There is nothing I recommend more to people wanting to understand their finances more than a budget. Seriously, it is an essential first step.
Yes, really! What’s the first thing you think of when you think of budgeting? Unless you’re a fellow personal finance geek, you probably had words like ‘boring‘ or ‘uncool‘ or ‘not my thing‘ cross your mind. It gets a bad rap, but that’s just not fair. Nothing can turn your financial life around faster than the right budget.
Notice how I said the right budget? I truly mean that. Your budget can (and should) be as individual as you are. I’m all about balance and want to save you from a super restrictive budget. I’ve been there, done that, and you know what? It sucks. If your impression of a budget is something that takes away all your fun money, you’re wrong. A good budget will open up options to you and take away spending guilt. There’s no one size fits all, and that’s why I’m taking a look at four different budgeting styles so you can find your fit.
1. The Go With The Flow
I’m doing this list a little backwards, and am starting with the budget I use, but not necessarily the one I would recommend to beginners. That’s the thing about budgeting…the more you do it, the better you get at it and the less strict you need to be.
The trick to the ‘go with the flow’ budget, and why it works for me, is automation. What you want to do is set up as many bill payments and contributions to savings accounts as possible to run automatically. Your paycheque goes into your chequing account, and then everything gets deducted automatically as soon as possible. Then you’re free to spend the leftover balance however you like. One thing to remember is that you can’t always control when bill payments come out of your account. My car insurance gets deducted on the 20th of the month, my home insurance on the 26th (and they’re the same company!) You need to make sure you leave enough cushion in your account to cover everything. We don’t to get dinged with any NSF (non-sufficient funds) fees.
The reason this isn’t always the best option for first-time budgeters is figuring out how to work within the limits of that leftover balance. You don’t want to run out of money before your next pay cheque comes in. That comes from experience and from working within the confines of a stricter budget, at least temporarily.
2. Get Your Category On
Categorical budgeting looks at your spending the other way around. Instead of spending what’s leftover, you figure out your spending first and save what’s leftover. You can choose whatever categories apply to your situation. Examples include housing, food, entertainment, utilities, etc. Then you assign a dollar value to each category and keep your spending within that limit each month.
The envelope system of budgeting is one example of a category budget, but it focuses on cash-only spending. For this, you would put the exact amount of cash for each category in an envelope, and that’s your money for the month. I like credit cards and think they are a useful tool for getting added perks (cash back or travel rewards), but if you are struggling with debt then turning to cash can be beneficial. Whether you go cash or track your categorical spending with an app or spreadsheet, this budgeting style is simple to set-up and perfect for beginners with a consistent salary.
3. Divide and Conquer
Similar to the categorical budget, the divide and conquer style uses percentages instead of fixed dollar amounts to control spending. It is the perfect solution for those who have a variable income. Going by percentages makes it simple to adjust your budget each month based on how much money has come in.
How do you figure out your divisions? The most popular percentage-based budget out there is the 50/20/30. It allocates 50% of your income to fixed costs (rent, utilities, groceries), 20% goes to your savings goals, and the last 30% goes to non-essential spending (your wants). This is a good starting point, but you can change it up to what works for you. Depending on your income and where you live, your fixed costs may be lower than 50% of your income so you can drop that and bump up your savings rate. Try not to go under 20% savings though! There’s no rule that you have to stick with the 50/20/30 allocations. You could go with the 43/28/29 or the slightly less popular 37/22/41 budget.
4. Every Penny Counts
Last up we have the most time-consuming budget, but also the one I would recommend everyone start with…at least temporarily. Here you will track where every single dollar goes, down to the penny. I guess I should say the nickel since pennies aren’t even a thing in Canada anymore.
Yes, this is a bit of a pain in the ass, but it will give you insight into your spending habits and where you can make changes. Don’t worry; you don’t have to keep this up for too long. After a few months of strict budgeting, you’ll have an excellent handle on things and be able to ‘go with the flow’.
You don’t have to do all your tracking manually. There are apps out there (like Mint or YNAB) that will make tracking your spending easier. Once you determine your spending, you will want to assign every dollar you have coming in a job. Whether that goes towards essentials or savings, nothing is left unaccounted.
Something for Everyone
Each of these methods can be tweaked to work for you, and there’s no rule saying you can’t try out all of them before making a choice. The important thing is finding the one you’re willing to stick with, and then do just that. I promise, once you’re in the habit of budgeting, it will become second nature, and you won’t think twice about it.
Once you’ve found a budget, you’re happy with it doesn’t take that much time to check in with it every so often. Budgeting isn’t as time-consuming as you might think. The only time you’ll have to make substantial changes to your budget is if something significant happens in your life. For example, you get a big raise at work, or you find out you’re having a baby, or you lose your job. That’s not to say that you can’t tweak your budget at other times. If you find yourself with extra cash at the end of the month (hooray) or frustrated with your spending money (not so hooray), then change things up. Remember, the most important thing is sticking to a budget, and you’re not going to do that if it’s making you miserable.
What budgeting style do you use? And why do you think that one works the best for you?