Last Updated on June 9, 2021
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Which Budgeting Method Is Best For You?
When starting to budget there are a few ways we can create something that will help us get our financial lives on track. A couple we will discuss here include the 50-20-30 budget and the envelope system. We will also have a quick discussion on why you should not be afraid to use a spreadsheet.
The 50-30-20 Budgeting Method
Originally published in 2005, Senator Elizabeth Warren popularized the infamous 50-20-30 budget rule. This rule of thumb was designed for working class families to be able to plan their financial spending in order to be prepared for their future events.
It is categorized into three components: Needs (rent, groceries, and utilities), Wants (Shopping, Entertainment, and Travel) and Savings (Emergency fund and debt relief). However, in practice you will find that the Needs bucket and Wants bucket often do not have neat separation, especially among different members of the family.
This budgeting method could be implemented by anyone who finds themselves overwhelmed by overly detailed budgeting.
To get started with the 50-30-20 budget you should first calculate your monthly income. Once you’ve got the total, you should then calculate your spending limits. Simply multiply your total monthly income by .50, .30, and .20. The three numbers are also known as spending thresholds.
These are the amounts that you are supposed to spend in each category. The categories are broken down as being 50% of income going towards your “needs”, 30% towards your “wants” and 20% towards your savings.
Once you have established where your money is going, you then need to plan around that budget every month. If you do this for a couple of months and really monitor where your money is going, you might notice a pattern that can help you become even more efficient with your money.
The benefit of this method is that it leaves you in charge of the minor details in your finances while also preparing you for unseen emergencies.
As this method is pretty generic there are challenges that come with implementation. These range from the difficulty of drawing a line between the needs versus wants categories and learning to leave your savings alone, to not having enough earnings to make the ends meet.
However, there are other methods also that can help you get your financial situation under control. Let’s take a look at those, too.
The Envelope System
The Envelope System is another SUPER easy way to begin budgeting your money to meet your needs.
This system takes your actual cash in hand from your earnings and simply sticks the needed amounts into however many envelopes are needed to pay your monthly expenses plus a savings fund.
This helps some people because if they place actual money in a file ready for spending, they are less likely to not pay the bill because of an oversight or due to the inevitable monthly “emergencies” that happen to us all.
An interesting tidbit is that this system helps you avoid overdraft fees and can break you of the habit of using credit cards for random purchases that add to your debt.
However, this method requires pre-planning, a willingness to use paper cash instead of cards, and some discipline.
But becoming more disciplined with your money allows you to become fully aware of just how much money you are probably wasting on unimportant items each month.
Of course, carrying cash is not practical for most people, but one could try implementing using checks, too.
The downside of cash envelopes is, well, carrying large amounts of cash. Thefts can occur, but also there are many perks to being a responsible user of plastic money including additional rewards that credit cards may offer as well guaranteed protection on your card purchases.
But if you are truly desperate to reign in your out-of-control spending then it is hard to go wrong with the envelope system because you simply can’t spend what is not there. This means you are forced to be far more efficient as a consumer.
Tips for a Successful Budget
- Determine the amount of income you are working with after taxes
- Calculate monthly expenses
- Calculate the difference of your expenses and your earnings.
- Determine what the net dollars go towards.
- Make a habit of saving and tracking the expenses used each month
- Set spending limits: Observe and understand your spending habits and use it as a guide when setting up your budget.
- Focus on cutting non-essential expenses: Constantly calculate the amount you can reduce within these expenses.
- Don’t forget Debt: Before placing money into savings, consider paying off delinquencies or debt that you may have acquired.
- Learn to use spreadsheets or apps to track spending: This shows you how your spending changes over time. This also allows you to plan expenses for a holiday or vacation.
How To Track Your Expenses
You have already decided you want to budget, but do you know how to track expenses and pinpoint where you money is actually going?
You’ll need to do this to get your spending in order and figure out where you really want to direct it. You should take a deeper look into all expenses that come out of your account.
Reconciling your bank and credit card accounts is key to guaranteeing that you are not missing or forgetting about expenses, and ensuring that you have enough to do what you need to do each month.
After reconciling, you will notice that your spending is usually either a debt payment or life expense.
Debt spending includes payments for mortgages or credit card debt while life expenses (things that can probably be reduced somehow) include rent, utilities, insurance, or education payments. Other variable expenses you can control include your food, clothing and travel expenses.
Tips for Tracking Your Expenses
When tracking expenses there are a number of ways to do it but most people use spreadsheets. You can learn simple google sheets here.
When tracking expenses be sure to identify any room you have for changes and adjustments.
By identifying items that can be changed, you will soon understand what your spending habits are doing to your finances and figure out the total you could potentially save each month.
This could be very valuable when you see what your expenses are really costing you each month. Being able to consistently lower expenses while also investing the savings is The Key to wealth.
How To Stick To Your Budget
- Sleep on Big purchases: when wanting to spend a significant amount of money on a purchase, take at least a week to think about it. Ensure that this is something you really want and that it will NOT effect your monthly budget.
- Never spend more than necessary: If you can’t afford something you want, try waiting a week before buying it.
- Sticking to a lower credit card limit: cards with high limits are easy to rack up and hard to pay down, resist the temptation. Rule of thumb is to stick to an amount that you can pay this off at any given time.
- Budget to zero: When creating your budget, your income minus your expenses should add up to zero.
- Trying a no spend challenge AKA spending freeze. This is a commitment to not spending money on anything that’s not a necessity for a certain amount of time, say a day, a weekend, or a week.
- Go minimal: Identify your needs and wants, then reduce the wants as far as you can and stick strictly to supporting your necessities for a period of time.
- Plan your meals: Sticking to a routine or a certain list when eating can save big bucks because we often nickel and dime ourselves to death eating out.
- Do your grocery shopping online: This technique saves you time in store and saves you from buying what your eyes want but pockets don’t have.
- Paying yourself first: Setting up automatic transfers as soon as your paycheck hits. You will see that small amount that you set aside can grow into something quite useful in a year or so.
- Rethinking Brands: While grocery shopping it is extremely important that you ask yourself if the Name Brand items are worth it and if your budget can handle the extra spending. Sometimes it is smarter to pay a generic brand rather than a brand-name item because the price could really end up taking a toll on you at checkout. Ensure that you are buying groceries that fit your budget and not a pretty label.
- Connect your spending to your work: When purchasing items, try comparing the amount of the item with the amount of labor that you put in that day for it. If the numbers feel right to you, then go for it, but if the amount of hours doesn’t add up to the price of the item then give it some time to sit on your mind.