People evolve, and so should their budgets. I use the term “budget” loosely. It could apply to the type of budget you use, your budgeting habits, or the actual dollar amounts within your budget. As my circumstances have changed throughout my life, I have tried to improve my budgeting habits as well as to use more effective types of budgets, a few of which I shall discuss.
The “No budget” budget
Take the “no budget” budget, for example. Many of us used this type of budget for the first couple decades of our lives only to eventually wonder where all of our money was going.
I was 22 before I started to wonder what my spending and saving breakdown was. I was doing door to door sales and making more money than I ever had before. I felt like that justified the fact that I was living the good life and eating out for lunch every single day. My curiosity eventually got the best of me, and I created a simple spreadsheet that allowed me to track all of my daily purchases.
The “Not quite a budget” budget
This type of budget is otherwise known as a spending tracker. Whether you are entering your income and expenses into a spreadsheet or monitoring them with an online tool like mint.com, you’re really just tracking your financial activity which is just one step in the budget process.
Even though it doesn’t involve savings goals, a spending tracker can still drive someone to make better decisions based on the fact that tracking what you spend causes more financial awareness.
That was definitely the case with me. After discovering that I was spending hundreds of dollars on eating out for lunch each month, I started scaling back. I didn’t have any spending targets yet, but it still caused me to spend less than before.
The traditional budget
A true written budget did not enter my life until I got married. All that meant was that I added financial targets to my spending tracker. That made it a budget.
Each month showed how much we planned to earn, spend, and save. Note that a budget is not just writing out what you think you’ll earn and spend. It should give you something to strive for. That’s the whole point of a budget–to challenge ourselves to earn more, spend less, and save more.
The traditional budget equation is simple.
Income – Expenses = Savings
It’s that simple. You decide how much you want to save, and then you have 2 levers you can pull to get you there: income and expenses.
(Hint: the income should exceed the expenses.)
The wannabe budget: Zero Sum
A zero sum budget is the traditional budget’s sneaky cousin and employs a simple algebraic trick. It simply moves “savings” to the left side of the equation and gives itself a fancy name. Take a look.
Traditional Budget: Income – Expenses = Savings
Zero Sum Budget: Income – Savings – Expenses = 0
See the difference? Take the traditional budget formula, subtract “savings” from both sides, and you have a zero sum budget!
Some believe that the zero sum method helps people be more intentional with their saving. For instance, if you look at the traditional budget formula, you might assume that savings are just what’s left over after you spend everything. A zero sum budget, however, encourages you to set aside savings first.
Which format you use is simply a matter of preference. I feel like I can be just as intentional with saving by using the traditional method.
Setting a savings target first and then figuring out what combination of income and expenses is needed yields the same result regardless of algebraic nuances.
The Mind Budget
This is the budget that bridges the gap between what’s on our written budget and what’s in our mind. You know those things that you’ve been planning to buy for months, or even years, but you’re not sure when you’ll actually pull the trigger? Then, when a good deal comes along, and we find that we don’t have room in the written budget, we have our friend the mind budget to rely on.
This is not a budget that I necessarily condone, but acknowledging its existence is one step forward in determining the best way to deal with it.
We took a short family trip this weekend near Chicago. On our way back home, we decided to stop at Costco since there isn’t one very close to where we live. Amanda has been looking for outdoor tables some months now, stalking craigslist and Ana White building plans. I knew we were going to look at the tables at Costco, but I wasn’t sure if we’d actually go through with a purchase.
But when decision time came, I was torn. I wanted to be supportive, but I also had to point out that we hadn’t budgeted for them this month. She responded that she had been budgeting for them in her mind for over a year. Does that really count?
[Amanda’s edit: Just last month, over dinner dishes, we wrote out everything we wanted on our kitchen whiteboard–trampoline, desk for the office, patio seating, etc.–and nixed almost everything except the outdoor table. Mark just never added it to the actual excel budget–therefore, I had to resort to the mind budget!].
So we bought them. They’re actually pretty awesome. We got 2 convertible benches for $99 each, which is a smokin deal based on the prices I’ve seen online.
That is the power of the mind budget…and a determined wife.
Once you have at least a traditional budget in place, you can give it further structure by using proportional targets. Among the most popular are the 50/30/20 budget and the 80/20 budget.
Save 20% of your take-home pay and spend the rest. It’s that simple. There is nothing special about 80/20. You can modify it to be 70/30, 60/40, etc. depending on your savings goals. But you cannot, under any circumstances, modify it to 90/10.
This basically takes the 80 from the 80/20 and breaks it out into wants versus needs.
- 50% for needs
- 30% for wants
- 20% for saving
Again, you can alter the proportions. Do you know what your current want vs. needs spending habits are? Take a look, and you might find something that surprises you.
Bare your budget
The bare your budget tool is set up in the traditional budget format. I have specifically broken out housing, groceries, restaurants, gas, and clothing. These categories are the most frequently asked about as far as how much one should spend on them monthly.
If you post your budget, not only will you be contributing valuable information for the greater good but I’ll also give you feedback on your current budget or financial situation (whether you like it or not).
Do you have a preference about traditional vs. zero sum? Are you guilty of mind budgeting?