Let’s take a minute to talk about the “B word.” A word that makes grown women and men alike cringe. A word with an undoubtedly negative connotation. A word most people never want hurled at them. I’m, of course, talking about the word “budget”. I suspect most people would prefer the other B word, to be honest.
I’m not so sure why budgets get such a bad rap. I suppose most people think of budgets as restricting and a surefire way to sit at home on a Friday night with nothing to do. But in all actuality, budgets are a vessel designed to carry you where you want to be and allow you to do more of what you want to do.
Essentially, a budget is just you telling your money where to go. Many people earn their monthly paychecks, spend their money, then wonder where the heck all of their money went. But simply by paying attention to where your money goes and directing it to the right places, you can give yourself freedom that you probably never imagined was possible.
The most important piece of budgeting is obviously sticking to it month after month. But the only way to do that is to find the budget that works best for you. Below are the four most common budgeting methods.
The Zero Sum Budget
With the zero sum budgeting system you take the total amount of money that you will earn during a month and simply subtract your expenses until you end up at zero. The easiest way to do this is to start by subtracting all of your fixed monthly expenses. By fixed expenses, I mean monthly bills that cost the same each month. Your rent or mortgage, car payment, car insurance, phone bill, and minimum payments on credit cards are all fixed expenses. Then you subtract all of your variable expenses (expenses that change every month) until you get to zero, which leaves no wiggle room for those “Where did all my money go?” moments.
Cash Envelope Budget
With the cash envelope budget, you hide your credit and debit cards away and pay for everything in cash. Obviously you can pay your fixed expenses with your debit card or by automatic withdrawal, but you will only spend cash for your variable expenses. Create separate envelopes for each of those variable expenses (groceries, eating out, entertainment, clothing, etc.). Figure out your budget for each of the categories, then put that amount in your envelope (in cash, of course). If you mess up and go over in one category, you’ll have to take that money out of another envelope, thus forcing you to spend less in whichever category you’ve taken it from. If there’s any cash left in your envelopes at the end of the month, that means you’ll have a little extra for the next month to really treat yourself, or to give your savings account a little boost.
The 50-30-20 budgeting system suggests that 50% of your income should be spent on needs, 30% on wants, and 20% on savings or repaying debt. This isn’t necessarily a system I agree with, as I think 30% on wants is too high, but it could be a great jumping point if you aren’t ready to totally scale back or you don’t have very much debt to repay.
The Snowball Method
The snowball debt repayment method, which was made popular by personal finance expert Dave Ramsey, means paying the minimum on all of your debts, then throwing anything extra into the debt with the lowest balance. Once you pay that off, that minimum payment plus anything extra goes towards the next lowest debt, and so on and so forth. It’s a highly effective method and is an excellent way to gain momentum and confidence as you see the balances on your debts decrease each month.
You can take the same theory and use it for budgeting. Create your monthly budget with all of your fixed expenses, do your best at minimizing your variable expenses, then take everything that’s left over or any extra earnings and put it towards savings or debt repayment. Pretty simple.
Tips to Get Started
Before even putting a budget into place, I think the easiest way to start is by tracking your current spending habits. It is also imperative that you continue to do the same after you’ve started budgeting. For a long time I kept a spreadsheet which indicated every dollar I earned and every dollar I spent, but that was just too difficult and time consuming. Now I use budgeting apps. Personal Capital, Mint, and Clarity Money are my favorites. I have all of my spending accounts (including my credit card) linked, and at the beginning of every month I go in and check on my spending in each category. Before I began budgeting, I thought I had everything under control until I realized I was spending $300 on going out to eat, $300 on clothes, plus all sorts of other frivolous expenditures every month.
Once you’ve started tracking your spending and have a general idea of what you have coming in each month vs. your output each month, you can start to sift through what your wants and your needs are. Your wants are those things that you don’t need in order to survive. Once you’ve identified your wants, challenge yourself to spend half of what you normally spend, or even less than that if you’re feeling super motivated. If you only glean one piece of advice from this entire article, it should be to treat your savings and your retirement savings (yes, those should be separate) as a fixed monthly expense. This is what is meant every time you hear someone say “pay yourself first.”
Extra expenses, whether unexpected or planned, are a fact of life. Incorporate those into your budget as well. If you know your 6-month car insurance premium is due this month, write that into your budget and tighten the belt in other areas. If you know you’re going to attend a fancy dinner for your best friend’s birthday, by all means include that in your restaurant budget. Just make sure you take that out of your vacation or clothing budget that month.
Budgeting isn’t a way of making you needlessly suffer, as so many people seem to think. Rather, it’s a way for you to learn to prioritize areas of your life so that you have more resources for you to do or own the things you love most. If you resolve to give it a shot and stick with it for even just a few months, I can guarantee you won’t look back and regret it.