budgeting is one of the best ways to take control of our money and reach our goals.
Besides helping align your spending with your goals and give us a clear path to follow as we work to reduce our debt and save for our goals. While some (very few) people can keep track of everything in their head, for the rest of us a physical budget of some type is usually best.
There are many different budgeting methods you can use to keep you on track. I’ll highlight a few methods that have worked for me personally as well as for clients I’ve worked with over the years. There are no right or wrong methods, just variations on the theme of helping you keep track of the money in your life.
No matter the method you use, the goal is the same…to take control of the money in your life and create a spending plan that reflects your needs as well as your goals.
The concept behind the zero-based budget is that income minus expenses should equal zero. A common statement about this budgeting method is “give every dollar a job”. The reason it works for many people is that it forces you to prioritize your spending and assign specific amounts to specific categories.
With a zero-based budget there is none of the “I still have money in my checking account so I can spend it” because you are tracking your money category by category.
You designate categories for your money and each time money comes into your life (paycheck, gifts, Powerball, etc.) you are assigning it to either an expense category or savings/goal.
Zero-based budgeting is great for people who want to be in control of their money. You decide in advance where you want your money to be spent.
On the other hand, zero-based budgeting can be time-consuming. Tracking every transaction can get tedious, especially if it’s not convenient to do. Fortunately there is an app out there that makes things much easier. YNAB is it’s name and next week I will talk about how it can be used to take control of your spending without taking all of your time.
Often called the “envelope budgeting method”, cash-based budgeting uses cash, and only cash. No credit cards allowed!
You allocate your money to each category (groceries, rent, etc.) and put the cash for each category in an envelope. When the money is gone from the envelope you’re done spending in that category.
This method is good for people who struggle with overspending but the downside is, if you follow it literally, that you are withdrawing and keeping a lot of cash in your house/on your person. There’s always a risk of losing it, etc. The concept of this budget can be implemented using budgeting software such as YNAB (more on this next week).
The 50/30/20 budget is straightforward and requires less work than the zero-based and envelope budgets. The idea is to break down your expenses into three categories: necessary expenses (50%), discretionary expenses (30%), and savings and debt payments (20%).
This budgeting method is a good option for those that are new to budgeting because it doesn’t require detailed tracking of all your expenses. You can succeed with this budget as long as you know what counts as a want versus a need and that you put enough towards savings and debt.
The main drawback is that the 50/30/20 rule might be unrealistic for people who have a lot of debt or have big savings goals because 20% isn’t a lot.
Of course you can customize it to fit your needs. For example, you may want to consider increasing the savings and debt repayments category and decreasing the discretionary or necessary expenses categories.
As the name says, the “no” budget consists completely of not spending money that you don’t have. Instead of creating a budget, you:
While the “no” budget might sound easier than the other methods, it’s not always easy to tell yourself “no.” This method is best if you’ve demonstrated spending discipline in the past and are confident that you can continue that streak.
Also, it’s best if you use only a debit card with this budget because it’s tied directly to your checking account and automatically updates your balance.
If you’ve been following along you have a good idea of why you want to budget and what type of approach you might want to take with your budgeting. Now, the question is, what are some tools you can use to build and maintain your budget over time. Well, you could do things “old skool” and get a piece of paper and pencil and have at it. Many people do this with great success. If a pad and pencil is not your style there are a number of software based tools you can use. Next week we’ll discuss some options and I’ll let you know my personal recommendation. See you then!
Setting goals and building and acting on a financial life plan takes work. While many people have the time, motivation and energy to do it all on their own, many do not.
If you would like some help building your own financial plan or would like a second opinion on anything related to your financial life, I’d be honored to speak with you. You can contact me by sending an email to firstname.lastname@example.org or visiting our website at www.financialclaritypartners.com and clicking the link for the “Contact Us” page. Or, if you want to speak with me directly, go ahead and give me a call at 678-626-7526 and we can discuss your needs and determine if my services might be a match.
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