Intro to Budgeting Methods
Ahh, yes. Good ol’ budgeting. I've noticed that when a lot of people think of budgeting, they automatically think about restrictions and ...
Ahh, yes. Good ol’ budgeting. I've noticed that when a lot of people think of budgeting, they automatically think about restrictions and the money they can't spend; it's kinda like how people view diets. Adapting a budget doesn't mean penny-pinching or going on a saltine cracker and tap water diet. More than anything, it's about being aware. Your budget can be as strict as African parents, or it can be as lenient as Walmart’s return policy—the choice is yours. There are many ways you can set up your budget, and there’s no one-budget-fits-all method, but this post will focus on five different techniques that you should consider in 2020. If nothing else, you can use them as a foundation to build on and adjust to meet your specific circumstances. Balanced Money Formula The Balanced Money Formula tries to keep budgeting as straightforward as possible. It follows a 50-30-20 rule that suggests spending 50% of your after-tax income on needs, 30% on wants, and 20% on savings and investing. More than a detailed budget, the Balanced Money Formula is a goal that you should work towards. A lot of people's current financial situation doesn't allow them to follow the 50-30-20 rule, but the goal is to get to that point eventually. Here is what counts as needs, wants, and savings: Needs Rent Utilities Health insurance Basic clothing (emphasis on basic; that new designer bag doesn’t count, beloved) Car payment (if public transportation isn't available) Car insurance (if public transportation isn't available) Wants Cable Phone (yes, it's a want, not a need) Entertainment Vacations Non-basic clothing Car payment (if public transportation is available) Car insurance (if public transportation is available) Savings Emergency fund (at least three months of expenses, but six is preferred) Debt repayment Retirement accounts like a 401(k) and IRA Investing Instead of dedicating a certain amount to your cable, phone, entertainment, etc. separately, you assign an amount to your wants category as a whole and divide it how you like. This adds a sense of freedom and doesn’t make budgeting seem as strict. Remember: the 50-30-20 percentages are only recommendations and can be tweaked to fit your financial situation. You shouldn’t change them too much, but a few percentage points here and there won’t be the difference between you panhandling at the nearest highway exit or turning into Warren Buffett. Value-Based Budgeting Value-based budgeting is a method that focuses on spending and saving money in alignment with what you value in life. The idea is that if you’re going to spend, you should at least spend it on something you give a damn about, instead of spending for the sake of spending. You’d be surprised at how much money you’ll save by cutting out expenses that don’t align with your top values. Even if you don’t save a lot of money, at least the money you do spend will have a purpose behind it. Here’s an excellent way to start: List your values: Be honest with yourself, fam. If you value traveling and eating good food, write down traveling and eating good food. If you value partying and expensive clothes, write down partying and expensive clothes. No need to sugarcoat it. Set one goal for each listed value: If traveling is a value, visiting China may be a goal. If you value partying, spraying a champagne bottle on the crowd in Liv on a Sunday night might be a goal. Again, it’s all up to you. Check your previous expenses: Add up all expenses that weren’t a bill, savings, or fall under one of your listed values. The easiest way to do this is to get your last bank statement and physically go through it, marking the expenses. It might sound like a lot of work, but if you're serious about finessin' your finances, you'll take the time to do it. Work towards your goals: Take the amount from #3 and divide it between the goals you listed in #2. How you split it between the goals is up to you. Example Values: Traveling, spending time with family, expensive clothes. Goals: Visit Ghana ($2,500). Fly your parents out to visit you ($700). Get an exclusive pair of Off-White shoes ($1,000). Expenses (not including values): $500. Using that “extra” $500, divide it between your listed goals as you see fit. You can even decide to use some of that money to increase your savings (don’t feel pressured to do so, but I’m obligated to throw that out there). Zero-Based Budgeting The zero-based budgeting method is pretty simple. It’s a way of budgeting that makes sure you account for every dollar you bring in monthly. Whatever you bring in, must go out. This doesn’t mean you spend all the money you bring in (that's