Budgeting Basics - Different Kinds of Budgets (2/3)
Hi, everyone! This is Lara Hammock from the Marble Jar channel and in today’s video, I’ll talk about a bunch of different kinds of budgeting systems. This is the second in a three part series.
The first video in this series covers the basics of budgeting — what is it, why would you do, it and how does it work. For many people, budgeting is about as appealing as dieting. Which is to say — not very. In fact — they ARE very similar processes — in both you are required to follow a set of rules that change your behavior in order to achieve a goal — either to lose weight in the case of dieting or to save money, in the case of budgeting. As you know, there are a BILLION different diets out there - Atkins, South Beach, Weight Watchers, Keto, etc. Believe it or not — there are practically as many ways to budget as well. In the same way that not all diets work for everyone — not all budgeting systems work for everyone either.
In this video, I want to give you a high level overview of several different budgeting systems. The key is finding the system that works best for you with your unique brain, your lifestyle, and your goals. So, first off — just a quick visual to show what budgeting accomplishes for you. This is your income. Some portion of your income should be saved for short and long term savings — let’s say 30%. The remainder — this 70% can be used for living expenses. A budget helps you to determine how you are dividing up your living expenses now and how you want to divide that money up. For example, let’s say to make things easy, your income is $1,000 — you’ll notice that I haven’t given a time frame since different budgets use different time frames -- but generally budgets tend to be monthly. You put $300 of your $1,000 aside for savings. How do you split up this $700? $300 goes towards rent, $200 food, $25 gasoline, etc. These are called budget categories. First you have to figure out how you are actually using this money now and then you determine your plan for how you want to split this money up going forward.
Generally speaking, the more detailed and complicated the system, the more control you have, but the harder it is to maintain. The trick is finding the right balance for yourself.
Okay — let’s go through some of the budgeting systems! First
50/30/20
This budget system is both prescriptive and simple. The idea is that 50% of your income (after tax, of course) should be going to needs (mortgage, utilities, transportation, groceries, basic clothing), 30% should be going to wants (Netflix, dining out, electronics, etc.), and 20% should go towards goals or savings. There are only 3 budget categories, so it is simple and should be pretty easy to maintain. It may not be great for those who need more detailed info about where they can make cuts in their spending.
Zero Based
Zero Based budgeting was popularized by Dave Ramsey. It’s both a philosophy and a system. It requires that you set a new budget each month based on your projected income and expenses. The philosophy part is that it requires that you plan where every dollar will go. In other words, you establish in advance how each dollar will be used so that you are incredibly intentional about savings, goal planning, and expenses. A zero based budget never has anything “left over” — income minus spending/savings should equal zero. The unique component of this system is the fact that you set up a new budget every month, which helps you to stay on track and to know where every dollar is going.
Paycheck Budgeting
While most budgets tend to be monthly since we pay most of our bills monthly, paycheck budgeting uses your paycheck as the budgeting period. Say you get paid twice a month. Each of the monthly expenses like rent, car payment, or utilities is assigned to one of your paychecks with portions of ongoing expenses like groceries and gasoline being allocated as well. It has the benefit of being more concrete in matching income directly to expenses and covers a shorter time period, which can make it easier to control expenses. The drawback is that it requires more planning and calendaring then a monthly plan.
These have all been specific systems. Let’s say you are using a more standard plan — saving 30% and just trying to control the 70% left for living expenses. How do you do this? Well, you are going to lump together like expenses and determine about how much you plan to spend in each category each month. Your budget is just the amount that you plan to spend on each category going forward. And hopefully, when you add all of the budget categories up, that will add up to 70% or less of your take home pay. If not, you may need to make some cuts. So, now that you have this plan, how do you make sure you stay on your budget? You have to track your expenses throughout the month. There are lots of ways to do this — I’ll go from the most concrete to the most abstract.
Envelope Method
This is a cash based method that some people swear by. For all of your budget categories that are not automatically paid, you go to the bank each month, take out cash, and put the amount that you have budgeted in envelopes for each category. The idea is that you spend only the money in this envelope for that category throughout the month and when the money is gone, you can’t spend anymore! The cash is a clear reminder of the limits — plus people hate spending cash. They find it much more difficult to part with than credit. There are some obvious drawbacks with this system. First the trip to the bank each month, but also you can get into a bad cycle of taking money out of other envelopes in order to pay for things and then you have NO IDEA where your money is going.
Worksheet or Notebook
Some folks work best with good old fashioned worksheets or a notebook. They don’t want to carry cash around, but they don’t mind writing things down on a worksheet split into categories. Each time they make a purchase or a transaction hits their bank account, they write it down on a worksheet or in a notebook, which is helpfully sorted into budget categories. As they go, they can subtract from their budgeted amount to determine how much they have left to spend for the month. There are a ton of budget notebooks for sale and there are thousands of budget worksheet templates on the Internet , but you can also make your own worksheet if you don’t like their standard categories. This is pretty straightforward, but requires you to do quite a bit of calculating and it can’t easily be maintained and shared by more than one person.
Spreadsheet
This is the same concept as a worksheet except you have the benefit of being able to use the spreadsheet to do your calculations automatically for you. You can also bring in transactions from a bank or credit card export file and subtotal each category. In addition, if you use a cloud based spreadsheet like Google Sheets, you can share with multiple family members. This method is flexible, but requires some technical know how and you still have to mostly manually enter transactions or go through the steps to import them from your bank or credit card account. There are also a ton of templates for budget spreadsheets on the Internet.
Smart Phone App
Finally, there are apps that will help you to create a budget and track your expenses. Some examples are Mint, YNAB, and Yolt. I consider this the most abstract tracking system since the app communicates directly with your bank or credit card accounts, pulls your transactions into the app, and sometimes will even categorize them for you. All you are responsible for is making sure the app has categorized things properly and consulting your budget throughout the month to determine whether you are on track to meet your goals. Apps can be convenient and low maintenance, but by the same token -- they might allow you to be so hands off that you aren't paying attention to how you are spending your money until you are way over budget. They also require a bit of technical know-how to find your way around the app and hook all of your accounts up. I use Mint, which I've done a tutorial series on.
So, this is a sampling of the different budget systems. There are also hybrid systems. For example, Jordan Page from FunCheaporFree uses a combination of systems -- a spreadsheet (I think) for the majority of fixed cost items in her budget and a worksheet of sorts (it's actually an envelope that she carries around in her wallet) for weekly groceries and other discretionary spending. In order to control spending, she splits her monthly budget into more digestible weekly portions and writes down every expense for those two categories. This helps her prevent overspending at the beginning of the month, forces some tough choices, and ultimately helps her stay on budget. I use the Mint app, but I pull the transactions into a spreadsheet at the end of each month to do some additional calculations since I find Mint's reporting limited. The key is finding the budgeting system that works best for you, your brain, your lifestyle, and your budget plan.
And that's it! Join me in my next video where I break down the four steps to successful budgeting. Let me know what you think -- or if you use a system that I didn't cover. Comments are always appreciated and thanks for watching!
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