Budgeting. It’s something everybody talks about but how do you get started?
I scored my first job at a smoothie shop when I was 15 and with that first monster $500 paycheck, I started squirreling money away. It wasn’t much, but I knew even then that saving was important. But with on-and-off jobs through high school and college, I never had learned to budget, which meant that by the time I graduated from college, it was nearly all gone.
So when I landed my first “big girl” job at a major financial institution, I was in complete YOLO-mode. I spent it all. Literally, all of it. Within that first week.
Did I learn my lesson?
Two weeks later the next paycheck came. I managed to hide a tiny bit of it in my 401k–but you guessed it–I spent the rest. No budget or plan. Months went by and I was still spending every dollar as fast as I earned it. Looking back at all of the wasted time, I finally stepped back and realized I needed a budget, and badly! I was so embarrassed that here I was, working in finance and helping other people manage their money, and I couldn’t even manage my own. Ouch.
So I started test driving budgets.
With so many budgeting methods, how do you know what will work for you? Ask any one of your friends or family members and I’m sure they will tell you that their method is numero-uno. That was the case for me. Everyone I asked had a different opinion and the worst advice I got was when someone brushed budgeting off like it was a waste of time and said, “just save what you can.”
Good news for you, I shrugged off the bad advice and I’ve now tried lots of budgeting methods. I’ve figured out not only what works (and doesn’t work!) for me but also what might work for you, too!
I’ll share my method later, but first, let’s walk through some of the other popular budget methods I tried, and I’ll identify who these might work best for.
The Envelope Method
Just as it sounds, you have an envelope for each spending category (dining out, shopping, entertainment, etc.) and allocate a budget amount to each envelope with each paycheck. Once the money in an envelope is gone, it’s gone. This works great if you are disciplined and won’t be tempted to “steal” from another envelope. But it can be so tempting to just borrow a little from the dining out envelope so you can shop a little more. And then the budget goes out the window! I briefly tried this method but I realized my spending varied each month and I felt stuck if I allocated the wrong amount to a category.
Pro: Easy to see how much you have to spend in each category
Con: Need to be disciplined
Works Well For: Disciplined person who can stick to the budget and not be tempted to spend from other categories when one is depleted. Also works best if you typically spend the same amount in each category every month.
With this, you use cash anywhere and everywhere you can. Yes, that literally means going to the bank each time you get paid and withdrawing cash from the ATM. And yes, that is also a giant pain in the you-know-what. But you know what else, it worked! There’s something about handing over a $20 bill that just feels different than swiping your credit card. It’s a lot harder to spend all of a sudden. I found myself spending less and thinking more about what I was spending my money on. The shift in mindset is amazing, even if you don’t continue with it forever. I guarantee it will make you stop and think about at least one purchase during that month.
Pro: Makes you think more about your purchases
Con: Withdrawing cash every few weeks isn’t always convenient
Works Well For: Someone who wants more flexibility on their spending categories but still wants an overall discretionary spending budget
Zero Sum Budgeting
If you are a visual person, you are going to like this one. This is where you track where every single dollar of your paycheck goes. From rent/mortgage to food and savings, every dollar has a purpose and you are going to list it out. Visually seeing a piece of paper with this written down can be a really good exercise. I’d recommend physically writing it out instead of using Excel. Similar to the cash method, there’s something about writing it down that changes your mindset. I tried this when I started budgeting because I wanted to see exactly where my money was going. It was a great visual tool and taking the time to write it down and see where my money was going was eye-opening.
Pro: There’s a plan for every dollar and you know exactly where your money is spent
Con: May need to reference back to it each month or manually make updates
Works Well For: Visual and organized person possibly looking to prioritize debt pay-off
Online tools such as Mint and Personal Capital are great resources to help you track your spending and overall net worth. I’ve personally used both but use Personal Capital now because I like the net worth tracking better than Mint. If you aren’t familiar, they have similar features. You can create a budget, track your spending, see your investment asset allocation (if you choose to link those accounts), and track your net worth.
Pro: Both have apps so you can use anywhere and are user friendly
Con: Although the software categorizes your spend, manual updates and categorization have to be made sometimes and it can be time consuming
Works Well For: Anyone decent with technology that wants an easy-to-use tool to track spending and net worth. I personally think these are good for everyone.
I didn’t actually try this one but I wanted to include it because it’s popular and I read a lot about it before deciding it wasn’t for me. The idea is that 50% of your income goes to your needs, 30% to wants and 20% towards savings. To be completely honest, I didn’t see how saving only 20% was going to get me to my goals and I wanted a more aggressive budget so I decided to skip this. If I had tried this method earlier in my savings journey, I think it would have been more beneficial. And I do think it is helpful for someone just getting started with a budget.
Pro: Quick and easy to determine where to spend your money
Con: Might not meet your long-term savings goals
Works Wells For: Someone getting started with a budget for the first time
So what do I do?
My version today is a hybrid of several but the premise is pay-yourself-first. As you start trying different budgets, you’ll most likely start to create your own version too. We use several bank accounts to achieve this which does make it more complicated at first but it’s actually very easy once direct deposits are set up. The main idea here is that we “pay ourselves first”, meaning we have a savings goal and know how much we need to save per paycheck to reach that goal. With that in mind, here’s how we set up our accounts and budget:
Fixed expenses: These are easy to calculate and are the same each month (mortgage, insurance car payment). The amount needed to pay fixed expenses gets deposited each paycheck into a separate account than our discretionary spending. We always know that all our fixed expenses will be paid each month and this account drops close to $0 each month intentionally.
Taxable savings: We already know how much we need to save each paycheck based on our overall long-term goals and that amount goes directly to a taxable investment account (retirement savings is done separately). The key is that it never touches our checking account (it’s even at a completely different institution!). If we ever need funds from this account, it’s available to transfer within a few days. But the simple act of having it deposited to an investment account without touching our checking account first limits the temptation to spend it.
Discretionary spending: The amount left over after saving and fixed expenses is deposited to our checking account. We can spend this on whatever we want! We don’t allocate a certain amount to each spending category. Instead we spend it wherever we want, but are limited in the total amount of discretionary spending. This gives us the most flexibility to spend where we want but still have a budget in place.
Pro: Prioritizes savings
Con: Multiple accounts to manage and set up
Works Well For: Someone who already has a savings goal set. If you don’t, you can still implement this strategy with the fixed expense account to start.
With so many methods to choose from, budgeting can be intimidating at first but the important thing is to get started and make it a habit. You might find that a combination of several strategies works best for you but the habits you build by following a budget will stay with you as your financial goals and needs change.
What method do you use? Is it one of the above or have you created your own version too? Let me know in the comments!
I tried zero sum, but didn’t stick with it. I think I’ll give it another try now though! I also like the 50/30/20
Thanks for the comment! Out of curiosity, what aspect of zero sum did you not like/what made you stop it? Depending on what it was, I wonder if there’s a slight adjustment you can make this time to make it more useful (or some combination of a few strategies that might work better!). 50/30/20 is great too!
I’m wondering too, James! BTW: is this film reviewer James?
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I found Mint and Personal Capital not helpful for budgeting. They track what I’ve already spent. I budget for now and the future spending. Used to use Mvelopes for several years but way too buggy. Switched to YNAB and it has been great. My money grows when I stay focused on now and the future.