hustlin' backwards), it means that everything you spend, save, invest, or give away must equal exactly what you bring in. Having this planned out at the beginning of the month makes sure you know exactly where your money is going—down to the last dollar. Here are the steps: Add up your monthly income: Your check from your day job, your side hustle money, child support, or whatever. Add it all up and write it down. Add up your monthly expenses: Needs, wants, savings, all'at. Subtract #2 from #1: Assuming you’re bringing in more money than you’re spending, this number should be positive. If it's not, that presents a bigger problem. Take the money in #3 and give every dollar a destination: It doesn’t necessarily matter what you do with it—you can save it, invest it, give some away, or spend it. What matters is that you know where every single dollar is going. Not knowing where your money is going is the easiest way to overspend. Don’t get caught slippin'. Also, don't forget about seasonal expenses. Birthdays, anniversaries, and Christmas are the same every year, fam. Stop waiting ‘til the 3rd week in December to act surprised that Christmas is coming up soon. Example Monthly income ($2,500): Corporate job: $2,000 Rental property: $500 Monthly expenses ($2,200): Bills: $1,000 Savings: $750 Groceries: $250 Entertainment: $200 $2,500 - $2,200 = $300 "leftover" New monthly expenses: Bills: $1,000 Savings: $900 (+$150) Groceries: $250 Entertainment: $200 Vacation savings: $150 (+150) Cash-Only Budgeting The cash-only budgeting method is a method where you...well...only use cash. Go figure, right? It’s one thing to keep swiping a piece of plastic and not realize you’ve spent too much ‘til you check your account or receive the ever-so-humbling, “Sorry, your card didn’t go through,” from a cashier. It’s a whole ‘nother ballgame to witness your money start to disappear right before your eyes like a magic trick. The latter tends to make people tighten up and stick to their budgets. Steps to take: Write down your monthly income Subtract your needs and savings from #1 Take the remaining amount out in cash Create subcategories for the cash Divide the cash between the subcategories Spend only what’s in the envelope Example Monthly income: $2,000 Needs + savings: $1,200 Amount withdrawn in cash: $2,000 - $1,200 = $800 Subcategories (five envelopes needed): Phone ($150) Cable/Internet ($150) Entertainment ($100) New clothes ($200) Eating out ($200) No-Budget Budget There's a good chance that when you read No-Budget Budget, you thought to yourself, “Huh? What the hell is he talking about?” If so, I don’t blame you. Believe it or not, though, the no-budget budget is an actual thing, and it’s as straightforward as any budgeting method. Some people find it as efficient as digging a tunnel with a spoon, but it’s a start for those who refuse to give themselves a structured budget. There are only two things you need to know: how much you bring in monthly and your monthly expenses. The recommended way to do the no-budget budget is as follows: Add up all your monthly income. Add up your monthly expenses. Set up your bills for autopay: If autopay is an option, you should be using it. No excuse. Arrange to have 10% of your paycheck automatically sent to a savings account: This isn’t necessarily required, but trust me when I say that you’re going to want to do this. It’s too easy to get lost in the no-budget sauce if you don’t. If #2 is more than #1, this budget isn’t for you. It’s back to the drawing board for you; you either need more income or fewer expenses. Godspeed. Example Monthly income: $2,000 Monthly expenses: $1,200 Savings: $200 Amount leftover = $2,000 - $1,200 - $200 = $600 The difference between this method and other methods is that other methods usually give you a specific plan for the money you have after your expenses—this isn't the case with the no-budget method. That $600 is yours to spend as responsibly or recklessly as you see fit. I'm by no means encouraging this method, but at the very least, it ensures your bills are paid, and you save something leftover, regardless of how small. The Final Word More than anything, budgeting is about habits. Writing down a budget isn't going to magically change your spending habits at the drop of a dime. Since we're all adults here, let's just be honest: it may not change them at all. At the very least, it's a constant reminder of where you stand financially. "Ignorance is bliss" applies to a lot of things in life—your finances aren't one of them. Not knowing is the quickest way to catch a first-class flight to Broketown or Humbleville. If you're just starting, keep it simple; you shouldn't be growing grey hairs trying to perfect a budget. The key is to begin.
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