As families dive into summer vacation planning, let's delve into the timely topic of budgeting. For many, budgeting feels like joining a gym in January with grand resolutions, only to find yourself auto-paying for a year without ever stepping inside. Like any endeavor, finding the right approach is key.
Personally, I take a top-down approach. My emergency fund doubles as my vacation fund, ensuring I'm prepared for unexpected expenses and seasonal splurges. I prioritize contributions to retirement and education funds.
I have a grasp of my fixed expenses and their monthly or annual averages. Every quarter, I review these expenses to ensure there are no unexpected fluctuations. Regular reminders to check are crucial; otherwise, you might unknowingly be overpaying, like missing a leak that drives up your water bill.
To track non-essential expenses, I rely on my credit card annual reports. Any outliers are scrutinized, and adjustments are made accordingly. Annually, we target bills for improvement, such as the gratifying decision to switch from DirecTV to YouTube TV in 2019. Escaping the burdensome2-year contract and the frustrating bill hikes without notice was a relief.
My stretch goal is to continue to contribute to my brokerage account. I also avoid micromanaging day-to-day spending as long as we remain within reasonable ranges, it helps maintain marital harmony.
Common methods of budgeting:
50/30/20 – It is important to build it off net income.
This system is appealing because it provides flexibility to tackle debt, meet present needs, and plan for future expenses. It divides your income into three key areas: 50% for essentials, 30% for discretionary spending, and 20% for savings and debt reduction. Whether utilized independently or as a foundation for other adaptable budgeting approaches, its structured allocation offers a clear path to financial balance.
The envelope system, or 'cash stuffing' or bucket system.
If you're seeking a stringent method to curb impulsive spending or avoid debt without the hassle of monitoring every transaction, consider adopting this cash-centric strategy. Assign a spending cap to various categories, such as groceries, and allocate the designated amount of cash into corresponding envelopes. Once an envelope is depleted, refrain from further spending in that specific category for the remainder of the month.
Pay yourself first.
This "reverse" budget prioritizes savings over immediate expenses. Under this framework, you determine the portion of your monthly income to allocate towards savings objectives such as retirement and emergency funds, before allotting the remaining funds towards bills and other expenditures. This approach helps you from the necessity of meticulously scrutinizing every financial detail.
The zero-based budget.
This budgeting method caters to both extravagant spenders and detail-oriented planners. It offers transparent monitoring of your expenses. You allocate your monthly income with precision, assigning each dollar a specific purpose, whether it's setting aside funds for a vacation or covering utilities and groceries, until there's no money remaining unallocated. However, unlike the envelope system that relies on cash, using this approach may require logging each expense to ensure adherence to your budget. Utilizing budgeting apps like YNAB and Mint can facilitate the implementation of a zero-based budget.
I used Mint, enjoyed the user experience but never kept up with the entries. Two of my most successful clients with this method use Quicken.
Ultimately, there's no one-size-fits-all solution. Awareness of income, debts, goals, and spending habits is paramount. If you're staying on track and enjoying life's little indulgences, there's no need to micro-manage every penny. After all, financial success is about balance, not deprivation.
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