The Ultimate Budgeting Guide: Part 2-Choose Your Budget

The Ultimate Budgeting Guide: Part 2-Choose Your Budget

If you missed part 1, that’s okay click here to go back. I highly recommend that you don’t skip the first step in budgeting, if you don’t have a reason to start a budget, you probably aren’t going to keep it. So go back, read part 1, then come back here to learn which way to manage your money is best for you πŸ™‚


There’s this idea that the only way to create a personal budget is on a spreadsheet or with a pen and paper. These are of course, the most common ways to do it, but neither of them may be the right one for you. There have been many people (way smarter than me) who have come up with different, simpler methods for creating a budget. Part 2 of the 4 part Ultimate Budgeting Guide is learning about these personal budget ideas and picking the one that is best for you.

Before we continue to the list I do want to recommend something…Find out where your money is going each month.

Here’s an example, have you ever started doing your taxes, got your W-2 form and saw how much you actually made that year (positive vibes), and then wondered to yourself “where did all that money go?” Like seriously, think of the last I don’t know, 3 months. How much money did you make? Where is it now?

So when you go through this list you may choose a different budget than a “traditional” one. I want to suggest that you create a standard budget at first just to know where your money is going. Three months is usually a good amount of time. All this will do is let you know where your money is going, how much you spend a month on average, and where you can cut back. Once you are in a good place, go back to the budget type you chose (more on that in part 3).

Last thing…this part (part 2) is simply picking the budget that is best for you. So don’t worry if you don’t know which categories to choose, how to set it up, or where numbers go, etc. Focus on the budget you feel is best for you (you can always switch if it doesn’t work out, this post will always be here to reference).


Choose your budget:

I’ll start with “manual” budgets then go from there.

1. Pen and Paper:

Materials: Pen/Pencil, Paper πŸ™‚

How It Works: Using a pen and paper is pretty simple. Feel free to customize it how you want, but the basics are…

  • Make a list down the left side of your paper.
    • Include your income
    • List all of your expenses
    • Put your debts
    • Add a totals column (see template under examples).

Positive:Β Pen and paper was my first budget. The great thing about it is the ability you have to customize it. You can create it how you want, so that you understand it. It’s completely manual, which is beneficial because you physically have to write down how much you are spending. This will make you more aware of where your money is going. Give it a try for a month or two if you’re a new to budgeting.

Negative: While a pen and paper being manual can help you become more aware of how much you are spending, it’s tedious. Once every few weeks having to check your budget and physically write down your numbers will probably become annoying and you’ll potentially burn out after a few months. Plus, think of the trees! πŸ˜‰

Examples: I haven’t uploaded the template to the site so if you want to see the example or would like a copy email me and I’ll send it to you.

2. Envelope System:

Materials: Pack of envelopes, Pen/Pencil

How It Works: This idea was made popular by Dave Ramsey, but was probably used by many of our grandparents. Here’s how it works. Take your envelopes and write down each expense category you want to budget for on the front (i.e. groceries, entertainment, clothes, etc.). Then decide how much money you want to spend on each category. When you receive your paycheck for that month take out the amount you chose, in cash, and place it in its allotted envelope.

For example lets say you get paid bi-weekly (every two weeks, lets do the 5th and 20th of each month) and decided you can afford to spend $200 on entertainment for that month. When you got paid on the 5th you would take out $100 in cash from that check and place it in the envelope labeled “entertainment.” Then when you got paid on the 20th you would take out the remaining $100 you budgeted for and place that in the envelope. Now, anytime you want to go to a movie, football game, ice skating rink, whatever form of entertainment you choose, pay for it with the cash in that envelope and that envelope only. If the money runs out in your envelope and a friend invites you to go laser tagging, the envelope tells you that maybe you should take a rain check or do something that doesn’t cost money.

Positive: This is really good to make sure you stick with your budget, because once the money is gone from your envelope you can’t spend anymore on that particular category.

Negative: The hard part is having to go to the bank every month or two weeks to pick up cash. If your bank isn’t on the way to your house this can be annoying. There can also be a feeling of restriction (which is kind of the point but still…) because you aren’t supposed to spend more than what is in each envelope.

Examples: Here is the Envelope System Explained in more detail on Dave Ramsey’s site.

3. Cash Only:

Materials: Cash

How It Works: If you don’t want to use envelopes because it feels too restricting try using cash. Obviously there are things that you won’t normally use cash for (rent, car payment, etc.), but pick the categories you can use it for, i.e. groceries, entertainment, eating out, etc.

Positive: Using cash allows you to see and feel physical dollar bills leaving your hands (hopefully) making you realize how much you are actually spending. When you use a debit or credit card you don’t have that same physical feeling of money being taken away from you.

