Managing Your Finances

composition of calculator with paper money and notebook with pen

Have you ever awakened and wondered where all your hard earned cash went? Sure, you remember a couple places you’ve been and know you spent some, but surely not your whole pay check. Unfortunately, many people run into this issue!

A wise man once said, “It is not how much money you make that gets you ahead, but rather what you do with the money you have.”

Most people are able to keep track of where their money goes through creating a budget for themselves, yet different budgeting methods work better for different people. There are five primary methods that have been proven to work over time.

The 5 Methods of Budgeting

1) Envelope System or Cash Only Budget

This is where you use save and spend cash rather than using a card.

First, get several envelopes and write categories on each of them. For example: grocery, entertainment, home expenses, car expenses, etc. After withdrawing cash from your bank account, allocate your cash into your separate categories. Most importantly, once you have allocated the funds, only use the funds for the category they were meant for!

Let’s use a grocery budget as an example.

If you have a $350 a month grocery budget, you would withdrawal $350 in cash from your bank account and then place that money into your envelope labeled “Groceries.”

Today, there are electronic versions of the envelope system as well, if you don’t want to have a lot of cash out of the bank. A couple of these apps are Mvelopes, Goodbudget Budget Planner, and Spending Tracker.

Who Should Try This Budget?

If you struggle with overspending, this is a great way to help reign that in.

Once the cash is gone, you can’t get more. This method requires you to leave the credit cards and debit card at home.

It’s ok to take one credit card strictly for emergencies. Just make sure you are ONLY using it for an actual emergency.

This method is also good for those that really like to have control over their budgeted categories and how much cash is allotted to each category.

What to Watch Out For

When you are dealing with cash, there is always a chance that you’re going to lose it. You could drop the money or misplace it.

Luckily, Amazon has a great selection of physical wallets and notebooks that can be used to help minimize that risk.

2) Zero-based Budget

Deriving from the term, “give every dollar a job,” the Zero-Based Budgeting system is where the money you have in income matches exactly what is going out of your account.

Now, this doesn’t mean that you are literally spending all of your money. This also accounts for the money going into savings, 401k, and other investments.

This method takes, “give every dollar a job,” very literally.

A portion of your money should have the job of paying your electric bill or mortgage, while other portions have the job of funding your retirement or emergency fund. Regardless of how the funds are allocated, every dollar should be accounted for.

With this method, if you were to save and spend exactly what was in each of your budgeted categories, you wouldn’t be positive or negative. You would literally be at $0.

Who Should Try This Budget?

Zero-based budgeting is the ultimate budget for those who want to be completely in control of their money.

It allows you to micromanage your money as you see fit. You have the ability to decide in advance where each dollar is spent.

What to Watch Out For

Zero-based budgeting can be quite time-consuming due to how much planning and tracking is involved.

Ideally, you’ll want to find a way to record every transaction as it happens so you know you’re not over budget.

If you don’t have the time to do it, then you may get off track with your finances. This can lead to needing even more time to catch up.

3) 50/30/20 Budget

The idea for this budgeting method is to spend 50% of your total income on your needs, 20% on saving, and 30% on wants. The 50-20-30 method is very simple to maintain, which is one of the reasons why many find it to be attractive.

Using this budgeting method, it is important to be honest with yourself about what your actual needs are versus your wants. One way of distinguishing between the two is to ask yourself, “If I decided not to pay for this, what would happen?” If the consequences are doable, then leave it out of the “needs” category.

Your “savings” consist of your investments, emergency fund, and debt repayment.

Your “wants” are exactly that. This is pretty much everything else.

Who Should Try This Budget?

If you don’t want to track every line item in your budget, this method allows you to only have the three categories to think about.

So if you are looking for simplicity, this just might be the right budgeting method for you.

What to Watch Out For

Overspending can be a common occurrence with this budgeting method.

Since you aren’t budgeting for every category, it can be easy to spend a little too much on something like food and then forget that you are low on gas in two cars and go a little bit over budget.

To remedy this, I recommend you have some wiggle room in each of your budgets. That way if you accidentally go over in your “wants” category, you won’t have to take out of your “savings” category.

