Budgeting, Beyond the Basics

With respect to household resource allocation, the budgeting method used is one of the largest factors that determines how successful people are. I assumed, for a long time, that the one method I’d been taught was the only way to budget. It turns out there are many.

Some approaches will work better than others, based on your personality, available time and energy, and financial goals. As life becomes more complex, you may need to reconsider which types of budgets will suit your new situation. If you struggle in certain areas, you may need to create a hybrid style to add helpful tactics, or make modifications, creating something unique to you.

Types & Techniques

Paying Yourself First

This ensures that saving and investment are treated as nonnegotiable highest priorities.

Benchmarks & Percentages

Establishing percentages can help keep spending balanced, to avoid either overspending (living too lavishly) or underspending (living too frugally).

This strategy can be kept simple:
– 50% for living expenses, 30% in discretionary funds, and 20% to savings and investments (the 50/30/20 method)
– 70% for monthly spending, 20% in savings, and 10% to donate (the 70/20/10 method)

If these are overly simple, percentages can be made significantly more complex (50% in living expenses, 15% for discretionary funds, 10% to stocks, another 10% to fixed-income assets, 5% for my Bali trip, 5% toward short-term debt repayment, and the final 5% will go to long-term debt repayment).

Track & Limit

Sometimes, just understanding where money comes from and where it goes, through cash flow analysis, will significantly shift your spending habits.

Cash envelopes can be used in certain areas, such as groceries, to eliminate overspending.

Assign Every Dollar

If you live well below your means, you may want to try allocating everything that remains at the end of each month.

A slight variation of this, zero-based budgeting, could work for those who know exactly what will be coming in and going out each month.

The ultimate goal is:

Income – Savings and Investments – Expenses = $0

One of the trickiest aspects of these two methods is that they require a fairly accurate estimation of expenses.

Be Extra Prepared!

The Super Saving method requires very little estimating and balancing. It simply requires setting aside a large cash reserve, to handle whatever lies ahead.

A popular tactic among those whose income or expenses are less consistent or predictable is overestimating expenses while underestimating income.

When someone creates their first budget, they often include all of their monthly expenses while overlooking some of those things that occur annually or less often (30,000-mile maintenance, bathroom upgrade, relocation, a growing family, etc.).

To avoid this, some use the prior year’s spending to approximate average costs. Be sure, if you select this method, to inflation adjust the resulting estimated cost of living.

Value-Based Budgeting

The intentional budget aligns our money with our values. It’s less about overall spending and saving than about ensuring that your resources are being used for what matters most. Someone, who values healthier living, for instance, may chose to forgo spending in others areas to leave more for personal trainers, yoga retreats, and organic groceries.

People are more inclined to save or invest when they have personalized their reasons. A popular variation of this strategy involves opening multiple savings or investment accounts, then naming them (Brian’s Getting a Degree, European Adventure, Play Golf All Day).

The Best Method

Try not to get too attached to one variation. Think of your budget as a living document (app, excel spreadsheet). Stay open to modifying tactics, over time, as your life circumstances change. Simplify what you’re doing if it’s becoming overly cumbersome, add complexity when your budget isn’t capturing important aspects or information.

You may not pick the perfect method right way. If you’re struggling with an approach, don’t give up! Try new styles.

Remember, in the end, the best system of budgeting is the one that most suits you. Everyone has different strengths, needs, and goals. Let these factors serve as a guide in designing something uniquely (although tentatively) perfect.

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