Basic Budgeting Strategies

Budgeting is something that many of us would rather avoid. But it’s an essential exercise—and often far easier than you think. In fact, investing time today will help you manage your money more efficiently and achieve your goals faster.

Reaching long-term financial goals isn’t just about investing. It requires saving, too—and you can’t do either without spending less than you bring home. A budget is simply a tool that helps you understand your spending while staying cash-flow positive.

But there’s the rub: You need to understand your cash flow to manage it. Many people have a clear picture of major monthly expenses like their mortgage and car payments, but they’re surprised to find how big a bite all the “little things” take out of their bank account. For example, spending $15 on lunch at work every day adds up to $3,900 a year.

Creating a budget helps you develop a clear picture of your cash flow and prevent overspending. Let’s explore three common budgeting methods and how they might work for you.

• The 50/30/20 Plan. The beauty of this approach is that it’s so straightforward. Simply group your expenses into three types: Needs, wants, and savings and debt. Specifically, earmark 50% of your income for necessary expenses (housing costs, utility bills, groceries, etc.). Then direct 30% toward discretionary items like entertainment or travel. Finally, dedicate the last 20% to savings and paying down debt.

This method is ideal for beginners because it doesn’t require meticulous tracking of every dollar spent. The 50/30/20 proportions are guidelines that can shift a bit depending on your needs. But that’s also the strategy’s greatest drawback—the flexibility does less to instill discipline and create a routine compared to other approaches. To get started, we recommend automating the 20% (before paying expenses or spending on discretionary items) to make sure you meet your savings goals.

• Zero-Based Budgeting. Often called the “give every dollar a job” approach, the goal here is to ensure that your income minus your expenses equals zero. You shouldn’t have a spare dollar at the end of the month—they’re all accounted for. In this case, savings and debt payments are considered expenses. It’s a smart approach that works best when your monthly income is consistent and you have a tight handle on your expenses. If you can stick to this method, you’ll know exactly how your money is being spent.
• The Envelope Method. This classic strategy requires physical cash. (You know, those green pieces of paper we all carried around in our wallets at one time?) To get started, make a list of your monthly expenses by category—groceries, dining out, utility bills, rent, etc. Remember to include infrequent outlays like gifts to friends and the occasional donation. From there, allocate one envelope per category and budget your cash accordingly. In this case, pulling cash from those envelopes is the only way you can spend. Of the three approaches, the envelope method requires the most discipline. When an envelope is empty, you can’t spend any more money in that particular category. From a practical standpoint, this method is difficult to sustain over the long term, but it’s great for someone with a tendency to overspend using credit cards.

Which method should you choose? The one that you can stick to that keeps you on track to meet your financial goals.

No matter which budgeting approach resonates with you, there is one common thread—financial awareness. It is impossible to plan and maintain a budget without knowing your income and expenses. To that end, we created our exclusive Budget Worksheet to give you a boost and get you started.

And please don’t hesitate to call or email us with any questions about what method might work best for you. We’d be happy to help. After all, we are The Planner You Can Talk To.

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