Our culture often teaches us that there is one right way to do things. This is a common issue with personal finance advice, where experts will state that if you’re not doing X the way they do, you’re doing money wrong. Budgeting is particularly vulnerable to this type of thinking. You may believe that if you’re not creating spreadsheets or feeling deprived, then you are doing budgeting wrong.
No, no, no Shaggy, that's not how you do it.
This misguided thinking often stems from a good place: being goal oriented. When you are focused solely on a goal, whether that goal is getting your budget under control, buying a house, or becoming a world-class athlete, you often ask yourself the question “Can I do this?” rather than “How do I do this?” The problem is that the first question assumes failure is an option. The second assumes that you will succeed and prompts you to figure out your process for doing so.
A few years ago, I took an introductory drawing class with the goal of improving my drawing skills. On the first day, I discovered that the rest of the students were already talented artists (at least to my eye). If I had wondered, as I often did throughout my life, if I could draw the still life as well as my classmates, the question would have paralyzed me. I would have flinched at the idea of putting pencil to paper for fear of “drawing wrong.” This time, I instead wondered how I would represent the still life on paper. It set me free to enjoy the process of drawing and find my own style—which is unlike anyone else’s.
Believing in one right way to do things is called outcome orientation, according to Ellen Langer, author of the book Mindfulness. Such beliefs can make it difficult to make progress on your goals because any failures along the way might convince you that your goal is unattainable. But if you are open to the idea that “there are no failures, only ineffective solutions,” you are prepared to keep trying different solutions until you find what works for you. Langer calls this a process orientation, and the mindset prompts you to try various options and discard them if they don’t work for you.
This means you can find budgeting system that works, as long as you are open to the process. Being open to this process can be easier said than done, of course, if you are accustomed to outcome-oriented thinking. So how do you settle into a process mindset? How do you change your Can I do this? to a How do I do this?
Envisioning What You Want From Budgeting
The odd thing about an outcome orientation is that you are often judging the process rather than the outcome—even when the outcome works for you.
For instance, I have always used mental tricks to remember important tasks. If I had something to take to work that I absolutely could not afford to forget, I would place my car keys on top of it to remind myself to grab the work folder during the morning rush out the door. This ensured that I would arrive at work with everything I needed.
My born-organized sister, on the other hand, uses a to-do list to remember important stuff. It always seemed to me that Tracie’s lists were a more “legitimate” tool for organization compared to my memory tricks. I always believed I wasn’t an organized person because I focused on how my process looked different from my sister’s. It took me years to realize that it didn’t matter how I got to the outcome I wanted. Her lists were no more legitimate than my memory tricks. They were just a different process.
That’s why the first step to making a budget you consistently follow is to figure out your ideal outcome. Forget the process for right now and instead consider what your ideal weekly budgeting ritual will look like:
1. What will your life look like once you have mastered money management? Be as specific as possible, imagining your outcome unfolding in front of you like a movie. Focus on the sensory details. What are you doing? Where are you? Who are you with? What are you wearing?
2. What will your attitude toward money be once you have mastered money management? How will you feel about the money flowing in and out of your life? How will you feel about financial successes? How will you respond to financial mistakes?
Once you have a vision in your mind of both the physical and emotional details of what money mastery will look like, you can begin to identify what processes are going to get you there.
Knowing the Processes that Work for You
Digital, paper, which works for you?
While being open to the question “how do I do this?” is an important part of embracing the process of mastering your money, it’s also a good idea to recognize how your preferences can shape your effective processes. Here are some questions to answer for you to help you pinpoint the budgeting system that will most likely appeal to you:
Do you have a preference for paper or digital recording? How comfortable are you with apps and software that access your banking information?
Which seems more like “free” money to you, cash or credit? Some people are wired to see cash as “free to spend” but are cautious with their credit cards, whereas others can refrain from breaking a $20 bill for weeks at a time, but always forget how much their charges add up to.
What is the ideal number of times per week, month, and year that you would like to check in on your money? (It’s perfectly okay to say 0!) Knowing how often you would feel happiest checking on your money can help steer you to the most productive processes for your money management.
What money management tasks do you like the most? Which do you like the least? For instance, perhaps you enjoy transferring money into a savings or investment account, but tracking expenditures feels like pulling teeth.
Do you have a steady paycheck, or is your income irregular throughout the year?
With these answers in mind, you can see which of the following budgeting styles fits best.
How does your money work for you?
This budgeting system is known for its catchphrase “give every dollar a job.” The goal of this budget is to have a specific purpose in mind for every single dollar that you receive in income. Your income minus your expenditures and savings should ideally equal $0 by the end of the month.
Here’s how it might work. Let’s say your monthly income is $3,000. Your zero-based budget might look like this:
Budget Item Amount Total
Income $3,000 $3,000
Rent -$1,100 $1,900
Utilities -$200 $1,700
Cell phone -$60 $1,640
Retirement -$250 $1,390
Savings -$200 $1,190
Car payment -$400 $790
Food -$500 $290
Student loan -$200 $90
Fun money -$90 $0
The benefit of this system is that it requires a mindful approach. Since you know for sure what every dollar will be doing throughout the month, you are protecting yourself from mindless spending. Though there is a great deal of “manual” work in this method (since you must plan ahead for your expenses each month and make sure you know where your dollars are going), the zero-based budget is ultimately a method of automating your finances. You make the mindful decisions about where your money will go at the beginning of each budget cycle, and then you don’t have to think about it again until the following month.
The Cash-Flow Bucket System
For many people, the amount of work required for the zero-based budget makes that system a non-starter. If the idea of tracking your expenses sounds about as joyful as unmedicated dental surgery, the cash flow bucket system can allow you to keep your finances healthy without forcing you to pay detailed attention to your expenditures.