Negative: Similar to the envelope system it can be a pain to have to go to the bank every couple weeks to take out cash. You also may have to deal with change jingling in your pocket which can be annoying. πŸ™‚

Examples: Using only cash is fairly simple, I don’t really have any examples or further explanations. If you have any questions feel free to email me and I’ll do my best to find the answer. πŸ™‚

4. Spreadsheet:

Materials: Laptop/Computer, Microsoft/Google/Etc. Excel Spreadsheet

How It Works: You can use any type of spreadsheet you have available. It’s a little difficult to explain the set up in a short paragraph so I’ll refer to the picture below. Click on it to see a blown up example.

Positive: Spreadsheets are super cool because you can adapt it and customize it how you want. You can also set the columns to automatically add up so all you have to do is type in the numbers.

Negative: While it’s less manual then say pen and paper you still have to manually go in and type the numbers. If you are creating one from scratch it is a little time consuming at the beginning. You may have to adapt it as you go but once it’s all set up it’s usually easy to maintain. You need some type of computer which may or may not be a problem.

Examples: Click on the image to enlarge for an example of what Kate and I use πŸ™‚


Here are the more automated budgets.

5. App:

Materials: Anything you can get an App on (smartphone, iPad, tablet, etc.).

How It Works: Most apps have instructions or a process to help you when setting up so basically it comes down to choosing the right app for you. The two apps that I’ve used and recommend (for strictly budgeting purposes) are “Mint” and “EveryDollar.” Mint is pretty easy to use and probably the most popular among personal finance bloggers. It’s very detailed and has other very detailed accessories inside. EveryDollar (Dave Ramsey’s budgeting app) is much simpler and very easy to use. It isn’t over complicated and very intuitive making it easy for first time budgeters, Dave and Co. claim that it’ll literally take you 10 minutes to get your budget up and running. I can vouch for maybe 30 πŸ™‚

Positive: You can link your checking account to most budgeting apps allowing it to automatically place your expenses in its appropriate category, helping you avoid the mundane daily tracking. Mint and EveryDollar are both pretty simple to use and aesthetically pleasing to look at.

Negative: While it’s a positive it can also be a negative. Linking your account to the app and having it automatically place your expenses in the appropriate category can cause you to stop looking at your budget and ultimately not keeping up with it. Also, the automatic placement isn’t perfect at first so it may take a month or two of manually switching the expense to its appropriate category. The good news is the app will remember the categories for future purchases.

Examples: I did some research on this and found there are a toooon of budgeting apps. As mentioned my two favorites are “Mint” and “EveryDollar.” If you don’t want to use either of those apps you can check out this list of 27 Personal Finance and Budgeting apps I found by Tom from Tom’s Guide.

6. Pay yourself first (10%):

Materials: Checking and Saving Accounts

How It Works: Rather than tracking every penny you make and where it goes “The Richest Man in Babylon” suggests you pay yourself first. George S. Clason, through stories and parables suggests that everyone should take 10% out of their paycheck first thing and put it away (savings account, investment account, etc.). As you do this your money will slowly begin to grow and you don’t have to track where the remainder of your money is going because you already saved the money from the beginning. So the order is…pay yourself first, obviously pay your bills next and any other necessities. Then spend the rest on whatever you want.

Positive: It’s automatic. It takes a lot of the pressure off of having to track where all your money is going because you know you’ve already saved a certain amount. This is a great strategy and excellent place to start for someone who isn’t used to saving.

Negative: You don’t know if you could be saving more. While this is good for first time savers and those of us who are just starting out, it’s limiting. It doesn’t allow you to see where you are spending too much and how to improve. If I were recommending this, I would suggest to start with it but once you get the hang of it, look to improve the percentage you are saving (see options 7-9).

Examples: Read the book for yourself!! πŸ™‚

7.Β 80/20 (Andrew Tobias):

Materials: Checking Account, Saving/Investment Account

How It Works: Andrew Tobias is a Journalist and Author mostly known for his ideas on investing. His budgeting method is simple…cut up your credit cards, invest 20% of all you make, live on the remaining 80%. If you aren’t comfortable or ready to invest your money simply putting 20% in a savings account is a good place to start until you learn what you want to invest in.

Positive: Similar to “The Richest Man in Babylon” it’s automatic. It takes a lot of the pressure off of having to track where all your money is going because you know you’ve already saved a certain amount.

Negative: You don’t know if you could be saving more. While this is good for first time savers and those of us who are just starting out, it’s limiting. It doesn’t allow you to see where you are spending too much and how to improve.

Examples: Read the book Andrew Tobias wrote yourself. πŸ™‚

8.Β 50/30/20 (Elizabeth Warren):

Materials: Checking Account, Saving/Investment Account

How It Works: Elizabeth Warren (politician) breaks the percentages down even further in her book “All Your Worth.” She gives the 50%, 30%, 20% rule. Again 20% of your money should go to investments/savings. The 80% is then split into two categories, 50% goes towards all of your needs (bills, food, etc.), 30% goes towards wants (movies, eating out, shoes, etc.).

