There are actually a few people who love budgeting. It is like an enjoyable and satisfying game for them. However, most of us avoid the task, not wanting the tedium or to be hemmed in by rigid rules. What if I told you that there is probably a way to budget that aligns with your personality, feels intuitive, and helps you achieve your financial goals?
Are you ready to find your financial groove and develop a budgeting strategy that feels right for you? Let’s dive into the world of personalized budgeting and discover the method that will help you achieve the life you want today and into the future.
NOTE: Not sure you need to budget? Explore 8 reasons to adopt this foundational financial habit.
1. The No Budget Budget: Just Monitor Your Bank Account Balance
Perhaps the simplest way to budget is to make sure that your bank account does not go to zero. For this to work, you need to pay all of your expenses and fund your savings from one account and you simply monitor to make sure that you stay above zero dollars.
This may not enable you to prioritize spending according to your values or reduce stress, but it is a minimalist way to stay on top of your money.
(See, I told you there would be a way to budget for almost everyone.)
2. Reconciliation of Total Income and Total Expenses
If you are generally opposed to budgeting, a simple reconciliation of total income and total expenses at regular intervals is probably the best way to approach budgeting. This method involves:
- Determining the time frame for your budget reconciliation. Do you want to evaluate your income and spending each week? Month? Year?
- Adding up all sources of income for that time period.
- Recording a total of all of your expenses throughout the month.
- Assessing if you are spending more or less than you earn and:
- Deciding what to do about the excess or the deficit
- Determining how to adjust your budget for the future
3. Track Spending Categories
If you want to get more elaborate and really use budgeting as a way to ensure that you are spending according to your priorities and values, you’ll want to get more detailed and track exactly how you are spending your money.
Use receipts and bank & credit card statements to record of all your expenses throughout the month. Categorize your expenses into different categories such as housing, transportation, groceries, utilities, debt payments, entertainment, etc. Be diligent in capturing every expense and try to be as accurate as possible.
This creates awareness for where your money is going and you can determine if your spending is in line with what you value.
4. Give Every Dollar You Earn a Job, Budget to Zero
The two previous budgeting methods above are about assessing what you have already spent. To build on those habits, you may want to determine how much you can or want to spend in future time periods.
With this approach, you allocate every dollar of your income towards a specific purpose, ensuring that your income minus expenses equals zero. You give every dollar a job, whether it’s for essential expenses, savings, debt repayment, or discretionary spending. It helps you track and account for every dollar and encourages intentional decision-making.
- Create a budget that is aspirational. While being realistic, determine how much you think you will be spending in different categories. Give every dollar a job.
- Then, each time period (week, month, year, etc..) you can compare what you planned to spend with what you actually spent.
- Adjust your budget projections based on what you learn about your spending.
5. Create Both an Essential and a Discretionary Spending Budget
This way of budgeting means that all of your spending goes into one of two categories: needs and wants.
Essential Spending (Needs): These are the expenses required to live. What do you need to spend on housing, utilities, groceries, transportation, healthcare, insurance, debt payments, savings, and other necessary costs?
Discretionary Spending(Wants): Discretionary spending are those expenses that are not essential for your basic needs but are desired for enjoyment, convenience, or personal satisfaction.
For example, you need to eat every day (essential spending) but going to a restaurant is a nice treat (discretionary spending).
This can be a simple way of categorizing your spending and it is useful to evaluate if you are having a hard time with meeting your essential or discretionary spending each month and make changes accordingly.
6. Envelope System
Most ways of budgeting involve tracking digital financial transactions. The envelope system involves real cash money – like actual paper dollars.
You start by determining how much you are going to spend in various categories and write the amounts on various envelopes. Then you withdraw as much cash as you need to fill each envelope based on your budget. As you go through the month, spending can only be done from the appropriate envelope and when an envelope is empty, you can not spend any more in that category.
This is a concrete way of controlling your spending and is good for people who are visual learners or impulse spenders.
7. 50/30/20 Budgeting
Some experts recommend three categories of spending with the following suggested percentages. Allocate
- 50% of your income for needs (such as housing, utilities, groceries)
- 30% for wants (such as dining out, entertainment)
- 20% for savings and debt repayment.