Certified financial planner Roger P. Whitney devised the four steps to this system:
Step 1: Determine Your Monthly Lifestyle Budget
Your monthly lifestyle budget is the amount of money you need each month to maintain your lifestyle while still living within your means. To determine your monthly lifestyle budget, you will need to know your monthly income, your fixed monthly expenses, and your variable monthly expenses.
Step 2: Set Up an Income Account
With this step, you will open a separate savings or checking account to receive all of your income. You will deposit any and all income, windfalls, bonuses, or other cash into this account.
Step 3: Establish a Monthly Transfer
On the first of each month, you will transfer your monthly lifestyle budget amount from your income account to your spending account. You will spend that money each month without having to worry about tracking your spending.
Your spending account will be nearly depleted by the end of the month, but if you correctly calculated your monthly lifestyle budget, the money should last until the first of the following month. If you are running short prior to the end of the month, you will need to look at your expenses to see where your calculation went wrong or where your spending was too high. You can also decide to move more money from your income account to your spending account or go on a spending fast (that is, make no purchases until the next month begins) to make it to the next month.
Step 4: Adjust and Decide
Finally, you will need to review your cash flow bucket system every three months. During your quarterly review, you will look back to see if and how often you had to transfer additional funds from your income account to your spending account. If this was a consistent problem, you can work on reducing your expenses again or, if you made a mistake initially, recalculate your monthly lifestyle budget amount.
The quarterly review will also give you an opportunity to see if there is excess cash built up in your income account—which there will be if you have not had to make additional transfers each month. You can take this time to decide where your excess money will go to help you reach your financial goals.
Cash Envelope Budgeting
Cash is king.
If you struggle with credit card spending but can be more responsible with cash, using cash envelopes can help you prevent overspending.
To use this strategy, start by determining which budget items you need help planning for. These will generally include the spending that is more-or-less discretionary, because those expenses are tougher to plan for. For instance, your regular bills, such as rent, utilities, cell phone, subscriptions, car payment, and childcare probably don’t change a great deal from month to month. This makes it easier to budget for them, since you know how much you will need.
Discretionary or irregular spending, like for groceries, clothes, medical expenses, gifts, car repair, and the like can be more difficult to plan for. That means they are also easier to overspend on when they do crop up.
Once you’ve identified the budget items that you consistently forget about, overspend on, or struggle to track, determine which ones you could pay for in cash. Then calculate how much you need to set aside per month in each of these cash budget categories, and create an envelope for each one. For instance, you might create the following cash envelope categories
Once you have set up these envelopes, you will put the predetermined amount of cash in each one every payday, and only spend money from the envelopes for each category. This system makes it impossible for you to overspend any of your accounts unintentionally. It also forces you to plan ahead for future expenses, since you will be assigning money to each category every month. With this system, there is no way to fool yourself into thinking you are not overspending in any one category because your accounts are tangible.
The only caveat to the envelope budgeting system is the fact that we increasingly live in a cashless society. Cash can also feel like it’s “free to spend” for many people, meaning they use up the cash in their envelopes too quickly, when they might be able to make better decisions with money in the bank. For these cases, it may make more sense to create targeted savings accounts.
These targeted savings accounts could be the same as the cash envelopes, or they could include some savings goals or anticipated needs, such as:
House Down Payment
Having such targeted savings accounts can help to ensure you do not accidentally spend your car repair budget on your vacation.
Targeted savings accounts can also make budgeting easier if you have an irregular income. You could add targeted savings accounts for each of your regular monthly bills, such as rent, utilities, car payment, student loan payment, and the like. During flush months, you would send your excess money to these targeted accounts so the money is available to you in lean months.
Many online banks offer customers the option of opening multiple savings accounts, and you often have the option to name each account based upon your savings category.
The 50/30/20 Budget
You may want it all, but what do you really need?
This simplified budget—which was originally coined by Senator Elizabeth Warren—asks you to separate your expenses into three categories:
No more than 50% of your after-tax income should go toward your basic essentials. Needs include your rent/mortgage, utilities, food, clothing, etc. The things you need to live.
No more than 30% of your income should go toward your wants. The definition of “wants” is not sky-is-the-limit extravagances, however. Your wants are about the monthly niceties that make your life enjoyable, such as your Netflix subscription and your unlimited data plan on your cell phone.
The remaining 20% of your income should go toward savings (and debt repayment). This is where you set money aside for emergencies, your retirement, to pay down your credit card debt, and your dream of traveling to Machu Picchu.
For instance, if you bring home $3,000 per month, then you should plan on spending no more than $1,500 per month on necessities, no more than $900 on wants, and saving $600 each month.
Where this budgeting system gets tricky is in the difference between needs and wants. Having warm clothes to get you through a Wisconsin winter (that apparently goes from October to May, ahem) is a need. But buying a new wardrobe every season is a want. Figuring out whether you truly need something or you just want it can be remarkably difficult, especially when something you need (like transportation or clothing) could be nicer, more comfortable, more attractive, or newer than the most basic level available.
If you recognize that meeting your needs is not an opportunity to indulge your wants, then the 50/30/20 budget can be a great fit.
Making Budgeting Work For You
Whatever budget that works for you is the right one. It could be that one of these budgeting systems seems to fit you like a glove, or it might be that you need to create some sort of cobbled together Frankensystem* of a budget to fit your particular financial situation, personality, and preference for glitter. Whatever process works to get you to the financial outcome you desire is the right process. No need to overthink it!
*Yes, I know that Frankensystem was the name of the scientist and your cobbled-together budget is technically Frankensystem’s monster. Allow a blogger some creative license, okay?