Five Simple Budgeting Strategies That Can Bring Real Results
Since childhood, I have had a craving for numbers. My dad loves to tell the story of how, when I was seven, I corrected one guy’s math out of my head – of course that fix worked against my dad and cost him some money.
This post was originally published on The Simple Dollar .
I enjoy playing with numbers in spreadsheet programs, and I even enjoy writing computer programs to manipulate numbers – after all, that’s what I’ve done for a living for years. At the same time, I know that there are many people who do not have this intimacy. Their gifts and talents lie elsewhere, and tables and series of numbers are not easy for them to get.
The idea of a budget – one of those formalized budgets that you see in personal finance books – seems like torture. Rows and rows of numbers, calculations and estimates … for some people, this alone is more than enough to put them off a valuable tool.
But here’s the thing: This is really just one way to budget. There are other ways to organize your money and make sure you come out on top without looking at the many numbers. You will inevitably have to look at a few numbers, but not anything beyond what you can do on a piece of note paper.
Here are five budgeting methods that don’t take a lot of numbers to get you to the top of your financial game. But first, you need to know a few key principles that apply to all of these budgeting strategies.
All of these strategies have one big thing in common: they don’t require you to look at a lot of numbers to get your finances in order. For some, this can be invaluable. Moving away from these numbers, however, comes with some real problems, problems that traditional budgeting addresses but can be overlooked with these strategies.
So, here are four things to keep in mind when you try any of these budgeting methods.
First, don’t use credit cards until you can make these budgets work. Just don’t use them. The goal of a budget is to make sure you are living within your means, and a full budget can do that well enough, but when you eliminate numbers, you are removing a few fences that may be holding you back from overusing. credit card. The best thing you can do is just take credit cards out of your life for a while, until you really feel confident that you are spending less than you are earning month after month.
Second, budgeting takes time and patience, just like cycling. Your first try may fail, but that doesn’t mean budgeting isn’t working. This means that just like when you learned to ride a bike, you need to pull yourself together and try again.
Third, keeping track of your expenses is incredibly useful , even if you don’t know how to count. Just looking back at all of your spending, even without adding up the numbers, can give you a real shock when you realize how you spent so much of your money. It’s worth spending time each month looking at your receipts, bank statements, and credit card statements to see where your money has gone.
Finally, there is no fast track to wealth. It does not exist. You’re not going to budget for three months and suddenly find that all your financial problems have resolved themselves. However, you will find that some of your problems have begun to diminish, and if you continue like this, they will eventually disappear. This is not a sprint – this is a marathon.
Now let’s talk about strategies.
Subtracting a budget is probably the simplest form of budgeting available. This is nothing more than a little addition and subtraction that you can do on the calculator on the back of the envelope, and in fact most people already do it in one form or another.
It’s simple. Just add up all your bills for the month. Then take the amount you bring home, subtract the total of your bills from it, and then subtract the additional amount to save. The remaining amount is how much you can spend in a specific month.
The “economic” part serves several purposes. First, it helps cover you in an emergency, such as a car breakdown. It can also be used to cover irregular bills such as insurance. You will want to insert this “savings” portion directly into your savings account.
But how much savings? One good way to do this is to save as much as you can freely spend. So, if you have $ 400 left after paying your bills, save $ 200 and use the remaining $ 200 to spend freely.
I suggest keeping the amount you set aside in your checking account and carrying it over at the end of the month simply as protection against accidental overdraft. Just remember that you need to maintain a balance above this amount.
It is important to remember about all your bills, including those that are paid automatically. If you forget automatic bills, you are more likely to run into overdraft.
It’s so easy that anyone who knows how to manipulate addition and subtraction on a calculator can do it. You just add up the numbers, then you subtract a few numbers, and that’s it. It tells you how much you need to spend.
One of the problems people sometimes run into when budgeting is that money is not in their hands. It’s abstract, in the form of credit cards, checks, and debit cards, so they can sometimes lose sight of things and not quite understand how much – or how little – they have to spend. When this happens, it is incredibly easy to make financial mistakes.
One great approach to tackling this problem is to move to cash budgeting, sometimes also called envelope budgeting .
It’s very simple too (I suppose that’s the topic here). You just budget your entire budget in cash or as much as possible. You cash your check, take it home, sort all the dollars and cents, and then use that money directly for everything.
Yes, it is easier for accounts to put them in a checking account and use online banking most of the time. For things like entertainment or groceries, however, money is incredibly easy to use.
For convenience and online shopping, it makes sense to use some cash to fund a pre-purchased credit card. This card can potentially be used to pay for small recurring bills like Netflix.
What is the advantage of this? If you budget this way, you can see exactly where each dollar goes. There is no doubt about where your money is going because you see every penny and hold it in your hands.
During the pay period, you can literally watch your money deplete over time. Dollars and cents are spent on all sorts of things – food, household items, rent, utilities, entertainment (and probably more entertainment than you thought), and so on and so forth.
When you see money going this way, you often start to realize that maybe some of the things you spend money on are not the smartest choices, which is the real benefit of budgeting.
This is a very smart and simple budgeting method, first widely featured in the excellent personal finance book All Your Worth by Elizabeth Warren and Amelia Warren Tiaghi.