NOTE: These percentages are just a rule of thumb. You can alter the percentages to fit your particular needs.
8. 80/20 Budget
In this method, you allocate 80% of your income towards planned expenses and financial goals, and the remaining 20% is for flexible spending or unexpected expenses. This type of budget allows for some flexibility and play money while ensuring that the majority of your income is directed towards your predetermined priorities.
This is a good budgeting method for those who want some guardrails, but don’t want to meticulously track expenses.
There is a group of people who opt to save very aggressively in order to retire early, like in their 30s or 40s.
In order to achieve this goal, FIRE adherents opt to live very frugally and save 50-75% of their income.
10. Pay Yourself First Budget
If you want to improve your savings (or debt repayment), the pay-yourself-first budget is another simple budgeting method that focuses primarily on savings and debt repayment.
With this budgeting method, you set aside a specific amount every time you get paid for savings and debt payments, then the rest of your money can be spent however you think best. This prioritizes the two most important financial goals and means that you just need to make do with whatever is left over.
11. Mindful Budgeting: Kakeibo Budgeting
Kakeibo is a traditional Japanese method of budgeting that promotes mindful spending and financial mindfulness. Developed in the early 1900s by Hani Motoko, kakeibo translates to “household financial ledger” or “account book.” It focuses on the principles of tracking expenses, reflecting on spending habits, and setting financial goals.
What makes kakeibo budgeting different from other budgeting practices is more focus on the meaning behind your spending. With kakeibo budgeting you are to:
- Take the time to reflect on your purchases and consider their value and impact so that you can make more conscious decisions about your spending, prioritizing what truly matters to you.
- Reflect on your spending habits and analyze your financial behavior at the end of each month. Kakeibo encourages self-reflection by asking questions such as “How much money did I spend and on what?” and “How did I feel about my spending?” This reflection helps you gain insight into your financial choices and patterns.
Most of these budgeting methods are for households budgets. And, a household budget needs to involve the needs, wants, values, and proclivities of all members of the household, especially those of your spouse.
If it is difficult to compromise or reach full consensus on all of the details of the household budget, you may want to adopt one of the more simple budgeting methods for shared spending categories and allow each member of the household the ability to control their own pool of funds and opt for a budgeting method to track their own money.
13. Retirement Planning Budgeting
Most budgeting methods on this list are about monitoring spending on a relatively short-term basis (weekly, monthly or perhaps annually).
However, when you are planning your retirement, you need to create a budget projection for the next 10,20, 30 or more years. There are different ways to approach the task of planning your future spending, but we strongly recommend that you use the NewRetirement Planner to assess the actual viability of your overall future financial security.
There are hundreds of different levers that go into your retirement plans and it is vastly more complicated than household budgeting.
If monthly budgeting is tic tac toe, then retirement planning is multidimensional chess.
It used to be that you’d keep a written ledger to monitor your budget.
However, these days there are various tools to make the process easier and more accurate. You can use a spreadsheet or apps to budget.
Spreadsheet Budgeting: This involves using spreadsheet software like Microsoft Excel or Google Sheets to create a detailed budget. You list your income sources, itemize expenses, set spending limits, and track your progress over time. Spreadsheet budgeting offers flexibility, customization, and the ability to perform calculations and analyze data easily.
Budgeting Apps or Software: There are numerous budgeting apps and software available that automate and streamline the budgeting process. These tools often sync with your bank accounts, categorize transactions, and provide visual representations of your spending. They offer features such as expense tracking, goal setting, and financial reports, making budgeting more convenient and accessible.
NewRetirement for Long Term Budgeting Projections: The NewRetirement Planner enables you to build a budget for all of your future expenses. You can vary expenses over time, set tax treatment, and build both essential as well as discretionary expense levels. (And, it automatically reconciles with your retirement income and savings.)
Remember, the most effective budgeting method is the one that suits your financial situation, goals, and personal preferences. You can start with a simpler approach and gradually adopt more elaborate techniques as your budgeting skills and financial needs evolve. The key is to find a method that helps you stay organized, maintain control over your finances, and work towards your financial goals.