EXPLORING BUDGET APPROACHES

BUDGETS HELP US PRIORITIZE OUR SPENDING

Budgeting is so important in being able to make sure that we are getting the most out of our money. Sometimes people think that if you are on a budget it means you are struggling. Budgeting helps you get the most out of your money regardless of your current financial situation. No matter youR income level, it never feels good to not know what is happening with the money that you make.

Using a budget allows us to see what we have available to spend and decide how we want to spend or save what is available after paying our bills. It also helps us decide if there are things we can cut back on to make room for something else. Sometimes we just get used to paying for something but might not really think much about it’s value until we start digging into the budget. It is a great feeling to know that you are in control of where your money is going. If you don’t like to feel like you are on a budget, call it your financial plan.

IS YOUR BUDGET GOOD FOR YOU?

Sometimes we might start to budget and then not stick with it. It could be that you feel like you are never able to come in on budget. Or maybe the process of tracking your spending against your budget is just too time-consuming for you. Everyone is different in how they like to manage their money. I love to be detailed and track everything that goes in and out of my accounts. I helped my son set up a similar system to mine.  He stuck with it for a while but could not keep up with the constant tracking.

Something that seemed enjoyable to me, was way too much for him to deal with. It made me really see that what I see as the best method for me is not the best method for everyone. Regardless of how detailed you want to get, it is important to have a budget and keep it maintained in some way. If you have not yet been able to get budgeting to work for you, maybe consider a new method. So, today I am going to share some different methods that you might want to try if you feel like your current budget system is not working for you.

ZERO-BASED BUDGETING

If you are someone who likes details, then a zero-based budget might be a good tool for you. Even if you know you will not be able to keep up with tracking a budget with this level of detail, it can still be a really good exercise to go through to see how your income lines up with your expenses. With a zero-based budget system, you assign a purpose to every dollar. To create a zero-based budget, you first need to list out your income for the period you are budgeting for. This can be done by paycheck, by month, or annually. This will clearly let you know how much you have to work with so that you have a good starting point.

The next step is to list your expenses. You want to think about everything you spend money on such as: Living expenses (food, utilities, transportation), Holidays, birthdays, vacations, or entertainment. Insurance bills, mortgage payments, property taxes, monthly or annual memberships. Car maintenance, home maintenance. Also make sure to include a cushion to cover unexpected expenses, because they always come up no matter how good you are at budgeting! Then list out the items you need to save for.  This can include sinking funds for future expenses, long-term savings/investing, and short-term savings for a vacation or some other financial goal. If your expenses exceed your income, you will need to really look to see what can be adjusted. When our expenses exceed what we have coming in, we end up in debt.  So, it’s important to see what your budget is telling you and make adjustments as needed.

PERCENTAGE METHOD

If you really don’t want to get into the little details of how you will be spending your money, you might want to consider using the percentage method of budgeting. In this budget style, you create your budget allocating money to each spending area based on a percentage of your income. One way to set up a percentage method budget is to use the 50/30/20 rule. This means that 50% of your income goes to needs.  This would cover things like your mortgage payment, insurance, cell phone, gas, groceries, utilities, etc. 30% goes towards wants.  This could be things like dining out, paying for a Netflix subscription, vacations, or new clothing. 20% goes towards savings.  This would be for things like retirement, emergency funds, and other long-term savings goals.  Maybe saving for a new car in the future or a major home improvement. These percentages are just an example and would be adjusted based on your actual situation and goals.

Whatever your percentages end up being, it will give you a guideline to divide up your money as it comes in so that you know where it should go. Each time you get paid you would divide up the money based on category so that you will know how much you have for needs, wants, and savings. Using the percentage method offers more flexibility and less tracking. One downfall is that the percentage method can lead to excess spending if you are not careful. But, it can still be a great tool to make sure your needs are met and you are putting money towards savings for those you do not want to have to get too much into the details. You will need to occasionally adjust your percentages when costs or income amounts change.

PAY YOURSELF FIRST

A pay-yourself-first budget focuses on putting money aside for savings first. The purpose of this budget style is to make sure the amount you want to put aside for savings is taken care of before allowing yourself access to the money for other things. This involves creating a budget to determine how much you need for bills and other spending and how much can be dedicated to savings. Each time you receive income, a portion of that income goes to savings immediately. This ensures that you do not end up spending excess money on things that are not a priority to you.

