Budgeting is like flossing – we understand that it is important, but it is not something we like to think about, let alone actually do. You may even view budgeting as a punishment, a way to restrain yourself from buying the things you want and feel guilty about spending money on things you need.
However, its purpose is not to fix bad habits but to build an awareness of your spending. It is not to penalize yourself for spending money but rather to better prioritize how you spend so you have enough for the things that matter most. By taking control of your finances, you have to take responsibility for your spending and the unnecessary purchases you make so you can understand that nothing will change unless you change your behavior.
For many, budgeting is a nonstarter. Nevertheless, the journey of a thousand miles begins with a single step. The program will work if you do it! When you keep taking those steps, you will eventually start to experience the magic of this process, feel a sense of accomplishment, and further your financial goals and objectives.
Below are some popular budgeting strategies. Remember that budgeting is an individualized process and looks different for each person. It is crucial to find a budgeting solution you can work with and will work for you. It should also be conducive to tracking your goals and ensuring you are steadily moving forward. The time you spend will be well rewarded through a lifetime of financial success in building wealth and achieving your financial goals and objectives.
The Traditional Budget
Conceptually, the practice of a budget is pretty straightforward: keep a record of the money that comes into and goes out of your life. This can be a fairly rigorous system, but it will be exceptionally beneficial. If you are someone who 'sweats the pennies' or appreciates detailed analysis and wants to know where your money is going, this is an excellent technique for you. Traditional budgets hold up a mirror of your actual financial life; with it, you will see what you get from the money you spend.
Your budget can be a spreadsheet, a pen and notepad/journal, or a budgeting app. If you are using the spreadsheet or pen and paper method, start by drawing a line down the center. In one column are your cash inflows (any income you receive), and in the next column are outflows (all your expenses). Within each column, include subcategories to help classify and group your income and expenses. We encourage you to establish spending categories that reflect the uniqueness of your life (not just the oversimplified textbook categories like food, shelter, clothing, transportation, and health). As you work with your budget, you will find that you will refine your categories and that each one reveals your spending needs and preferences.
This method can be further enhanced if you consistently record your money movements as they happen. The more it becomes second nature to note where money is coming from and going to and the reasoning behind it, the more effective this method will be. Further refinement will come as you determine how to plan for larger or more unusual expenses (e.g., annual insurance premiums, capital expenses like a new roof, balloon payments on your mortgage, etc.)
One downside of traditional budgeting is that it can be a time-consuming undertaking. Many believe this is the most useful budgeting method for them, but they never take the first step. Also, this methodology has a ruthless honesty to it because you document every money movement. Some people appreciate this level of detail, while others find it stressful and deterring. In addition, confronting the realities of why and how you may be falling further behind may be so uncomfortable you will be tempted to stop the process. Lastly, those who start using this method often give up easily and stop doing it before it becomes a regular part of their routine.
The 50/30/20 Budget
This budgeting method starts the same as the traditional budget – you document all of your expenses. Once you have this information, you then subdivide the expenses into three categories: needs, wants, and savings. According to this practice:
50% of your takehome pay should go to your needs,
30% should go to your wants, and
20% should go to your savings.
Your needs are fixed costs, including rent or mortgage payments, groceries, transportation, utilities, healthcare, and minimum debt payments – basically the things you cannot live without. Wants are characterized by things you desire to spend money on but do not actually need. These include things like a gym membership, dining out, and shopping. Lastly, this budget systematizes allocating 20% of your after-tax income to savings and investments to help support your financial well-being and safeguard your financial future.
The primary driver of this system is that it recommends a certain balance between spending your money on things you want versus things you need while also stressing the importance of setting money aside in savings. This is also a suitable budgeting method for those who feel overwhelmed by the rigidity of only being able to spend a certain amount on every category of the spending – like with the traditional budget. This can be a great way to ensure you stay within your budget, save for the future, and stick with the process.
