When it comes to implementing a budget – or what I now affectionately call creating a Spending Plan – you don’t have to go further than the internet to find examples that detail what works and what doesn’t. Here are a just a few:
- Patriots’ Joejuan Williams lives off 10% of his income and says a high school finance class taught him how to save(1/14/2020)
- Olympic swimmer Ryan Lochte went from earning millions to living paycheck-to-paycheck—here’s what he learned(1/14/2020)
- Wealthy People Need Budgets Too: It’s Called Cash Flow Management(1/14/2020)
In the Accrue Financial Services blog, we’ve talked about how important it is for you (and your partner) to sit down and create a plan together. Now, we’re going to get into the nuts and bolts of how to build a Spending Plan that can give you control over your money (rather than the other way around).
The Traditional Budget
There are a few different ways that you can prepare a budget. The traditional way is to use your take-home pay, or after-tax money (what is deposited into your bank account), and then subtract your obligations and see what you have left over. This is better than not having a budget at all, but it’s more of a reactive plan. When I see a budget set up this way, people are usually behind, or if an unexpected expense comes up it can cause stress (and sometimes cause someone to abandon their budget altogether).
The 50/30/20 Split
This is when you take your income and use it the following way:
- 50% for your needs (monthly obligations such as mortgage, insurance, taxes, etc.).
- 30% of your after-tax income for your wants (eating out, shopping, entertainment, etc.).
- 20% toward savings and paying off debt.
Personally, I struggle with this philosophy as well because you end up spending more on wants than saving and/or paying down debt. Yes, everyone should allocate some money for fun things, but I’m not confident that this is a sound budgeting method for most people. Now, as I mentioned earlier each budget is different; you might use something like this method but adjust the percentages and categories a bit.
The Zero-Sum Budget
The main idea behind this method is to spend every penny you have each month to get to zero. No, I’m not saying this allows you to go spend your money on whatever you want (bummer!).
In essence what you’re doing is putting your money to work for you. This all-inclusive budgeting method helps people to make sure their money is being used toward their values and goals. It also helps eliminate wasteful spending, or that feeling at the end of the month of “where did all my money go?”
Once you have this set up for your personal budget you will be able to plan months in advance - even a full year - so that you will begin using last month’s income.
Test Your Plan Options
Just because you’re on one path doesn’t mean that’s where you should stay. Personally, my husband and I used to create our personal budget quarterly and then sit down to discuss it. Now we follow the Zero-Sum Budget because we find it less stressful and perfect for our lifestyle.
Also keep in mind that there are many resources out there to help you. Here are a few for you to consider:
- YNAB - https://www.youneedabudget.com/ - useful for using to setup the zero-sum budget.
- Tiller - https://www.tillerhq.com/ - spreadsheets galore!
- Trim - https://www.asktrim.com/ - helps find subscription services you may want to cancel and works with some providers to lower your bills.
- Good Budget - https://goodbudget.com/ - Another method that people may have heard of is the envelope system, but who wants to have envelopes of money lying around? This option allows you to have virtual envelopes if this approach works for you.
Melissa Thompson is an Investment Advisor Representative holding a ChFC® designation in the Castle Rock, CO and Denver, CO areas who focuses on educating individuals and small businesses about the importance of protecting and growing their financial assets. “My preliminary meeting process is a chance for us to talk about where you are and where you’d like to go. You’ll have the opportunity to make sure that my services fit your unique needs before you commit to moving forward. I look forward to creating life-long relationships with my clients and taking the fear out of financial planning.” To schedule a consultation with Melissa, CLICK HERE. (1/14/2020)
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