budgeting · Clarity Money Articles · Managing Money

4 Budgets You Can Actually Use

This article first appeared on May 26, 2017 on the Clarity Money Blog

 

Let’s take a minute to talk about the “B” word. No, not that B-word. I’m talking of course about a “budget.”

For most people, living on a budget is synonymous with sitting at home alone on a Friday night and eating Top Ramen—while your friends hit up the hot new sushi spot in town.

In actuality, a budget is a sound financial tool to carry you from where you are to where you want to be.

When you’re in control of a budget, you’re telling your money where to go, instead of wondering where the heck it all went.

But before you attempt to go it alone, here are four different types of budgets you can try on for size before sticking to one. Here are the four budgeting methods to try:

Zero-Based Budget

In a zero-based budget, the goal is to take the money you earn during a specific time period, say a month, and then subtract your expenses until you end up at zero.

Start by subtracting all of your fixed monthly expenses such as your rent or mortgage, car insurance, Internet service, minimum payments on credit cards, and any other fixed payment monthly bills.

Then, subtract all of your variable expenses that change each month, such as your phone bill, groceries, and gas.

Anything left over should go toward debt repayment or savings.

Cash Envelope Budget

cash envelope budget describes the physical management of allocating cash spendings across labeled envelopes. For this type of budgeting system, you would only use your debit card or automatic withdrawal for fixed monthly expenses, such as your rent or mortgage, utilities, or your car payment.

For everything else, create separate envelopes for expenses such as groceries, gas, and eating out, and place your monthly budget for each in the corresponding envelopes (in cash, of course).

If you exceed your budget in one category, you’re out of luck,  or you’ll have to take the money out of another envelope’s budget for that month. Any cash left across your envelopes at the end of the month means you’ll have a little extra to really treat yourself the next month, pay toward debt, or give your savings a boost.

While this method may require more manual, hands-on involvement, the tangible act of spending only what you physically have may help prevent you from going overboard with buying on plastic.

50-30-20 Budget

The 50-30-20 budgeting system is as straightforward as it sounds. For this method, you would allocate 50% of your earned income on needs, 30% on wants, and 20% on savings or repaying debt.

This method is fairly cut-and-dry, but can give you a baseline for prioritizing actual needs versus wants, while also helping to boost savings.

A tip on establishing needs versus wants: Imagine you need a pair of sensible nude pumps. You may want the designer label, but you exert control by acknowledging the difference between what you need versus want, and you end up buying a great quality shoe from a more affordable designer.

If you find it difficult to categorize between needs versus wants, the 50-30-20 budget can be especially helpful to remove the emotions associated with choosing.

Once you’ve identified your wants, challenge yourself to spend half of what you would normally spend, or if you’re feeling super motivated, spend even less. Nailing this strategy can not only boost your savings or your debt repayment potential, but also provide a practical approach to budgeting.

The Savings Snowball Method

Personal finance expert Dave Ramsey coined the debt snowball method as a debt payoff strategy, where you would pay the minimum due on all of your debts while throwing anything extra at the debt with the lowest balance until paid off. Then, move on to  the next lowest debt balance, pay it off, and repeat.

You can use this same theory for budgeting. Create your list of monthly fixed and variable expenses, paying those first, then throw anything left over toward a savings goal, for say, an emergency fund of three months of your monthly rent or mortgage.

Once you’ve met this savings goal, move toward a second aspirational goal, such as a dream vacation for the family, or a down payment toward a new home. The savings snowball is highly effective reverse method on the debt snowball, and an excellent way to gain momentum as you see your savings increase.

Tips to Get Started

Before you attempt to establish a budget, get a sense of your current spending habits.

Budgeting apps are much easier than tracking everything in a spreadsheet. You can link all of your accounts and track your spending in real time.

Following a good budget practice doesn’t have to be frustrating, nor should you have to suffer and neglect yourself from having any fun. Rather, it’s a learning opportunity to prioritize areas of your life so that you have more resources to experience or have the things you love most. If you resolve to give it a shot and stick with it, you won’t look back in regret. And who knows, you may even have a little fun in your newfound financial empowerment.

