Hearing the word budget is about as fun as hearing the words “diet” or “root canal.” And yet a budget is one of the necessary keys to financial health. What is the point of setting goals for ourselves if we don’t know if they are achievable or not? The only way we can truly determine the attainability of our goals is by setting a budget.
Real Life Story
I had a client who wanted to save $10,000 for the year, which is a great round number. The challenge we had was that he only makes $52,000 a year and he lives in New York City. The $10,000 savings goal would comprise almost 20% of his gross income.
So what did we do next? We worked his numbers into a budget. We realized that this could be an attainable goal for him; however, he was going to have to limit his food and clothes budget significantly from where he was given the fact that his rent was pretty high.
The wonderful thing about this story is that this client hit his goal in exactly one year. Honestly, I didn’t think he could do it, but it was an important goal for him and once he knew what it would take to get there, he committed to it.
Budgets are liberating
I think that many people hate budgets because they think of them as constricting spreadsheets without real world applications. I find that it is people without financial goals who have the most issues with the budget process. If you don’t have a goal, then of course you would hate a budget. After all, what are you working toward? Why put in so much energy?
I have found that most of the time when people start to budget, they actually feel less restricted because all of the sudden, their spending makes sense. Many of our clients are on budgets and they don’t even know it. They are on budgets, because we have set goals for each month, quarter and year and the only way we can achieve those goals is staying within certain parameters on their spending and saving.
Lots of Resources
There are lots of great budgeting resources out there, in fact, there is a whole website devoted to the sexiness of budgets; however, I encourage you to find the one that makes the most sense to you. When we get frustrated or lose focus on our budget, it’s typically because it got too complicated or doesn’t fit our lifestyle. Here are some budget types that might work for you.
Types of Budgets
Old School Budget
This is the traditional method where you would look at your current monthly expenses and add them to a spreadsheet or website and determine where you spend your money every month and then decide what your target amount should be in each category for the month. The hard part with this method is that we don’t live in 12 equally divided amounts every month.
Goals Based Budget
If you use this method, then you determine what amount you need every month to reach a goal. This goal could be student loan debt repayment, saving for a house or other large expense, a travel fund or a dog fund. Whatever the goal is, determine how much you will need every month and start with that number, then you work the rest of your expenses around this goal. This is similar to what my client who wants to save $10,000 is doing.
Percentage Based Budgeting
My good friend Stefanie shared the fact that she uses a percentage budget approach, which is great for people who have fluctuating income. With a percentage-based budget, you determine the percentages of what should go to various aspects of your finances and every time a dollar comes into your household, you split it up according to the budget. For example, 70% goes to required expenses like mortgage, food utilities, 20% goes to savings and 10% goes to splurging.
Zero Based Budgeting
In this approach, you allocate every last dollar of income to a specific expense or goal. For example, if you earn $2,000 a month, then your budget would allocate every last dollar to a line item like rent, savings, food, etc. This is great for people who lack focus and the zero based budget forces you to focus your money.
Find the right one for you
Budgets are similar to diets or lifestyle changes, but just like finding the right diet, you can find the right budget method for you and when you do, you will find yourself reaching your goals faster. It is not enough to just set your compass to where you want to go, you need the roadmap to get you from A to B and your budget is the best roadmap for your financial journey.