That plan is your budget.
Wait! Don’t leave!
It’s really not that bad! While budgets get a bad rap, they don’t have to be something that you dread dealing with. There are all sorts of different ways to budget.
We’ll find something that works for you!
You Don’t Need to Hate Your Budget!
People hate budgeting because it has a reputation for being inflexible and preventing you from having fun. But it doesn’t have to be that way.
Budgeting just means deciding what you want to do with your money.
This can be as granular and detailed as you’d like it to be.
If you want to assign a job for every dollar of income, then great!
If you want to create a rough guide for your spending, that’s fine too.
If you want to work on your savings goals and ignore the rest of your spending, then go for it.
The problems arise when you choose not to budget at all. Your money is going to leave your wallet regardless of whether you plan or not. A plan just makes sure it goes where you want.
First up, there’s the traditional budget. You allocate your income into different spending categories every month and then aim to stick to those allocations.
This can have different levels of strictness.
On one end of the spectrum is the envelope method.
With this type of budget you create an envelope for each spending category. Then you take out all of the money you will spend during the month in cash and distribute it amongst the envelopes. When an envelope is empty, you’re done with spending in that category until the next month rolls around and you refill the envelopes.
On the other end of the spectrum are tools like Mint budgeting. Here, you set goals for each spending category at the beginning of the month. Then you look back at the end of the month and see how your actual spending compares to your targets. If you missed, then you can either revamp your budget for the next month or be more careful about your spending in whatever category was problematic.
There are all sorts of options in between these, and you don’t even need any formal tools or apps.
You could write down your spending goals for the month and then keep a spending journal to make sure you are staying within your budget.
You could write down your goals and then check in every week to make sure you’re on track.
You could create any variation of this that works best for you. After all, an imperfect budget that you stick to is worlds better than a perfect budget that you ignore.
Different Budgets for Different People
I used to use the traditional budget. Specifically, I used an app called You Need a Budget (or YNAB). I’m a nerdy number cruncher and I like exact plans.
YNAB had you assign a job to every dollar of income. If it was coming into your bank account, then you needed to tell YNAB where it would eventually go.
You plugged each purchase into the app as you made it and YNAB automatically adjusted how much you had left in each budget category as you went. If you needed more money in a category, then you had to actively choose which other category you were going to steal that money from.
YNAB worked great for me.
I introduced my wife to YNAB and she absolutely hated it. It just didn’t work for her.
And she’s not alone! Traditional budgeting doesn’t work for tons of people. It can be hard to stick to and can feel demoralizing watching your categorized spending money disappear before your eyes.
I get it.
So if traditional budgets don’t work for you, there are other options.
Pay Yourself First
The least intrusive way to hit your money goals is to pay yourself first.
In the personal finance space, paying yourself first means setting aside your savings as soon as your paycheck hits your bank account and then allowing yourself to spend whatever is left.
The oldest iteration of this idea of which I am aware is from The Richest Man in Babylon. In that book, they recommend setting aside 10% of everything that you earn.
Work towards paying off your debts, but make sure you’re saving 10% first. Buy what you need to buy, but make sure you’re saving 10% first. Buy the things that you think will make you happy, but make sure you’re saving 10% first.
The financial independence community has taken this idea and amped it up. Some FI blogs will recommend paying yourself first by setting aside 50% of your paycheck towards your retirement savings. Some will recommend even higher.
For our purposes, though, paying yourself first doesn’t necessarily need to be solely for your retirement savings.
Look back at your top financial goals from the last article. How much do they cost? How much do you need to save?
Pay yourself first by setting aside whatever you need to reach those goals. Once you’ve prioritized those top goals, you can spend whatever is left guilt free.
Automate Your Goals
One trick to paying yourself first is to take full advantage of automation.
Most bank accounts and investment accounts will let you set up automatic recurring transfers.
Every other Tuesday I get paid. Every other Wednesday my bank automatically transfers a set amount into my Vanguard account. Vanguard automatically invests that entire amount into VTSAX.
I don’t need to do anything.
This is great! Partially because of the convenience and the time saved.
Mostly, though, automation is great because it is much easier to make the right choice once rather than every time you get a paycheck. If you can set it and forget, you will be far less tempted to skip your savings goals.
Join the Conversation!
You’ve got your starting point and you’ve got your destinations. Now take out a map and start plotting.
What method of budget do you use? What have you found works or doesn’t work for you? What are your savings goals? How soon can you hit them? Let us know in the comments!