According to a Gallup study, only 32% of households maintain a budget. Yet 49% of Americans are anxious about their current financial well-being. When you consider that 64% of American adults carry around credit card debt balances, it’s no wonder half of us feel anxious when we think about money.
If you fall into the 49% of Americans that suffer from anxiety caused by their financial situation, I’m here to let you know that the solution is right here waiting for you.
And it’s not as complicated as you might think.
Budgets get a bad rap, and I understand why. It’s no fun feeling like your life is run by a spreadsheet on your desktop or an app on your phone.
Here’s why you should start a budget anyway: I’ve found that the benefits far outweigh the initial feelings of restriction. In fact, creating and sticking to a budget has led my family to a place of freedom with our spending, as we are now able to spend guilt-free, meet our savings goals, and invest in our future.
Without a budget, we wouldn’t be able to do any of those things, because our money would be spent as quickly as it was earned. Budgeting quite literally set us free from stress and guilt associated with money and fear of our financial future.
3 different approaches to budgeting
When it comes to budgeting, there’s no one-size-fits-all approach. If you’ve tried budgeting before and felt defeated, you might need to try another method. Here are three of the most popular budgeting approaches for your consideration.
This approach is pretty straightforward, and it only requires you to keep track of three categories: needs, wants, and savings.
Needs make up 50% of your budget allocation. And they are exactly what you would expect–all of life’s necessities. Your mortgage/rent, transportation, groceries, gas, clothing (the truly needed kind), utilities, and so on.
Wants make up 30%. In this category, you’ll put vacations, eating out, cable, new toys, hobbies, etc.
Savings make up the last 20%. Here, you should place retirement savings, emergency fund savings, and even money spent paying off debts. If this is an easy target for you to hit, try for 30% instead, and knock your wants percentage down to 20%.
2. Envelope budgeting
This budgeting method involves real, physical, green cash like you see in the old movies.
Each month, you withdraw your spending money from the bank. Next, you label envelopes for each budget category and divvy up your spending money into each one.
Say you have $100 you budgeted to be spent at restaurants. Every time you eat out, you pull the money from the restaurants envelope. When it’s gone, you’re done eating out till your budget resets next month.
This might seem inconvenient, but I’ve heard from several people that this method works like magic.
3. The “no budget” budget
Because you can lead a horse to water, but you can’t make her drink. If you’ve tried budgeting and you just can’t handle it, this method is for you.
The “no budget” budget requires that you set up automatic transfers for all your bills and fixed expenses.
Set up your automated payments to take place right after your direct deposit hits your bank account. Make sure your savings transfers, debt payments, investments, and any other transfers are also automated so that all your financial goals are taken into account.
Now that you know the necessities are taken care of, what’s left in your account is what you have to spend for the month.
This method takes some practice. Chances are, you’re going to accidentally buy a new TV instead of groceries your first month. Then in your second month, you’ll get new shoes instead of getting your oil changed.
But with some discipline, it’s possible to get into a rhythm and do really well with this system. Just make sure you have a fully-funded emergency fund of 3-6 months’ expenses socked away. We all know that when it rains it pours, and this budgeting method leaves you little room for error.
Still not sold on budgeting? Now let’s get into some of the benefits.
The four benefits to budgeting
1. Budgets reduce financial stress
By removing the guess-work, you can sleep soundly knowing that your spending is in check. You know for certain that you’re saving what you intend, investing in your future, or paying down your debt at the appropriate rate. A stress-free financial life starts with your budget.
2. Budgeting aligns your family’s financial goals
Financial goals should never be assumed. These goals require all parties to be on board if you hope to ever make significant strides. Budgets enable these conversations to take place. When you sit down to create your budget together, you should discuss your goals, ask your partner about their goals, and decide how your spending will impact them.
3. Budgeting eliminates buyer’s remorse
When a purchase fits perfectly into a budget category, the buyer’s remorse goes away entirely. Your plan is in place, you’ve set aside a certain amount for this category, and there’s nothing to regret. Without a budget, it’s possible to feel guilty even when purchasing necessities.
4. Budgeting helps you spot bad spending habits
Bad spending habits sneak up on us. A couple more lattes, a new pair of jeans because they were on sale, or a few more nights of take-out. It happens to everyone. The only way you’ll spot problem areas is by keeping a detailed budget. You’ll be better off with the knowledge.
What if you have a cash flow problem?
A lot of people start budgeting and find that they have (what I like to call) a lot of potential. They begin to identify their goals and they realize they can accomplish a lot more if they a) cut back on their expenses or b) earn more money.
A budget provides us with the knowledge we need to create a plan for our financial future. It gives us a realistic picture of our financial health and the trajectory that we’re on. Maybe you’d like to kill your student loans, or purchase your first home, get out of debt completely, or begin saving for retirement.
Do your financial goals require more income?
If so, check out our article highlighting 27 creative ways to make money on the side here.
Best of luck, friends. Start your budget today, and you’ll be well on your way to peace of mind and financial security tomorrow.