Work and Wealth
What is your budget style?
Budgeting is a personal thing that needs to match your style. The budgeting principles are essentially the same, but execution varies for each personality. We’ve looked at the ‘Why’ of budgeting and covered tips to make your budget work, now it’s time to look at three different ways to budget and not all of these methods involve spreadsheets and a mind-numbing level of detail. All they require is a little awareness of your finances:
The goal of budgeting is to spend less than you earn and therefore save money. This method involves taking away any temptations, removes ‘easy’ means to spend more than you make and guarantees savings. The core purpose is to target the poor spending behaviour that has been developed over time. Rather than try to save what is left over at the end of the month, the save first method flips this around, save first and spend the rest!
There are two key aspects to this method,
- Have a set amount of money to be saved each month. The amount should be realistic based on living expenses, some of those living expenses may need to reduce in order for this to work. This may not be popular, but that’s the point of saving and budgeting ….. it’s living within your means and you’ll find it’s not as horrifying as you might think.
- The amount saved needs to move into another account. Open a savings account with the highest interest rate you can find and have the amount to be saved each month moved into this account.
Tracking every last cent spent is a tedious task that unless it changes your spending behaviour (perhaps it will by taking all your time or energy) then there is no point tracking expenses to this level. Generally overspending occurs in a few categories such as buying clothes, buying gadgets, entertainment or eating out. This style of budget aims to find out which category needs to be brought under control.
To use this method you need to accumulate data in order to track where your spending. Take a month or two of recording where you money goes into a set group of categories then identify which ones are above your expectations or causing a draw on your bank account. Then focus on being those under control by monitoring your spend in just these categories.
I can’t take any credit for this method (or any of the previous two as they’ve been around in different forms for years!). The 50-30-20 budget comes from Senator Elizabeth Warren’s book “All Your Worth”, which takes a simple approach to budgeting. The basic plan is to split your money into three classes, needs or necessities, wants and lifestyle and savings or wealth.
This method is a modified ‘save first’ model (there is a common theme here, save first, spend second) with more attention paid to your spending habits, while remaining easy to follow by allocating your money as follows:
50 Percent for Needs
These are necessities, things you cannot forgo such as rent/mortgage, groceries, insurance, etc. By allocating 50% to needs you’re forcing yourself to live within your means. If a mortgage or rent payment were to take up 50% of your income and all of your needs allocation, it’s probably an indicator that it’s not really a ‘need’ it’s a ‘want’.
30 Percent for Wants
This is the fun money for your lifestyle, the nonessential items or spending. Think dinners, movies, traveling etc, just there is a ‘cap’ on how much you spend. This makes you put a value how much these ‘wants’ actually mean to you.
20 Percent for Savings/Wealth
This is the ‘forced’ savings component which should be used to pay off debt, save for emergency funds and build wealth.
So that’s three variations of budgeting for you to try. Remember the purpose of the budget is to assist in achieving the financial goal, so mixing and matching styles to get the right fit is the secret to making it work.
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