4) The ‘no’ budget

The primary focus of this budgeting method is to make sure your account balance grows every month. The only thing you have to pay attention to is your bank account balance. There isn’t even a need to track your expenses.

Believe it or not, this actually works for some people. You can spend as you see fit, as long as by the end of the month your account balance grows.

Most people would automate paying all the bills. This allows them to see how much more money is in the account, and not worry about how much they have left to spend.

Who Should Try This Budget?

This budget is for people who really don’t like to budget.

If you hate figuring out numbers or putting in the time to manage your budget down to the dollar, this method might be for you.

It requires very little work and very little, if any, tracking of your expenses.

However, it is important that you keep track of how much spendable cash you have left!

What to Watch Out For

Since you are not tracking your expenses, the “No Budget” Budget can be dangerous if you are prone to overspending.

It is easy to forget how much spendable cash you have left and end up with less money over all than you started with that month. This would obviously defeat the purpose completely.

Also, how much you save every month will change month to month, therefore making it difficult to set specific long-term goals.

5) The 60% Solution

This method uses percentages to manage your finances rather than specific dollar amounts.

60% of your income is used for “committed expenses.” These include your mortgage, food, basic clothing, car payments, insurance, etc.

In this method, literally all of your bills are included in this category, including such wants as cable TV or your expensive cell phone plan, etc. These are bills that have to be paid each month.

The remaining 40% of your income is divided into four categories with 10% allocated to each category. They are:

  • Retirement– This is your standard 401K, Roth IRA, etc. It’s always best to get these subtracted from your paycheck, if you can.
  • Long-Term Savings– This is your emergency fund and standard stock purchases.
  • Short-Term Savings– This category is in a separate account that can be easily accessed to transfer funds to your checking account. The money in this category is used for things such as vacations, irregular expenses, and other bigger expenses. The idea is to be able to use all of this money over the course of a year.
  • Fun Money– The last 10% is where the “wants” come in. This is where things like dining out come in. These expenses are things that you can easily manage and don’t have to be paid. Let’s face it, you don’t have to go out to eat so it goes here.

Since only 70% of expenses are actually seen—the 60% of committed expense and 10% fun money—he doesn’t really miss the other 30%.

This is because the other 30% is automatically deposited into the account(s) where it needs to go.

Who Should Try This Budget?

So admittedly, this budget sounds intriguing. If you’re someone who likes to automate things—since it makes everyone’s life easier—this is a great way to ramp up your savings.

By only allowing for 60% of your income to be used for bills, you have the ability to save much more than normal.

It’s almost like giving yourself an artificial pay cut and living “paycheck to paycheck” on 60% of what your income actually is.

What to Watch Out For

Since you are working with percentages, there may be a temptation to no longer track your expenses.

You have your bills all taken care of with the first 60%, your savings are automated with 30% (divided in 10% increments), and your fun money doesn’t go over 10%.

In my opinion, it’s still important to track your expenses so you can see if any new expenses show up or if any older expenses can be cut out.

You won’t have to worry too much about your 60% of committed expenses, but you’ll at least want to make sure the dollar amount equivalent to 10% of your income isn’t overspent. I recommend tracking that 10% at the very least.

Take Action!

All the information in the world will not bring you to your desired outcome without the proper actions. You must decide to take action!

The question is: Are you willing to make sacrifices for the first several years so that you can live free for the rest of your life? If the answer is yes, then this is another opportunity for you to take action!

  1. Pick which budgeting method best suits your temperament and financial goals.
  2. Set it up! If you need to structure automatic action for your bank account, then do it! If you need envelopes and visible categories, then make it happen!
  3. Get Started! There is no better time than now to begin. Be strict with your budgeting habits. Old habits are often difficult to change. However, know in advance that you will not be perfect at first. Don’t use that as an excuse, but don’t dwell on mistakes made either.

I’m looking forward to continuing this journey with you! Please feel free to contact me if you have any questions, and please FOLLOW US so you don’t miss out on upcoming blogs!

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