The 70/20/10 Budget
Similar to the 50/30/20 budget, you start by categorizing your takehome pay into three categories:
70% of your paycheck should go to monthly spending,
20% goes to savings, and
10% is for donations and debt repayments above the minimum monthly payment(s).
This is the only budget on this list that factors in charitable giving. Therefore, this budgeting approach is more conducive for individuals with comfortable incomes who are charitably inclined and do not tend to overspend. By not differentiating between 'wants' and 'needs,' like with the 50/30/20 rule, the 70/20/10 method offers you more flexibility and freedom to spend – so long as you hit the 20% savings and 10% donations goals, you can spend the other 70% however you want.
This budgeting method could also work for someone who wants to donate money to charity but feels they do not have enough money left over. Having donations as a line item in your budget may be the subtle nudge you need to start allocating more of your paycheck to charitable contributions.
The 60% Solution
Like the 50/30/20 budgeting formula, this method uses percentages to manage your finances rather than set dollar amounts. Whereas traditional budgeting can be arduous and tiresome, the 60% solution is clean and straightforward. How it works is: 60% of your income goes to 'committed expenses,' this includes all of your bills (not just your needs from the 50/30/20 budget) – mortgage, food, transportation, insurance, cable and internet, cell phone, etc. Generally, these are recurring bills that have to be paid each month. The remaining 40% of your income is allocated as such:
10% to retirement savings (i.e., 401k, IRAs, 403bs, 457s, etc.),
10% to long-term savings (i.e., emergency funds and individual brokerage accounts/cash management accounts),
10% to short-term savings to be used over the course of a year (i.e., vacations, irregular expenses, or other larger expenses, etc.), and
10% to 'fun money' or the 'wants' category in the 50/30/20 budget system (i.e., dining out, shopping, etc.).
This can be an incredibly advantageous system if you have clear financial goals and want to save aggressively for them. Allocating only 60% of your income for bills leaves you with a lot of your paycheck to save.
If you find saving 30% of your income difficult, start with the 80/20 budget and work up to the 60% solution. The 80/20 budget is very similar conceptually to the 60% method:
Automatically keep 20% of your takehome pay for savings and investments, and
The rest is for everything else.
The Pay Yourself First Philosophy
The gist of this system is simple yet highly effective. When your paycheck comes into your bank account, you first make a savings payment to yourself before paying any expenses. Think of your savings as a bill, and you should pay that bill first before all of your other bills. By setting this up as an automatic recurring transfer, you stay disciplined.
From there, you ensure that you are spending within the means of the rest of your paycheck. If you struggle to do this, try aiming to reduce your number of transactions every month. Before you know it, you will find yourself spending less money.
This approach focuses on making savings your primary concern and keeping spending to a minimum. It can be a great choice if you have trouble overspending or need help saving. Since you prioritize saving over spending, you eliminate the possibility of spending money you really should be setting aside for the future, and your saving discipline will keep you on the path to achieving financial freedom.
The Zero-Based Budget
With a zero-based budget, your goal is to allocate every dollar of your paycheck to a specific expense, leaving you with a balance of $0. Every expense, including taxes and savings, should be a line item in this budget.
This does not mean that your bank account balance should be zero. Instead, it means that every dollar of your paycheck is accounted for – whether for paying taxes, saving for the future, paying off debt, buying groceries, etc.
The beauty of this method is that you create a plan for every dollar. Counting every dollar also helps reduce the temptation to make impulse purchases.
The 'No-Budget' Budget (aka Reverse Budgeting)
The primary reason budgeting is such a deterrent for people is simple: they worked hard for their money and do not want to be told how to spend it. Moreover, everyone knows the reason why they buy the things they buy: because they want it. If you feel controlled or restricted by a traditional budget, the 'no-budget' budget might work for you.
The first step of this plan utilizes the 'pay yourself first' philosophy. Start with your goals and fixed costs in mind, estimate how much those are, and automate the necessary savings or spending to fund them. Whatever is left over, spend as you please!