 

This article first appeared on May 26, 2017 on the Clarity Money Blog

budgeting

Why I Use Budgeting Apps

Have you ever had someone tell you all about how much they love spreadsheets? Maybe they’ve told you what a great tool they are when comparison shopping. Or maybe they love to use them to track their spending and budgeting. Perhaps you’ve listened to someone tell you how much spreadsheets have simplified this person’s life and how organized they are because of of this very precise type-A hobby of theirs.

If you’re like most people, you’ve probably rolled your eyes and wondered how someone could actually enjoy that level of structure in their life. I have personally tried to enjoy creating budget spreadsheets, but to no avail.

I created my budget for the month, went on spending as normal, then added all of the numbers together from my online banking statement at the end of the month and plugged them into my spreadsheet. That was not only time-consuming, but because I couldn’t see my spending in real time it didn’t help me spend any less.

Then I tried keeping track of my spending by taking the numbers every few days and adding them into my spreadsheet. That was just plain confusing, since I couldn’t remember which transactions I’d already added and which I hadn’t.

Then I discovered the wonderful world of budgeting apps.

Apps that budget for me

I have three budgeting apps that I use every day to track my spending. Personal Capital, Clarity Money, and Mint. The best thing about these apps is that they are ridiculously easy to use, and make budgeting a breeze. They are all free to download, which is a great perk. All of my online banking accounts are connected to these apps: checking accounts, savings accounts, credit cards, and investment accounts. I can sign in to any of these apps during the day and track my overall spending or my spending in a certain category.

Clarity Money keeps track of my credit score, which is extremely helpful to know. It also keeps track of any recurring payments it finds in my account and makes me aware of them, in case I’ve forgotten and want to cancel old accounts. Additionally, it tells me when it finds credit cards that would be better suited to my needs than the one I’m using.

Personal Capital is helpful because it tracks my net worth. I have my mortgage and student loan accounts, plus my home’s worth according to Zillow attached, so it really does show me the whole picture of my financial well-being. Not to mention the fact that I enjoy watching my net worth slowly increase each month as my debts get paid down, I beef up my savings, and the value of my house rises. It’s also quite easy to compare my spending this month on this date to my spending last month on this date, so it really helps to keep me in check and figure out where I can cut corners.

Mint is unique in all of the resources that it offers to its users. It has a robust collection of articles to browse on various money topics. It shows me credit card or loan offers that better suit me and my situation, and it also tracks my spending in all categories quite easily.

Apps that save for me

The other type of app that I’m obsessed with saves money for me. Yes, you heard me right. These apps connect to my bank account and save money little-by-little for me so that I don’t have to think about doing it myself. I have two that I use daily: Digit and Acorns.

Digit connects to my checking account and analyzes my spending. It somehow knows how much money I will have coming in at any certain point in the month and how much will be going out. Then it skims a few dollars here and there that it knows I won’t really miss and deposits it into a separate savings account for me. I can also set up recurring payments or make extra payments at any time.

One of my favorite ways to use Digit is to deposit money into my Digit account whenever I’ve saved anything. For example, whenever I go to a grocery store the receipt always tells me how much I saved by using coupons or by getting the club member discount. Before throwing the receipt away I always deposit that amount into my Digit account. So if my receipt tells me I saved $7.38 during my shopping trip, I add $7.38 to my Digit account. Or if I really practice my self control and brew my own coffee at home instead of buying a mocha on my way to work, I deposit $5 into my Digit account. I never really miss the money because I would have spent it anyway.

The other savings app that I absolutely adore is called Acorns. It also connects to my checking account, but rather than skimming a little money here and there, it rounds all of my transactions up to the nearest dollar and invests the difference. Let’s say I had a transaction that cost $10.45. Acorns would round that up to $11 and deposit the 55 cents into my Acorns account. Once I get $5 in that account, it invests it into ETF’s. I can also set up recurring payments to give myself a little boost. I definitely won’t be able to retire off of this account, but in the last 13 months I’ve invested $997.78, which definitely isn’t bad.

What’s the point?

The point I’m trying to make here is that budgeting (or saving) doesn’t have to be as hard as some people make it out to be. Sure you can tediously pore over your monthly transactions and add them into a spreadsheet. Or you can do it the lazy way and have your phone track it all for you in real time. The choice is up to you. But if it were my choice, I’d rather use that extra time to watch some Forensic Files or catch up on my sleep.