Whether you make $100K/year or $1MM/year, you likely need a budget. We have worked will all different types of individuals, each with their own unique financial hurdles. We have seen many different ways to track one’s expenses. Some work well. Some don’t.
The most unique way to budget that we’ve come across? An individual established a checking account for each of his expense categories. For example, he opened a checking account only for online purchases and another checking account only for car expenses. I believe he had 12 checking accounts in total. Each checking account is funded each month with a specific budgeted amount.
For example – he has a “Dining” account that receives a $300 deposit each month to fund his dining budget. Once this account is exhausted, he can no longer dine out for the rest of the month.
He has multiple accounts like this for different expense categories – mortgage, utilities, car, groceries, vacation, etc.
This method is highly unusual and one we don’t typically recommend to our clients.
However, I bring this up to illustrate the point that there are multiple ways to establish a healthy budget. At the end of the day, you do you. However, we’ve seen a lot of different methods over the years. Not all methods are created equal.
If a specific method works well for you and your goals, then great! If you are able to track and reduce your monthly spending, resulting in a healthier financial life, then stick with it.
With that said, here are the best ways to budget that we’ve come across: manual tracking, budgeting apps, the 50/30/20 Rule, and the No Budget Budget.
Nothing beats the good ol’ fashioned way of manually tracking your expenses. Why? Because it forces you to write down each and every expense you incur. Want to know where all of your money is going? The practice of writing down all of your expenses is an excellent way of finding out.
There are two popular methods of manually tracking your expenses – handwritten and spreadsheet (Excel). My wife manually tracks our expenses in Excel (yes, she tracks our household finances, and no, she is not also a financial professional. Life is funny this way).
She will log into our bank and credit card accounts at the end of each month and type each transaction into our Excel workbook. She will enter each transaction into separate categories she’s created (E.g., groceries, home, car, vacation, etc.).
She claims that this method takes little time, and she prefers this way to using a budgeting app. I personally would not track our finances this way, but to each their own. If it works for her, then great!
If you are looking for a budgeting worksheet you can use at home, feel free to use the one we created for our clients.
For those who don’t want to track their expenses manually, there are plenty of great apps that can do this for you. Among our most favorite include the following:
- Mint – Mint, recently acquired by Intuit, syncs to your bank account, credit cards, and retirement accounts to track your income, purchases, and savings. It includes a daily planner, which will suggest a budget based on your monthly spending habits. It can even account for your rental income. Mint is a great tool for cost conscience consumers as this is a free service, as long as you don’t mind the ads within the app.
- YNAB – You Need a Budget (YNAB) is our favorite resource for those that need to make a significant budget change. If you want to get serious about reigning in your monthly expenses, take a strong look at YNAB. This app also syncs with your bank accounts, credit cards, and retirement account, though it takes a unique approach to budgeting. YNAB will ask you to give every dollar a job, assigning it to either savings or a spending category. Therefore, there should be a zero balance at the end of each pay period. This forces individuals to stick with each categorized budget.
- PocketGuard – This app is a more simplistic version of Mint. It lets you track your expenses and look at your monthly cash flow. It will estimate your income and expenses, helping you avoid overspending.
- Fudget – For those looking for a simple, no-frills approach to budgeting, consider Fudget. There are no categories to manage, no charts to interpret, and only a simple way to track your income and expenses.
- Tiller – This is not a mobile app but rather a desktop spreadsheet. If you enjoy working within spreadsheets and are looking for extreme flexibility and analytics, consider Tiller. This app is an automated spreadsheet for tech-savvy budgeters. Think of it as an excel worksheet template (that you can customize) that is synced to your credit cards, bank accounts, and retirement accounts. You can run cash flow reports, create net worth statements, and even look at retirement projections. It is a steep learning curve, but it is incredibly feature-rich.
It can be overwhelming if you are just starting to budget for the first time. Where do you start? How much should you be saving? Are you spending too much on your home expenses?
The 50/30/20 Rule provides a framework that can apply to most budgeters. It is a fantastic place to start.
The 50/30/20 Rule splits your after-tax income into three categories: 50% for Essentials, 30% for Personal, and 20% for Savings.
Here is an example:
|Essentials (housing, groceries, utilities, cars, insurance)||-$10,000|
|Personal (entertainment, shopping, dining, charitable gifts, hobbies)||-$6,000|
|Savings (retirement, other long-term goals)||-$4,000|
It is important to remember that the 50/30/20 Rule is only a framework. It can be challenging to implement in high-cost areas, such as San Diego, LA, the Bay Area, New York, and others. Your mortgage or rent can easily exceed 50% of your after-tax income.
However, this rule can help you avoid this. Nobody wants to be house poor. All it takes is a little math to ensure you don’t fall into this trap.
No Budget Budget
This one is our favorite. The No Budget Budget is the simplest of budgeting methods, as it automates your savings targets. The idea behind this strategy is that as long as your savings target is met, you can freely spend the rest of your income.
For example, let’s assume your after-tax monthly income is $30K. If your target savings goal is $8K/month, which includes 401K contributions, a taxable brokerage account, and your child’s 529 plan, this leaves $22K/month for all other expenses.
Here is how the No Budget Budget works:
- Determine how much you need to save for your various financial goals, such as retirement, college, and vacation funds. Working with a financial professional can help you establish these amounts.
- Create an account for each goal (401K and brokerage account for your retirement, 529 for college, etc.)
- Direct monthly amounts into each one of these accounts. It is important to set these amounts as recurring tasks, such as direct deposit from your employer, auto-transfers (ACH) from your bank account, etc. It is also crucial that these amounts are invested automatically.
The beauty behind this method is that it is stress-free. No need to track all of your expenses. No need to manually enter your transactions monthly. By automating your savings, you can rest assured that your financial goals are covered.
You Do You
These are our four favorite budgeting methods, but there are other ways to track your finances. Whatever works for you, stick with it. If you are new to budgeting, don’t be overwhelmed. Simply jotting down your expenses in a journal is an excellent start and a great way to reduce financial anxiety. Take control of your finances and take that next step to achieve a more secure financial life.