Let me just say up front that I budget. Don’t pretend to be surprised. I know I’m a nerd.
But I won’t judge you if you don’t.
What I do want to make sure you do is make a conscious decision about how to handle your money. If you’re ignoring budgeting because you think it will take too long or be too constricting, then your money may be leaking out in places that you don’t want it to.
Whether you decide to budget or not, here’s what you should know before deciding how to apportion your money.
Track Your Spending
Tracking your spending is important for a number of reasons. First and foremost, you want to make sure that your spending is actually reflecting your values. It is far too easy just to coast along in your finances and spend money where you think you are supposed to.
When you stop and track your finances, you can compare your spending in different categories and adjust going forward in ways that will make you happier. Do you want to be spending more on travel and less on clothing? Do you want to be spending more on group activities with friends and less on lunch at work?
You can get more happiness out of the same paycheck by making conscious decisions about where your money is going.
The actual “how” of tracking your spending is easier. If you want the most detail and to be the most conscious, then you should track your spending in a notebook, a spreadsheet, or a program like You Need a Budget. If that sounds overwhelming, then set up an account with Mint.
Mint will link to your bank accounts and your credit cards and will allow you to categorize your purchases as they get automatically loaded into the system. Mint also lets you check out some nifty charts showing your spending habits and trends.
Pay Yourself First
Most people (entirely based on conjecture and anecdotal evidence – I have not looked for data to back me up on this) spend down their money during the month and then save whatever is left at the end. This system sucks.
Some people are incredibly disciplined or naturally frugal and can pull this off. Most people will spend more than they want and save less than they want.
Instead, the key is to set aside the money that you want to save as soon as you get your paycheck. Are you saving for a house, a car, or some other big expense? Retirement? College? Decide how much you need to save each paycheck and set up an automatic transfer of that amount from your checking account to your savings or investment account to occur the day the check hits your bank account. Get paid every other Friday? Set up an automatic transfer to occur every other Friday.
This method ensures that you hit your savings goals and that you don’t end up with a leaky budget that doesn’t reflect your priorities.
Decide how much you want to save. Pull that amount off the top of your paycheck. Spend whatever is left without stressing about where it is going.
I would still recommend adding Mint so that you can see patterns in your spending and adjust to maximize the happiness you get from your spending, but Paula’s Anti-Budget is still worlds better that what most people are currently doing. It’s not totally optimizing your spending, but it is quick, easy, and efficient.
In 2006, Elizabeth Warren, before jumping into the partisan rancor, included a similar approach to budgeting in the book that she wrote with her daughter, All Your Worth: The Ultimate Lifetime Money Plan. Warren’s plan says to split your take-home pay 50/30/20 between needs, wants, and savings, respectively. If you wind up using this system, the 50 (needs) and the 30 (wants) should be viewed as ceilings, while the 20 (savings) should be viewed as a floor.
Budgeting gets a bad rap. People see it as time consuming and inflexible. Both of those are wrong.
I use the You Need a Budget (YNAB) app. I hit a few buttons on my iPad to input my paycheck. The app tells me how much money I have to spend for the month. I separate the money into categories. It takes a few minutes.
I also overspend in my categories all the time. Things come up. A friend invites me to a bar. I want to go, but there’s no money left in my Restaurants and Bars category for the month. I decide that I want to go anyway (fostering relationships with others is the biggest happiness bang for your buck, after all) and so I move money over from a different category.
The important thing is that I am consciously deciding where my money is going. I find another category to spend less in that month so that I can spend more wherever I want. Quick and flexible.
Mint also has a budgeting system now. I haven’t used it, so I can’t give you much of a review, but anything that makes you pay more attention to where your money is actually going is a good thing in my book. (If you have experience with budgeting in Mint, tell us about it in the comments.)
So go ahead and try any or all of these systems. Figure out what works best for you. I’m not picky with methods, I just want to make sure that you are getting the most happiness and security that you can out of your money.
Let us know about your experience with different budgeting methods in the comments.