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Friday, April 12, 2024

How to budget money – Is there one true way to do it?

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I will state it upfront and fast that there is no one true answer to “How to budget money”. For each person, family, situation, and desired outcome there are going to be different ways of handling a personal budget. Of course, if you are to take a personal finance course, that specific personal budget plan will introduce a method that the personal finance course itself prefers. If that budgeting style feels good to you, then you should use it. However, if you are still on the fence about whether that style of personal budgeting is going to meet your needs, it is ok to shop around for a different budgeting style.

Here is a quick introduction to my personal favorite budget styles. Keep in mind that there are more ways than this to budget your money.

  1. Actual Expenses + Future Finance Vision – This is the number one method that I teach because it allows for the most flexibility and gives you the option to choose what kind of lifestyle you want to live. To create a budget like this you will usually use Google Sheets or Microsoft Excel which will again give you the most flexibility. Looking at recent months of expenses, you will track them starting with Income at the top. You will subtract out Savings, Debt, and Expenses which will bring you to a remainder. If positive that is good, if negative then you may need to rethink. Once you have a few months tracked you will start to see your averages. Average income, savings, debt payments, and expenses will allow you to use the averages to estimate your budget out 12 months into the future. (This is creating your own financial forecast) You can then see your remainder in 12 months, and instead of feeling confined to being strapped for cash in a single month, you can use the futures averages to make more flexible decisions.
  2. Zero Based Budgeting – This is a popular method of “how to budget money” that pops up everywhere. This is by far less flexible than #1, but it’s strict nature can also be helpful for people that need more control to taking over their finances. Each month you will sit down with your estimated income and then you will put in your estimated savings, debt payments, and expenses. The remainder will then be adjusted to equal zero. For example, if you put in your whole month and still have $100 left over, then you would need to decide, “am I putting it in savings?” or “Are there debts that need extra payments?”. You would then place that $100 into a category so that your remainder equals zero instead of rolling the remainder to the next month.
  3. Track and Adjust – This budget style is the most wild west of all budgeting methods. Most proponents of this method will use a mobile app, or some sort of automated system of tracking their income and expenses. I have also seen it done in a data sheet, but typically this style of budgeter doesn’t have as much care to take the time to track on their own. There is no concern with where your month will end, and there is no particular care to what will come next month. This type of budget just focuses on staying at a positive remainder in the given month in real time. As you arrive to a movie, you buy your ticket and the popcorn smells good, so you will quickly glance at your live tracking and see that you still have $50 remaining so you will buy the popcorn. Only major expenses like rent or a mortgage are premeditated in this method. Everything else is based on real time desire.

In answering “How to Budget Money” the answer is up to you. You should consider what amount of time and energy you want to give to your personal finances. A quick review of your lifestyle and how you want to design it for your own personal desires will probably point you to a budget method that will fit what you are going for.

The conclusion here is that there is not one true way to budget money. There are only great methods that you can choose from. In fact, if you don’t want to budget your own money but still want to have all the benefits of tracking your expenses and having a forward-looking view, then consider having someone budget for you! Yes, you read that right. There are excellent services out there that will do all your budgeting for you and send you the update when it is ready each month. Be sure to do your research and know that you are working with someone that is a real person, and a reputation that you can trust.


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