Three Smart Ways to Budget Your Money (And Why You Need One!)

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I have a soft spot in my heart for budgeting. But I think when people hear the word budget, cringe and anxiety start racing through their veins.

I've noticed resentment because people feel they have to budget because they're not "rich."

Another way budgets get a bad reputation is when people hear the word budget, they automatically think of constriction and confinement and would rather feel more free with their money.

I believe the complete opposite.

Before we get to the three budgets I want to teach you today, I want to explain why a budget is so wonderful.

1) Budget Gives You Freedom, Not Taketh Away

A budget gives you freedom and releases guilt about current spending. I used to stress any time I spent money beyond my needs, regardless of how much money I actually had in the bank.

The moment I started to embrace a thought-out budget was the moment that I felt most free and the least guilty about spending.

When I started my budget, I knew exactly where every dollar went. I could show up for something that may feel like a splurge, like a massage, and enjoy my time rather than feeling guilty about spending the money.

I knew I could still easily afford the massage while also having money for saving, investing, paying my bills, etc.

2) Strategize Big Purchase

Let's say your monthly income after taxes is $6,000, but you want to buy a couch that costs $2,000. You might need more than $2,000 to your budget, meaning you can't buy the couch, or you go into credit card debt to do so.

But when you live by a budget, you can better strategize how to make that $2,000 purchase happen through just a little planning.

3) Track Your Money

When you track things, they tend to grow. That's an idea from the law of attraction space, which I don't love, but there is some truth.

There is something to seeing the number on your spreadsheet every month and watching that number grow. It feels encouraging. And you're more likely to do things to help that growth.

I hope I've convinced you to at least entertain the idea of budgeting.

Now, here are three common budgeting methods. Of course, I have my favorite, but I'll give you the pros and cons of each.

Envelope Method

This may be the most well-known. Dave Ramsey has popularized it, though he didn't make it up.

In the envelope method, you pay recurring bills automatically. Then, you take all of your expenses outside of those fixed monthly costs and allocate a different amount of cash into other categories. You literally keep the money in envelopes.

The benefit of this is that if you tend to overspend, once the cash is gone out of the envelope, it's done until the first of the month.

However, I do want to say this. People with ADHD have told me that this is the only budgeting method that helps them from overspending.

I'm not a psychologist so I won't discuss that further. I'm simply relaying what I've been told. If you have ADHD or suspect you do, this might be a budgeting method to try.

I prefer a different method, but it might be right for you, depending on how your brain operates.

A major con is you miss out on credit card use, though if you use this method, you use a credit card for automated expenses like insurance, Netflix, etc. Credit card use is essential for building credit.

You also miss out on other credit card perks like cashback, miles, warranties, fraud protection, and more.

I also get nervous about you keeping that much cash on hand! What if you lose it? I shudder to think of something losing their wallet- that may have a few hundred or thousand in there!

Finally - if you like the idea of the envelope method but want to use something other than cash, some apps help you do this.

50/30/20

Again, this is not my preferred method, but there are parts to it that I like more than the envelope method.

Let's say your take-home pay after taxes is $10k. 50% of that would go towards your needs, including rent or mortgage, HOA, gas, car payments, insurance, groceries, etc.

30% would go towards wants, including anything beyond necessities, and 20% would go towards saving and investing.

I like this because it's a great starting point to consider how to use money now to enjoy life while saving and investing for the future.

Here's where this method breaks down for me. If you're making $10,000 a month and more, depending on where you live, you don't need to spend 50% of your budget on needs.

In fact, that is how many people never actually build wealth because they start getting raises but only upgrade their lifestyle without balancing it with saving and investing more.

That can push off retirement. Let's say you slowly get raises from a $70k salary and make your way to $150k, but you stay at the 50/30/20 ratio.

You've pushed off retirement because you're used to a lifestyle that costs $150,000 a year. And it will take you a lot longer to save and invest enough to fund a similar lifestyle in retirement. Does that make sense?

And so, as you make more money, these percentages need to change. The more you make, the 50% needs to go down while the 20% needs to go up. Otherwise, you'll save for a long time to afford your newer, higher-income lifestyle.

My other gripe with this budget is it sends my brain in circles. Clothes are a need, but at what point do they become a want? It's the same with groceries. It drives me crazy working all this out on the spreadsheet!

Zero-based budgeting

ZBB gets a bad reputation for the same reason that budgeting gets a bad reputation, but it can be most freeing. It's about intentionally giving every penny a purpose, allowing you to optimize your money to the greatest extent.

Zero-based budgeting is not pinching pennies. I encourage you to be generous with budgeting areas of life that are important and bring you joy and being discerning around money in areas that don't bring you joy.

Of course, you have to pay for boring stuff like electricity. But I'm talking about intentionally choosing to go to dinner with friends multiple times a week versus saving for a dream vacation.

For a more thorough explanation of all these budgets, with examples, make sure you listen to the podcast episode!

Learn more about working with me here.

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