The Budgeting Battle: 6 Ways to Make Budgeting Easier
You know what’s sexy about personal finance?
Traveling the world, eating at amazing restaurants, buying your dream home, having savings to start a dream business, being able to provide for the people you love, and doing all those knowing you’re not completely sabotaging your future!
You know what’s NOT sexy about personal finance?
Budgeting.
While it may not seem fun, budgeting is literally “the backbone” of your financial plan… i.e. what helps you reach the shiny experiences above. Think of it like eating your veggies as a kid. You simply can’t make a dependable financial plan when you don’t have a reasonably accurate estimate of your spending.
The Dilemma: 80% of personal finance is behavior, only 20% is head knowledge! To start budgeting you must make it fun (or at the least… less painful) so you’ll actually do it.
So Why Do So Many People Hate Budgeting?
Confronting spending is uncomfortable (i.e. guilt, self consciousness, etc)
You think budgeting is restrictive and requires extreme measures (cutting $5 coffees, reviewing their budget before every purchase).
You think budgeting takes up too much time (ironic, we work 40 hours/week to make money but won’t devote < 1 hour/month to help avoid squandering that money).
You don't know where to start and get overwhelmed
Another big reason? The way you budget doesn’t fit with how your mind works.
Engineers want detailed spreadsheets, your mom might write it in a paper notebook, you as a tech loving millennial or young family track it on budgeting apps like mint.com. Knowing what budgeting method works best for you helps ensure you’ll actually do it, which is what’s most important.
Bottom Line: Bad budgeting ruins financial plans. People think they know what they spend, then they create a budget, review their spending, and realize otherwise, knowing how much you spend is all that matters. How you determine that is up to you. Pick a budgeting method that suits your personality. Doing so reinforces the right behaviors and the right behaviors (not guessing the latest hot stock) are what make people wealthy over time!
6 Budgeting Methods - Which Fit Your Personality Type?
1. The 'Budgeting App' Approach
If you want a somewhat hands-off budgeting method, consider using a budgeting app that automatically tracks your income and expenses. It makes expense tracking easy.
The app uses AI to automatically assign a spending category to each transaction (i.e. a restaurant expense is auto assigned as “Dining”). The only work involved is to “re-link” accounts if the connection breaks and categorize transactions that don’t get categorized correctly.
Budgeting Apps include: Mint, YNAB, and Personal Capital
Who Should Use This Method?
This method works for the person who wants to automate the budgeting process. They don’t mind dealing with occasional technical hiccups and small limitations of the software.
2. The Zero-Based Budget
Zero-Based Budgeting is where the money you have in income matches exactly what is going out of your account. It assigns a “job” for every dollar of income you bring in. Each dollar might be assigned to things like paying your bills, saving for retirement, funding your emergency account, a fun budget, etc.
The budget software YNAB runs off this system.
Who Should Use This Method?
If you have a Type A personality and like to micromanage, then the Zero-Based budget is for you. You won't have to wonder where you spent your money or what you should do with any money left over. Every dollar will have a job.
3. The Traditional Approach
The traditional way of budgeting is reviewing your bank & credit card statements, manually adding up each expense, then dropping them into individual categories within a detailed spreadsheet. Update the budget monthly or quarterly then compare actual spending against planned spending.
Who Should Use This Method?
This method is for those who like the customization that a spreadsheet offers, tracking things precisely, and aren't a fan of the limitations of the budgeting apps. This is the highest accuracy but most manual approach.
4. The Cash Only Budget
The Cash Only Budget or “Envelope Budget” is an excellent option if you operate on cash. You create categories for your spending and place the appropriate amount of cash for each category in an assigned envelope. If you spend all the money in the envelope, you're done spending in that category for the month.
Who Should Use This Method?
This is an excellent method to try if you constantly overspend when using a debit or credit card. But, of course, you can't spend money you don't have, so it helps you get back on track with your spending in each category.
5. The “Pay Yourself First” Budget
The Pay Yourself First Budget works opposite to any any other budget I've mentioned.
Pay Yourself First: Automate savings you need to do to ensure it gets done first (retirement, down payment, emergency fund).
Pay Essential expenses: Pay the bills (i.e. rent, utilities, groceries, etc). Automate what you can.
Pay Fun expenses: What’s left over after the first two can be enjoyed and spent “guilt free” knowing you’ve saved as needed already.
Who Should Use This Method?
If saving has always been a challenge for you, don’t leave it to chance. Behaviorally, if you wait until month end to save “what’s left” it won’t happen. So automate savings as soon as you receive your paycheck. You save first, then spend, ensuring you always have money saved.
6. The Rule of Thumb Budget
The Rule of Thumb Budget is the 50/30/20 budget. This is a great place to start for most people because it assigns percentages to your categories. For example, you should use 50% of your budget to cover your fixed expenses, 30% of your income for your variable expenses (including fun money), and 20% for your savings and debt payoff.
Who Should Use This Method?
This budget is good for beginners who balk at spreadsheets but still want a loose structure to follow. This method is just a guide though, a “one size fits all” approach, not a fitted suit (like the traditional approach).
Final Thoughts
Bad budgeting ruins financial plans. Choosing the approach that behaviorally works for your personality type is key to building long term wealth! Some are incredibly detailed, and others can be scratched onto the back of a napkin. The key is to create a budget, so you truly see what you’re spending.
Remember, 80% of personal finance is behavior, and 20% is head knowledge. The easier or less painful a habit is, the more likely you are to do it. Pick the approach that works for you!
Special Offer: Sign up for the email list below and I will send you two beautifully made excel budget templates you can use (one is shorter/simpler and the other longer/detailed).
If budgeting and spending is a concern of yours….
Schedule a free 30 minute call with me here.
A financial planner can help you build the right habits to help you grow your wealth over time.
San Diego Financial Advisor | Fee-only Fiduciary
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