Positive: (See previous two personal budget ideas)

Negative: (See previous two personal budget ideas)

Examples: Take a look at Elizabeth Warrens book “All Your Worth.” πŸ™‚

9. Take % out first (Afford Anything):

Materials: Checking Account, Saving/Investment Account

How It Works: Paula Pant from the popular blog “Afford Anything” says to take out a percentage of your choosing off the top of your paycheck. Unlike the last three she doesn’t give a specific amount, but the higher the percentage you save the better. As soon as your direct deposit hits take the percentage you want to save first thing and put it away. Seasoned, big time savers can save up to 75% or more of their paycheck.

Positive: This method promotes saving as much of your paycheck as you possibly can. It gives you the flexibility and freedom to challenge where your money is going and find out where you can save more. You should take the money out of your paycheck as soon as you get it so you don’t have to worry about tracking every penny during the month.

Negative: This definitely isn’t for everyone. First off you have to be disciplined and not touch the money once you take it out of your paycheck (unless absolutely needed of course). Secondly, sometimes you simply can’t afford to save a higher percentage so saving 10%-20% might be the best place to start.

Examples: Here’s a link to Paula Pant’s blog “Afford Anything.”

10. Automate (Ramit Sethi):

Materials: Checking Account, Saving/Investment Accounts, Credit Card

How It Works: Ramit, author/blogger (I Will Teach You To Be Rich), believes in automating the whole process. Here’s how it works…

  • The first thingΒ  you do is go to your HR guy/gal and ask them to take out money from your paycheck and automatically place it into your 401(k). He or she will do it and boom you’re done saving for retirement (about 5% is his recommendation).
  • Now the rest should be directly deposited into your checking account (you can ask your HR person to set up direct deposit for you as well).
  • You now have 95% of your paycheck in your checking account, from there, Ramit suggests you send 5% to a Roth IRA and 5% into your savings account.
    • Inside his savings account he has sub-saving categories, 2% goes to a wedding account (for those who aren’t married), 2% for car repairs, 1% for stupid mistakes that we all make. To do all of this all you have to do is go to your Roth IRA company and tell them how much you want to contribute. Then go to your bank and tell them you want a certain percentage sent to your savings account and inside that your sub-saving accounts.
  • Now with 85% of your check left set up as many bills as you can to be automatically paid by your credit card (Netflix, gym, etc.).
  • For the bills that you can’t pay through your credit card you can set up a bill pay in your checking account to automatically pay your other bills off (rent, utilities, etc.). Now you’ve got money put in investment accounts, money stashed away in your savings account and paid all of your bills.
  • Next step…guilt free spending. You’ve put money away now spend the rest on what ever you feel like.
  • Again if you aren’t comfortable with these particular investments put the money in a savings account until you have learned about them yourself. Once you’ve learned what you want to invest in go for it!

Positive: You will literally spend less then an hour on your finances every month. Just a quick check up to make sure everything is running smooth. You automatically are saving for retirement and emergencies with out even having to think. You can adapt the savings numbers to what you want (put 10% into your 401(k), 10% into your Roth IRA, 10% into savings, etc.)

Negative: There is some work involved to get it set up, you do have to contact your bank and investment companies to set everything up. If you’re a hands on person who likes working with numbers and really knowing where everything is going this might not be for you.

Examples: Learn about this method in more detail from Ramit himself here, or buy his book and read it. πŸ™‚


Bonus (but slightly more complicated) budget.

11. Multiple Savings Accounts (The Bucket List):

Materials: Two separate Checking Accounts, Saving Account

How It Works: This is a little more complicated but someone might want to try it so I thought I’d throw it in. Here’s how it works…

  • The first thing you do is determine how much you want to put into savings every month and adjust your direct deposit to send that amount to your savings account.
    • Funnel the money from there into other investment/saving accounts (Roth IRA, College Savings Plan, etc.).
  • Now directly deposit the rest of your paycheck into your first checking account.
    • From here you can set up automatic payments for your the bills you pay monthly.
  • Then ask your bank to automatically put a quarter of what is left into your second checking account every month. This money should be used for expenses that aren’t fixed costs such as groceries and entertainment.
  • Spend the rest on whatever you want.

Positive: Similar to Ramit’s plan it allows you to adapt the savings numbers to what you want every month and it runs by itself once set up.

Negative: It’s definitely a little more complicated, you have to have a couple checking accounts. There is some work upfront that can be difficult.

Examples: Read more about it directly at Investopedia.


Conclusion:

Part 2 of the 4 part budgeting series, choose the budget that works best for you. Part 3 is about how to create and set up your budget (including what categories to choose and how much money to put towards each category, etc). If you have any questions about any of these, send me a message here.

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