This does not mean you must spend all the surplus money. Instead, this method gives you peace of mind that your goal funding for that month has already been met; now, you can spend the extra money where you see it best spent or saved. Keep in mind that you can be flexible with this and make updates to it.
It is also worth noting that automating certain aspects of your finances is about simplifying your life, not checking out of the process entirely. At the very least, you should go back every few months and look at your spending to review the prior period's expenses and see if any aspects of your lifestyle are over-inflated.
The Envelope System
Credit cards have become commonplace in our society. When a charge comes up, you may not even think twice about using a different payment method other than your credit card – especially if your card has a rewards system for swiping. However, while credit cards bring many efficiencies into your life, they also enable you to be more careless and unconscious with your spending. With credit so easily accessible today, it gives rise to instant gratification, especially with impulse purchases and online shopping.
Going plastic-free may be a good idea if you keep racking up credit card debt and have trouble tracking your money. The envelope method encourages you to withdraw cash from your bank account and keep track of how much you spend throughout the month by putting the cash in separately marked envelopes representing different budget categories. In doing this, not only will you gain a greater awareness of your spending habits, but you may also find saving more motivating once you see what you spend your money on. Once no money is left in that envelope, you can no longer spend within that budget category until the following month. On the other hand, if you have remaining funds in an envelope at the end of the month, you can use those funds to:
Roll them into the same envelope for next month,
Reallocate the money to a different envelope, or
Save the remaining funds for a later date.
Values-Based Budget
Budgeting is important not only because it illuminates how much we are spending but also because it helps us cultivate an awareness of how to save and spend in accordance with our values. Our values systems are those principles and qualities that matter to us. A values-based budget allows you to see the gap between what you say is important to you and how you actually spend money. For many, the values expressed in their expenditures do not align with those they want to be living.
Like the traditional budgeting method, you can start this process by writing down all of your expenses. This can be in a spreadsheet, notepad, or journal. Then, next to the expense, answer on a scale of one to ten:
How much did the purchase or experience leave you satisfied?
Content? or
At peace?
This simple exercise will show you where your spending is going and how much corresponding fulfillment you derive from it. If you received so much fulfillment from this expenditure that you would even like to increase spending in this category, place a '+' next to it. If you received little or no fulfillment from it, put a '-.' If the expense feels just fine as it is, mark it with a '0.'
If you like this approach but are unsure of your understanding of what makes you feel fulfilled and satisfied, trust that asking yourself these questions month after month and year after year will clarify and deepen your knowledge of what contentedness and purpose mean to you.
If you want to go the extra mile, make a note for each expenditure that would fall into a 'wants' category as to your reasoning for making that purchase. For example, if you ate out at a restaurant, your reasoning could be 'special occasion' or 'too tired to cook.' Having the ability to look back at these expenditures at a later date to see why you made those purchases can help steer you in the right direction going forward. If you look back at one month when you spent a lot on shopping, you may see that your reasoning for all those expenditures in hindsight was not strong enough, and you will be conscious of that spending habit in the future.
The Bottom Line
We all spend money on things we do not need and regret them later. First things first, when creating a budget – cut yourself some slack. It is perfectly human to justify spending money on the things you want. To a certain degree, everyone tries to satisfy some psychological or spiritual need with consumption.
When you create a budget, many feelings may arise, which is perfectly okay. You should not feel ashamed about how you have spent money in the past or assign blame to certain things or people for your spending habits. This exercise might be humbling, or it might make you feel great. You will confront difficult truths, which can be painful or liberating. Looking at these numbers dispassionately and trying not to agonize over rationalizing how much you spent in one category goes a long way in making this process truly enlightening. By facing this challenge head-on, asking questions, and adjusting specific areas of your finances, you are taking a big step in the right direction toward the Goldilocks feeling of just-rightness when you have enough of everything you want and need.
If you need help building a budget or need guidance on how you can achieve your financial goals, check us out! You can schedule a complimentary, no-obligation call with us here.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.