There are actually quite a few people who like to budget. It is such a fun and satisfying game for them. However, most of us avoid the task, not wanting boredom or being hemmed in by strict rules. What if I told you that there was probably a budgeting method 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 budgeting and discover the method that will help you achieve the life you want today and in the future.
Note: Not sure you need to budget? Find out 8 reasons to adopt this foundational money habit.
1. Budget No budget: Just watch your bank account balance
Perhaps the simplest way to budget is to make sure your bank account doesn’t go to zero. For this to work, you need to pay all your expenses and fund your savings from one account and you simply watch to make sure you stay above zero dollars.
This may not enable you to prioritize spending according to your values or reduce stress, but it is a simple way to stay on top of your finances.
(Look, I told you there would be a way to budget for just about everyone.)
2. Settlement of total income and total expenses
If you’re opposed to budgeting in general, simply juggling total income and total expenses at regular intervals is probably the best approach to budgeting. This method includes:
- Determine the time frame for reconciling your budget. Do you want to assess your income and spending every week? Month? year?
- Collect all sources of income for that time period.
- Record the total of all your expenses over the course of the month.
- Evaluate whether you spend more or less than you earn and:
- Deciding what to do about the excess or deficit
- Determine how to adjust your budget for the future
3. Track spending categories
If you want to get more specific and use budgeting as a way to make sure you’re spending according to your priorities and values, you’ll need to get more specific and keep track of exactly how you’re spending your money.
Use receipts, bank statements, and credit cards to record all of your expenses over the course of the month. Categorize your expenses into different categories like housing, transportation, groceries, utilities, debt payments, entertainment, etc. Be sure to factor in all expenses and try to be as accurate as possible.
This creates awareness of 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, and budget to zero
The two previous budgeting methods above are about assessing what you’ve already spent. To build on these habits, you may want to determine how much you can or are willing to spend in future time periods.
With this approach, you set aside every dollar of your income for a specific purpose, ensuring that your income minus expenses equals zero. You give a job for every dollar, whether it’s for essential expenses, savings, paying down debt, or discretionary spending. It helps you track and account for every dollar and encourages intentional decision making.
- Set an ambitious budget. Be realistic, work out how much you think you will spend in different categories. Give every dollar a job.
- Then, in each period of time (week, month, year, etc..) you can compare what you planned to spend with what you actually spent.
- Adjust your budget expectations based on what you’ve learned about your spending.
5. Create a basic and discretionary spending budget
This method of budgeting means that all of your spending falls into two categories: needs and wants.
Basic expenditure (needs): These are the expenses required to live. What do you need to spend on housing, utilities, groceries, transportation, health care, insurance, debt repayment, savings, and other necessary costs?
Discretionary Spending (Wants): Discretionary expenditure is that expenditure which is not necessary for your basic needs but desirable for personal enjoyment, convenience or satisfaction.
For example, you need to eat every day (primary spending) but going to a restaurant is good fun (discretionary spending).
This can be a simple way to categorize your spending and it is helpful to assess if you are having difficulty meeting your basic or discretionary spending each month and make changes accordingly.
6. Envelope system
Most budgeting methods involve tracking digital financial transactions. The envelope system includes real cash money – like actual paper dollars.
You start by determining the amount you will spend in different categories and writing the amounts on different envelopes. Then you withdraw the amount of cash you need to fill each envelope based on your budget. As you progress through the month, you can only spend from the appropriate envelope and when the envelope is empty, you cannot spend more in that category.
This is a concrete way to control your spending and is good for people who are visual learners or impulse spenders.
7. 50/30/20 Budget
Some experts recommend three categories of spending with the following suggested percentages. Customize
- 50% of your income for needs (such as housing, utilities, and groceries)
- 30% for cravings (such as dining out and entertainment)
- 20% to save and pay off debt.
Note: These percentages are just a general rule. You can change the proportions to suit your own needs.
8. 80/20 budget
In this method, you allocate 80% of your income to planned expenses and financial goals, and the remaining 20% to flexible spending or unexpected expenses. This type of budget allows for some flexibility and money play while ensuring that the majority of your income goes toward your predetermined priorities.
This is a good budgeting method for those who want some guardrails, but don’t want to track expenses precisely.
There is a group of people who choose to save very aggressively in order to retire early, such as in their 30s or 40s.
In order to achieve this goal, FIRE followers choose to live frugally and save 50-75% of their income.
10. Pay yourself first
If you want to improve your savings (or pay down debt), pay-it-yourself budgeting is another simple budgeting method that focuses primarily on savings and paying off debt.
With this method of budgeting, you set aside a set amount each time savings and debt payments are made, then the rest of your money can be spent as you think is best. This prioritizes the two most important financial goals and means that you only need to deal with all the rest.
11. Conscious Budgeting: Kakeibo Budget
Kakeibo is a traditional Japanese method of budgeting that promotes conscious spending and financial awareness. Developed in the early 1900s by Hani Motoko, Kakeibo translates to “family 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 the greater focus on the meaning behind your spending. With a kakeibo budget, you should:
- Take the time to reflect on your purchases and consider their value and impact so you can make more informed decisions about your spending, prioritizing what really matters to you.
- Think about 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 you spend and on what?” and “How did you feel about spending?” This thinking helps you gain insight into your financial choices and patterns.
Most of these budgeting methods are for household budgets. And the family budget needs to include the needs, wants, values, and tendencies of all family members, especially those of your spouse.
If it is difficult to bargain or reach complete consensus about all the details of a household budget, you may want to adopt one of the simpler budgeting methods for common spending categories and allow each family member the ability to control their own pool of funds and choose the budgeting method to track their own money.
13. Budget preparation for retirement planning
Most of the budgeting methods on this list relate to monitoring spending on a relatively short-term basis (weekly, monthly, or perhaps annually).
However, when you plan your retirement, you need to create budget projections for 10,20, 30 or more years. There are different ways to approach the task of planning your future spending, but we highly recommend using the NewRetirement Planner to assess the actual viability of your overall future financial security.
There are hundreds of different means that go into your retirement plans and they are far more complex than a family budget.
If a monthly budget is a cramp, retirement planning is a game of multidimensional chess.
Learn more about how to prepare a retirement budget and why it’s so important to make accurate forecasts.
It used to be that you kept a written ledger to monitor your budget.
However, these days there are different tools to make the process easier and more accurate. You can use a spreadsheet or budget apps.
spreadsheet budget: This includes using spreadsheet software such as Microsoft Excel or Google Sheets to create a detailed budget. You list your sources of income, break down expenses, set spending limits, and track your progress over time. A spreadsheet budget provides flexibility, customization, and the ability to perform calculations and analyze data with ease.
Budget apps or software: There are many budgeting apps and software available that automate and simplify 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 reporting, which makes budgeting more intuitive and accessible.
New Retirement Long-Term Budget Projections: NewRetirement Planner enables you to create a budget for all your future expenses. You can change expenses over time, define tax treatment, and build basic as well as discretionary expense levels. (It automatically corresponds to your retirement income and savings.)
Remember, the most effective budgeting method is the one that best fits 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 develop. The key is to find a way to help you stay organized, maintain control of your finances, and work toward your financial goals.