The idea behind this budgeting is to divide all of your spending into three categories: needs, savings, and desires. The “needs” category includes basic utilities, taxes, mortgages or rent, basic food, transportation, and insurance. “Wants” includes things like entertainment (such as cable TV and Netflix), extra food (such as high-quality food or eating out), additional rent or mortgage for a large house or apartment, additional costs for an expensive car, and td in other words, anything that goes beyond your basic needs.
Proportional budgeting means that you divide your money very clearly between these three categories. For example, you can spend 50% of your money on needs, 30% on desires, and 20% on savings – you can describe this as a 50/30/20 budget. On the other hand, perhaps you are well off and spend only 20% on needs, 50% on needs and 30% on savings – a 20/50/30 budget.
This type of budget is directly related to two important personal finance issues that people must address in their lives.
First, it helps people clarify the difference between needs and wants in their lives. The truth is that even the most frugal people often spend a lot of money on desires , even if they define them in their head as needs. Home Internet Access? This is desire . Cable TV? I want to . Big house? Most of it is desire . New car? Anything above a reliable last-model used car is a desire .
Because of this, it often helps people understand how much of their money is spent on personal desires and maintaining their appearance. It turns out that most people spend a lot of money on things they don’t really need in life. They are wasted on things that make life more enjoyable, and the truth is, none of that is needed. For me, looking at things from this point of view has become something of a call to become smarter in spending and spend less on the satisfaction of secondary desires.
I ended up spending a lot of time thinking that some of the things that I spent my money on that could qualify as “desire” were really important to me (for example, home Internet access), and other things – no (for example, buying Gatorade from a store or buying golf clubs).
After all, proportional budgeting is really most useful as an exercise in understanding how you are actually spending your money. Putting it all together, you really get a great idea of where your money is going, making it a great opportunity to reflect on that choice.
Budgeting two banks
“Two-bank” budgeting is based on the concept of “pay yourself first”. In fact, this is exactly what happens – you put money in the bank for yourself before you do anything else with your money.
With this type of budgeting, you start by opening a current account with a second bank. It is to this account that your actual salary will be credited in the future, so the next step is to instruct your workplace to deposit your check on this account, and not on your regular account.
After that, you instruct the new bank to automatically transfer money to your old account a few days after receiving the payment. So, if you get paid every two weeks on Friday, set up an automatic transfer to happen next Wednesday or so.
The trick is that you don’t transfer the entire amount of your salary. Instead, you just transfer most of it – maybe $ 100 less than your actual salary.
So let’s take a look at a complete example of this. You get paid $ 1,000 every two weeks. This money is now credited to a checking account with a new bank. Then, a few days after that, $ 900 is automatically deposited into your regular checking account. $ 100 remains in a new account after each paycheck.
What happens next? You live off the money in your regular checking account to cover what you need and want in a certain pay period. Money left in another account remains there until you have an emergency or run into high costs. In other words, it serves as an emergency fund / car replacement fund / down payment fund or whatever important purpose you might have for that.
Basically, the purpose of all of this is to automatically deliver savings where it’s hard to come by. You can’t just go to your local bank or use your regular ATM card to get this money – it’s in another bank and you’ve almost completely forgotten about it until you need it.
It also makes you live on a little less money than before. It’s not bad; it simply requires you to cut some of your least important expenses.
If you like this savings automation idea, you can leverage it massively and upgrade to fully automated budgeting.
To do this, you will need a bank with reliable online banking and, ideally, the ability to create “sub-accounts” to make things easier. Capital One 360 is a great example of this type of bank.
All you do with a budget like this is set up automatic payment of each bill, so you don’t have to worry about it. You simply set up automatic payment of all your bills closer to the due date, as well as set up automatic transfers of savings.
What about additional costs or expenses for items that are not specified, or expenses that occur in stores? The best way to get this money is to transfer it to a central checking account, from which you only spend money on things like food and household items.
At the moment, this is basically the kind of budget that we use for our family. Almost every bill is paid automatically and money is automatically transferred to separate savings accounts for various specific purposes (for example, for the next car replacement cycle) and for our overall investment in financial independence. We also automatically save money for “free spend”.
Once you tweak this setting, it will be as easy as possible. For us, paying bills comes down to checking the account once a week or so to make sure everything is in order, or transferring money from our “free spend” account to our main checking account.
One big trick is that if your account suddenly gets oversized or someone makes the wrong spending choices, all of this can go wrong and you can start accumulating some overdrafts. You have to control your spending well for this to work, and a good buffer in your checking account is a good idea too.
Another strong idea here is to make sure you have reasonable overdraft protection, ideally connected to a savings account with a healthy balance. That way, if you do make any mistake, it won’t have a serious negative impact on you.
Each of these strategies has advantages and disadvantages. Some of them are very simple to calculate, but they do not provide a lot of nuances and do not help you in making day-to-day decisions. Others require a ton of upfront work but are very helpful with day-to-day choices.
The general idea is that budgeting doesn’t have to be a giant spreadsheet. It doesn’t have to be endless strings of numbers. It doesn’t have to be endless calculations.
At the end of the day, a budget is just a tool to help you get to the point where you can easily spend less than you earn, start paying off debt, and start saving. All of these approaches allow you to do this without overwhelming you with numbers.
Don’t worry if you are overwhelmed by a bunch of columns and rows. There are other approaches as well. Good luck.