Budgets often get a bad name. Why? Because when people talk about budgets, they’re normally talking about restricting your spending. Budgets don’t have to be all bad and you don’t have to use them to restrict spending if you don’t want to. Instead, I want to share some of the more flexible budgets you can use while still monitoring your money.
This budget is pretty easy to follow. All you have to do is simply take your after tax income and apply some percentages to it. You guessed it, the percentages are 50%, 30% and 20%.
The first category, your needs, is where you’ll spend 50% of your after tax income. You’ll use this money for things like your housing, basic groceries, basic transportation and your other basic needs. Notice these are the basics only, nothing upgraded or fancy here. Those come in the next category.
Wants are the second largest category of this budget at 30%. Wants are things like cell phones, dining out and other things you don’t absolutely need to live your every day life. People easily get confused here and consider many wants as needs, but if you COULD live without it, chances are it is probably a want and not a need.
The smallest category is the most important. Coming in at 20%, this category is for your savings and debt repayment. Personally, I prefer to increase this category to more than 20% of my budget, but if you’re following this model exactly, you’d only save or pay off debt with 20% of your income. This doesn’t include your mortgage, but instead is debt like student loans, car loans, and other consumer debt.
As you can see, this budget is pretty flexible and allows for you to spend your money on what is most important to you in your life. It adds up to 100% of your after-tax income and doesn’t involve going into debt.
A customized budget is whatever works best for you. It is even less strict than the 50/30/20 budget because it allows you to base your budget on your personal needs.
If you have a ton of debt, you’ll likely need to use more than 20% of your budget to pay the debt down as quick as possible. If you want to retire at 40, you’ll need to save way more than 20% of your budget to invest for your early retirement.
On the other hand, if you already have your retirement accounts more than fully funded and you never have to put another penny in again, maybe you can spend more than 30% on wants. Just make sure that you’re not spending more than you earn and you’re reaching all of your goals financially.
Cash Envelope Budget
If the 50/30/20 budget doesn’t meet your needs and you’re worried that a customized budget won’t work for you because you’re prone to overspending then the cash envelope budget is likely your best bet. Instead of keeping track of your finances mentally or on spreadsheets, you’ll keep track of your finances visually with cash and envelopes.
When you get your paychecks go to your bank and withdraw your money in cash, just make sure you’re not paying any check cashing fees. Next, take the money home and make an envelope for each category of your budget. Divide your cash into the appropriate envelopes.
Be extremely careful when you do this, because once you put cash in the envelopes, you shouldn’t transfer money between envelopes. When the money in an envelope is gone, then you can no longer spend any more money in that category until your next paycheck. This is a great way to dip your feet into the budgeting waters if you are have trouble controlling your spending.
Between these three budgeting methods, hopefully one works for you. Do you have a favorite way of budgeting other than the one’s I’ve listed above? If so, please share them in the comments below. I’d love to learn from you.