What do you think of when you hear the word “budget?” For many, it sounds restrictive, boring or un-fun. For others, it triggers excitement to organize and plan. The truth is, budgeting is the key to a successful financial plan whether you like it or not. Fortunately, there are many ways to do it and the key is finding the one that works best for you!
The purpose of a budget is to help us spend money where we actually want to spend it. This is in contrast to wondering where it all went at the end of each month! Budgeting helps us align our checkbook (does anyone still use those?) with our values, and also save more. If we use a budgeting system we hate, it won’t work because we won’t stick to it! For some, a cash budget is easy, and they spend just a few minutes a day on it. For others, this is a burden and a nuisance. A 50/20/30 budgeting system might work better (we’ll get to that in a bit).
Since it’s the 21st century, very few people carry around cash. Not to mention it drives me nuts when the person in front of me at a store pays in cash and the cashier has to count out change! There are plenty of great apps that essentially bring cash-based budgeting to the digital age. Here is my review of 5 common budgeting systems: three that I recommend, one that I advise against and one for those of you who like to keep it super simple.
Every Dollar ($99/Yr)
Dave Ramsey’s team, who is a big proponent of a zero based-budget, created Everydollar. The program takes the envelope system he advocates into the modern-day banking. Every month, you take your monthly income and assign every dollar (hence the name) a job. You can assign money to groceries, eating out, gas, vacation, etc. Now, when you are going to the store to purchase groceries, you just launch the app. You can quickly see how much money is available in your grocery “envelope” for you to spend! It’s much more robust than what I am describing. In essence, you don’t spend more than you have assigned in each category.
You Need A Budget ($83.99/Yr)
YNAB or You Need a Budget, is similar to Everydollar in that you assign every dollar a job. The key difference is Everydollar looks at your budget month-to-month whereas YNAB looks at your budget day-to-day, as money comes in. Let me explain: Say your take-home income is $5000/month, but you get paid on the 1st and 15th. This means on the 1st of the month, you receive $2500 and you receive the remainder on the 15th. In Everydollar, you input and budget around $5000. What if, on the 14th of the month your mortgage payment has come, you’ve had to pay for groceries and your kid’s gymnastics class? You’ve spent $3000, and your budget is okay since you’re budgeting around $5000, but in actuality, you’ve had to dip into savings or use a credit card because you’ve only actually received $2500.
YNAB forces you to budget ONLY money that you have. When you start with YNAB, you account for all the money you already have (in your savings account, checking account, etc.). You assign this money a job based on your current needs. Then, when you get paid on the 1st, you assign THAT $2500 a job. You then ask yourself, where do I need this money to go before I get paid again? This is a bit of a learning curve for some people, which is why YNAB gives you a free trial. It IS effective though! Countless people are now thinking about what they have available to ACTUALLY spend.
Tiller is for the people who love using spreadsheets and want to customize/tweak to their heart’s content. The problem with Everydollar and YNAB is you’re forced into their layout. Sure, you can customize and create categories, but you can’t change the end layout much. Both Everydollar and YNAB use account aggregation. This is a fancy name for linking electronically with your bank to pull in balances as well as transactions.
Tiller essentially is account aggregation for Google Sheets (with Excel support coming soon). This allows you to take all of your bank balances and transaction and customize the data into YOUR spreadsheet. For those who love spreadsheets, you no longer have to log in to your accounts and enter the data manually; it can be automatically pulled from your bank and you can customize which fields that data goes into. They also have many templates you can choose from if you don’t want to create your own.
Intuit Mint (FREE)
Many people use Mint for their budgeting. The problem with Mint, and the reason I don’t recommend it is the fact that it’s reactive. It does a great job of showing you where you already spent money, but it doesn’t help you to be proactive. Sure, you can take the information in Mint and say to yourself, “Wow, I spent $800 eating out last month! I think we should only spend $500 next month,” but the onus is on you to force yourself to stay within that $500/month expense.
With Everydollar and YNAB, you can see in real-time how much you have available to eat out. That way, when your friends ask if you want to go out for lunch at the new sushi joint down the street, you can check your phone. You would then say, “not today folks, I only have $150 left in my eating out budget for the month, and I’m taking my dad somewhere nice for Father’s Day!”
The 50/20/30 Rule
For those of you who read over these budgeting apps and think, “there’s no way I want to track all of my spendings and check my budgeting app every day,” there’s still a way to successfully budget: the 50/20/30 Rule. The 50/20/30 rule assigns your income into “buckets.” 50% of your income is earmarked towards your needs.
These are basic essentials that you NEED to pay for every month: rent/mortgage, groceries, gas, insurance, medical expenses/insurance, etc. 20% of your income goes into your savings/debt bucket. These funds are to pay down debt and then set aside for savings. By taking 20% of our income and automatically setting it aside (into a separate account if you need to), you don’t co-mingle these funds with your spending money and therefore FORCE yourself to save. The last 30% goes into the fun bucket or things you “want.” This can be immediate expenses, like shopping, movies, drinks with friends, etc. or it can also be saved for bigger “want” items, like a new car or a big vacation.
Some people need 3 separate accounts, with 50, 20, and 30 percent of their income going into each account respectively in order to not “cheat” themselves and dip into different buckets, but you should know whether you need to do that or not. The key is making sure you don’t cheat!
Why A Budget is Essential
The vast number of Americans live paycheck to paycheck, and very few have enough saved for retirement. As a financial planner, one of the first things I ask is, “Do you have a budget?” Unfortunately, there is no magic potion for you to have more money. In order to get more money, you need to make more money, spend less money or both. By having a budget, you can dictate where your money goes. You no longer have to wonder how your bank balance became so low. A financial planner can help you see your financial trajectory, and how much you need to be saving to meet your goals. Creating and sticking to a budget is a key part of attaining those financial goals!
My question to you is: Do you have a budget? If you need help deciding what is best for you and sticking to your budget, I am here to help! Schedule an appointment with me here.