Budgeting: For some people, it’s akin to a bad word. There are lots of people out there who swear that they just can’t follow a budget. There are also some personal finance people out there who say they don’t follow a budget. Why has budgeting become such a bad thing? Part of it is due to perception. People hear the word budget and automatically think they have to track every penny. Suddenly budgeting seems complicated, time-consuming, and restrictive.
The thing about budgeting? It can be as unique as you are! A budgeting style that may work for one person may not work for another. And that’s ok. The key is figuring out what works for you, and then stick to it.
My budgeting style has been a “work-in-progress” over the years, incorporating new tricks and ideas that I’ve picked up along the way. The first big influence was Dave Ramsey. He believes in having a plan for every penny before you get it, having your spending money in cash, and using the envelope system. Some of that worked for me, some of it didn’t. I can plan my regular expenses out to a T. And I do prefer having my spending money in cash. While it’s not true for everyone, I find that I spend less when I use cash. But I like for my spending money to be more fluid. I don’t like assigning $x to clothing, and $x to restaurants. I like having flexibility with my spending money. Maybe it’s childish, but it’s my spending money, and I want to do with it what I want! And right now, I don’t know what I want next week, or the week after!
The next big influence came from an article by Liz Weston written about Elizabeth Warren and Amelia Warren Tyaqi’s 50/30/20 budget. I haven’t read the book, but the idea fascinated me. To budget, you take your net pay amount (the amount you actually take home), and add back in things like 401k and medical payments; Basically, everything except for taxes. For me, this amount equals out to $643.69. Of that amount, you should spend no more than 50% on your “must-haves”. Again, I haven’t read the book, but my understanding is that “must-haves” include anything that you are contracted or otherwise required to pay. I include my mortgage, utilities, all types of insurance, and student loan payments. This would also include things like car payments, credit card payments, and any recurring fees that you have a contract for, like cable, gym memberships, etc. For me, 50% of my weekly pay equals $321.85. From there, 30% of your remaining pay goes towards wants ($193.08), and 20% towards savings ($128.74), or debt pay-off if you are still in debt. The idea is that this is a starting place. If you can get your must-haves lower, you can redistribute that money towards debts pay-off, then savings, then wants.
I really liked this plan, as I felt it gave me some sort of benchmark to know how I was doing. From there, I setup three bank accounts: One for my must-haves, or regular expenses, one for spending, and one for savings. I put $200 a week into my expenses account, plus $20.95 a week that comes out of my check for insurance, flexible spending account, etc. That’s a little over 34% of my weekly pay. I put $200 per week into my savings account, plus $51.35 into my 401k at work. That’s around 39%. The other ~27% goes towards my wants. For me, wants also include my gas money and groceries. I’m not sure that’s really correct. Also, my savings money so far has gone towards things like the sewer project and tuition payments. As I’ve mentioned before, that’s not really considered savings, just saving up for larger expenses. Although I also have an emergency fund now of about $3,000. And now that I’m getting past a lot of my big expenses, some of that money will start going towards paying off my student loan.
For my expenses account, I like to be super detailed and keep an excel spreadsheet. I start a new one each year, and plug-in for each month all of my outgoing expenses, incoming pay, and a running total.
I setup equations in the Total column, so if I make any changes it will automatically recalculate everything for me. Every week or so I compare this with the online account, making any changes necessary, highlighting each item as it is paid, and bolding the amount in the Total column showing when it was in balance, since sometimes Holidays and weekends will change the expected payment dates. I also make sure to include non-monthly payments, like my semi-annual car insurance premiums. I’ve been doing this for years. It may seem a little anal for some, and that’s ok. But it makes me feel more secure that I can scroll through the rest of the year and see how I stand financially with my expenses. It also allows me to “try out” different scenarios, like adding a new recurring payment, or lowering or getting rid of one, to see how much I need to add or subtract each week to keep things in balance. What can I say, I like to see ahead!
My bank allows me to divide up my savings account into different categories, and set goals. This is an awesome feature! That way I can set up a goal for an emergency fund, and allocate money towards that goal, and online it looks like it is separated from the money I was saving towards the sewer project, or educational expenses. That way every penny of my money is assigned to something there, and it doesn’t look like I just have a random stockpile of money.
The spending account is just a regular checking account, with a debit card. I usually take my $100 out in cash every week, leaving the remaining amount to use my debit card for gas, and a little left over for anything that should come up. Some weeks I forget, and just use my debit card. Those are usually the weeks I end up spending too much.
There were a lot of other things that I’ve read over the years that have contributed to my budget system. To some, it may seem overly complex. To others, not detailed enough. The point is, it’s what works for me right now. Over the years I’m sure it will continue to change, as I learn new things, and have new needs. There isn’t just one way to make a budget! It can be as simple or complex as you want it to be. The point is just to have a plan of some sort for your money, not matter how loose or strict that plan may be.
If you’ve struggled in the past with budgeting, I encourage you to read a variety of budgeting ideas. Try them out, and then keep what works, and get rid of the rest. Combine different ideas until you develop something that works for you. Know that a budget is always changing, so you should be prepared to make changes and continue to incorporate new ideas.
What budgeting model do you follow? Are there certain things that work/don’t work for you? What do you think of my budget?
– Cindy W.