By not having that excess money in your account that went to savings you will be less tempted to spend it on other things such as eating out or making other unplanned purchases. The key to this budgeting method is not pulling money out of those savings unless it is an emergency. Once the money goes to savings you need to commit to leaving it there and sticking with spending the amounts you have for your other expenses.

CASH ENVELOPE METHOD

The cash envelop method of budgeting is kind of an add-on to your overall budget. You will not be making payments for things like your mortgage, property taxes, utilities, and other similar bills in cash. So, you first need to do a budget to make sure you cover those expenses. As part of that budget process, you would determine how much you have available to spend on things such as groceries, gas, clothing, etc. Whatever amounts you have determined can be spent on those categories are then taken from the bank and placed in various cash envelopes.

When the money is gone, you stop spending in that category, or you borrow from another if necessary.  But, then you have to reduce your spending in the category you borrowed from because you will run out of that cash sooner. Many people really like this method of budgeting because it forces you to stay within your spending limits if you stick to it. It also eliminates the need to track your expenses, because once the money is gone you know you have reached your limit. If you don’t want to use actual cash, you can do the same thing essentially on a spreadsheet. But using that method, you would have to do more tracking to subtract out your spending as it occurs from the amounts you allocated to each expense type

SINKING FUNDS

Sinking funds are not necessarily a budget style, but they can be used in combination with your budget style to help plan for irregular expenses. With sinking funds, you consider those expenses that will be coming up in the future and set aside money on a regular basis to save up for those expenses. You can do this at a high level or get really detailed. For example, you can determine on average you need $50 a week to cover all of these various expenses as they come up.

Or, you can get really detailed, and put aside weekly amounts of $10 for clothing, $5 for ordering out, in $20 for pet food, etc. I like to get really detailed because it makes me feel better to see exactly what the savings are for. But, for others, it may be just fine to have a lump savings amount that can be pulled from. Creating sinking funds is the #1 tool that finally helped me be able to stick much closer to my budget.

SIMPLE BUDGETING FORMAT FOR BUDGETS WITH MINIMAL EXPENSES

As I mentioned earlier, I recently set up a new more simplified budget format for my son. We took a look and his expenses and determined how much he would need in his checking account at any given time, assuming a regular paycheck every Friday. Since he only had a handful of budget categories that he needed to plan for, we set up a simple spreadsheet showing his current checking balance, less his credit card balance (making sure he always has enough to pay the card in full). From that amount, we subtracted out how much he needed for gas, insurance, food, and other personal spending.

Whatever amount is left after subtracting those amounts out goes to savings. He has a separate calculation to show how much goes to each savings based on a % that we calculated in advance. Each Friday when he gets paid, he enters his updated checking balance, and current credit card balance, and the rest is calculated automatically for him. This is working really well for him, and would probably be a good method for teens, young adults, or anyone with very minimal spending categories.

MAKE UP YOUR OWN BUDGET STYLE

The right way to do your budget is the way that works for you. Some people really love getting into the details and tracking expenses and others just want to see how much is left so they know what they can spend. There is no right answer to the best way to budget. But, you want to find a method of budgeting that you will stick with. Having a budget that you will keep up with can make your life a lot less stressful because it will greatly lower the likelihood that you will be wondering what has happened to the money you worked so hard for.

Budgeting is just a method of managing your money. So, if you need to pull pieces from all of the different methods to find something you like, go ahead and create your own style. It’s all about making sure you are able to get the most out of the money you have available to you!

OTHER TIPS

Even if you do not want to track your expenses in detail.  It is a good idea to at least take a look through to make sure you know what is coming out of your account at least occasionally. I am always surprised when I hear that people have been paying for subscriptions they didn’t know they had because they never looked at what came out of their accounts! If you haven’t been keeping up with your budget or never really even had one, like everything else, it’s usually best to start small and build up to something you are comfortable keeping up with.

I find tracking for a short time each day is much easier than trying to look at my expenses weekly or monthly because I often forget what purchases I made were even for! However, if you are doing a less detailed form of tracking, you will not need to look at your expenses as often. Just start somewhere, or pick an expense that you feel needs to be managed and focus on that to start with. Often, once you get certain spending habits under control, it just becomes part of your nature!

Thanks so much for checking in! If you would like to hear the podcast version of this topic check out Lola’s Frugal Life Podcast! Also, be sure to check out my other blog posts on this site!

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