Last week, I was talking about some of the budget mistakes we all make. This week I want to share some budgeting systems that have worked for many people. Hopefully when you check them out, you’ll find something that works for you.

Budgets and Spending Plans

Budgets, spending plans, or whatever you prefer to call it, all have the same goal – directing your money to cover your necessary expenses, save some money for long term plans, and to give you some money for fun.

How you plan your spending should fit well with your personality if you want to have it be sustainable. There are several approaches to budgets, each with advantages and disadvantages.

Some people use a zero balance budget, where every single dollar is assigned to a bill, savings goal, charity, or for fun. Dave Ramsey is a huge believe in having a plan for every dollar.

If that’s too much planning and organizing for you then you might want to try out the balanced money formula. It’s basically allocating your net income in chunks. It’s dividing up your money in 3 broad categories.

35 -50% Needs

This include essential bills such as rent/mortgage, food, utilities, cars/transportation, etc. The simpler your lifestyle is, the lower the portion. Some suggestion would include looking into splitting expenses with a roommate, finding a more affordable apartment, or using public transportation.

20% Savings

Whatever budget method you use, it’s smart to set aside some money for your short and long term goals. They could be:

  • Retirement (IRA/401(k))
  • Emergency Fund (3 months or more)
  • House Down Payment
  • Savings for your Next Car

20-30% Wants

This includes some optional bills like cable television, Netflix, and cell phones. Vacations, concerts, shopping trips, and other personal activities are covered in Wants.

Using the Envelope System

The benefit of the envelope method is that it helps you visualize your budget. If you’re new to the envelope system, I would start small and use it for eating out or clothes. We’ll use eating out for our example.

  • Grab an envelope and label it “Eating Out”.
  • Fill it with the cash you have allocated for the pay period. (Eventually you want to get to a monthly basis, but start easy.)
  • As you spend the money, write a note the envelope how much, where, and when you spent the money.
  • When the money in the envelope is gone, it’s gone. You have to decline eating out until next pay check.

The envelope system is concrete and may open your eyes to how much money you’re spending on something. If you keep notes on your envelope you can review and see if it was worth the cost or not. It may motivate you to be more selective with your purchases.

Thoughts on Planning Your Spending

I’m curious to hear your ideas on having a budget. How do you control your spending? How did you develop a system that works for you?