Are There Multiple Ways to Budget?
There's No One-Size-Fits-All Formula to Budgeting
A few readers have asked if budgeting is a one-size-fits-all regiment. Is it necessary to categorize and track every penny? Or is it okay to simply spend less than you earn?
Our professional opinion is that nothing in personal finance is one-size-fits-all. There are plenty of effective ways to budget, and you should 1) learn about a variety of strategies and 2) pick the strategy that best fits your personality, interests and financial situation. That’s why it’s called “personal” finance.
Here are a handful of the many ways you can budget:
The Traditional Method
The traditional budgeting method is to track your spending. You’ll see most of your spending by reviewing your bank statements and credit card statements each month; when you make a payment in cash, mark the expense down in a ledger.
At the end of each week or month, review your spending to see how much falls into each “category,” such as rent/mortgage, utilities, insurance, entertainment, gas, groceries, clothes, makeup, pet care and so forth. These worksheets are a good tool that can help you do it.
Again, this is the traditional method, but it’s not necessarily the “right” method for you. There are plenty of other options.
This budgeting method is great for people who don’t want to track every cent, but still want to make sure they’re dedicating enough money towards savings and debt repayment.
According to the 50/30/20 method, 50 percent of your take-home pay should be directed towards “needs,” 30 towards “wants,” and 20 towards savings and debt repayment.
(Read more: What’s a want and what’s a need?)
Let’s imagine that you’re not too keen on tracking each dollar, but you like the idea of adhering to the 50/30/20 method. Here’s the easiest way to do it:
First, automatically direct 20 percent of your take-home pay into a savings account. Start with savings – this is called “paying yourself first.” Set up an automatic transfer on payday that instantly deducts the money from your paycheck, so that you never see it. Divide this money into a combination of retirement and non-retirement accounts.
For instance, you might put aside 5 percent into a savings account that’s earmarked “making a car payment to myself,” 5 percent into a savings account that’s set aside for a down payment on a home, and 10 percent into your 401k. (Hopefully you’ll have an employer match that adds an extra 3-5 percent).
Secondly, pay all your “needs” bills for the month. Pay your mortgage, your utilities, your phone bill, your car payment. If these bills aren’t due yet, put aside the money for these particular expenses in a specific checking account that you use to only pay for your “needs.” If you have certain needs that you must pay in small increments throughout the month, like gasoline, put aside a month’s worth of money in that checking account, as well.
Whatever is leftover can be spent on “wants” like restaurants, movies, sports, clothes and shoes that you don’t really need, and little luxuries like a car wash, a housecleaning service, cable TV, and a salon haircut.
If you crunch the numbers and see that the amount available to spend on “wants” is less than 30 percent, you’ll know to reduce your “needs.” If nothing else, your savings won’t suffer, because you paid into that first.
Save, Then Spend
Here’s an amended version of the 50/30/20 method: when you get paid, automatically set aside a particular percentage into savings. Twenty percent is the minimum you should save, but feel free to pick a larger number. (Fun fact: Sir John Templeton, the founder of Templeton Investments, is said to have saved 50 percent of his take-home pay when he was young and just starting out, plus tithed another 10 percent to his church.)
After you’ve paid into your savings, spend the rest. Don’t worry about what categories you’re spending in, and don’t worry about what “bucket” the expense falls into. Rest assured that you’re saving enough money, and feel free to spend the rest as you please.
Periodically check your balances to make sure you have enough to get through the rest of the month, and adjust as necessary if you don’t. After a few months of this, you’ll get the hang of automatically living a lifestyle that’s in line with your income, minus the savings you set aside at the start of each pay period.