Budgeting is not a one size fits all approach. The best budget is the one that you’ll actually use. You can have “the best” one in the world, but if you don’t use it, it’s not good for anything. Let’s take a look at some options so you can find the one that works for you and your needs.
Cash Envelope System
If using budgeting software or figuring out a budget is overwhelming, you can keep it simple by using the cash envelope system. This is one of the tactics that Dave Ramsey speaks a lot about, but many have used a variation of this method.
To begin this method, you need to first make a budget. What? Didn’t you just tell me this was the answer if I didn’t want to make a budget. Well, yes I did. Preparing for this is not as difficult as it may seem. Bottom line is that every dollar you make must be accounted for. Don’t worry, you will modify this budget as time goes on and you get more efficient at the process.
Step 1: Write down all your income from every source. If your grandmother gives you the same amount for your birthday gift every year, write it down. If your income is variable, this is a tad harder, but you can use an average of your last 12 months to get a reasonable amount. The problem with a variable income is that it can be difficult to budget since even though your income may fluctuate, your expenses may not.
Step 2: Make a list of all your fixed expenses every month. Examples include rent, car payment, insurances, tuition, cell phone, subscriptions, student loan payments. This amount needs to be subtracted from your answer in step 1.
Step 3: Next make a list of your variable expenses you need to spend money on. Examples include groceries, dining out, gas, personal care, medicine, car maintenance, property maintenance, clothing, utilities, entertainment, gifts, personal (“me” items), etc.
Step 4: Take your net income and subtract your fixed expenses and divide the balance into each of the categories identified in step 3 (variable expenses). If your budget for dining out is $200/month and you get paid twice/month, you take $100 from each paycheck to put in your grocery envelope. Take the envelope with you to the grocery store and you can only spend that amount, absolutely nothing more. This can be really hard, but it’s much better than constantly overspending and going over budget. If you reach the end of your money, that’s it, you’re done. Time to raid the fridge or pantry to see what you can scrounge together without going to the grocery store until your next income rolls in. However, if you don’t spend the full amount of any of your envelopes, you can put it away into savings or paying down installment debt.
Step 5: Calculate a percentage of expense for each item. For example, if your monthly budget for groceries is $200/month and your net income is $3500/month, then your percentage would be 5.7%. This is especially important for those with variable incomes. Then when your income is decreased one month or pay period, you can use the percentage to calculate the adjusted amount to spend. This means if your income goes down to $2,800 in one month, your grocery envelope adjusts to $159.60 that month or $79.80 per pay period (from our example).
According to the 50/30/20 budget rule, 50% of your income should be allocated to “needs” and 30% should go toward your “wants.” The remaining 20% is dedicated to savings and investments. Once you have written down all your fixed and variable expenses and prepared your envelopes, you can categorize them into needs and wants. This is a good time to evaluate where you are spending your money. If your “needs” are much higher than 50%, you may need to evaluate if those items are truly “needs” after all.
Budgeting Via Debit Cards
Many young people don’t do a lot of cash and mostly pay everything online or through their debit cards. If this is you, you can still tackle budgeting, but you have to be creative and cannot cheat. Instead of envelopes, you can use your notes app or even just a notepad/journal. The calculations are done exactly as mentioned in the cash envelope system, but you keep the amounts notated digitally and then subtract when you make an expense within a certain item. If you choose to do this, you need to review your notes BEFORE making a purchase so you don’t accidentally overspend and go over budget.
What do you do if an emergency comes up within the month? Unfortunately, if you do not have an emergency fund set up yet, you have no choice but to shift your monetary divisions. This is especially the time to reevaluate your true needs and see where you can make some immediate cuts.
Tha advantage of the cash envelope system is that it creates discipline, keeps you on track and holds you immediately accountable. The main downside is that you have to go to your bank and have cash on hand. I recommend keeping it at home and only carrying it around when you’re about to use it. This could be an advantage to use debit cards.
Other Budgeting Options
If the Cash Envelope System is not for you, you can use traditional budgeting techniques. A great help is to set up budgeting software or an app in order to track where you’re spending your money. Some are free and others are not. Check out some of my top favorites to see which you like best.
Quicken https://www.quicken.com/ Quicken has a computer and app version. There is a fee for this one.
YNAB (You Need a Budget) https://www.youneedabudget.com/ YNAB has a computer and app version. There is a fee for this one, but you get a free month's trial and college students can get it for free. **This was one that was consistently recommended on college sites.
Every Dollar https://www.daveramsey.com/everydollar/?utm_source=google... Every Dollar is FREE and is in the Dave Ramsey family. It has a computer and app version.
The Budget Mom https://www.thebudgetmom.com/ There is not an app for this one.
Budgeting Using Credit Cards
Make sure that you can view your credit card statement online because it may open up many free and convenient services for you. In addition to just seeing a log of your purchases, most credit cards will categorize your spending for you. If they don’t, you can also use this budget worksheet from the Consumer Financial Protection Bureau (CFPB). https://files.consumerfinance.gov/f/documents/cfpb_well-being_monthly-budget.pdf
You should give your last few credit card statements (I suggest at least 3 months) a once over to determine your spending habits and categories. Are there any debts that aren’t necessary and could be curbed or avoided altogether? Where can you scale back? You need to be honest with yourself and set realistic goals and it’s now time to get excessive spending under control.
At this juncture, this is the time to implement the 50/30/20 rule. Using the online categories can help you organize your needs and wants. The great thing about budgeting with credit cards is that you have the opportunity to take advantage of the perks. Most of your credit cards come with some sort of rewards. Cash back, mileage, gifts, etc. You should be milking this for all it’s worth. You should be taking advantage of these without overspending. If you’re comfortable with owning several cards, you could even get more out of the cards. For example, you could use your Discover It card solely for its five percent BONUS CATEGORIES, that rotate quarterly. You could then use additional expenses on a card that earns miles for certain purchases. A personal friend of mine runs a very helpful YouTube page specifically for these tips. Please check it out. https://www.youtube.com/channel/UCvhkE6mhsYxdUXNjmJdtq_Q
Go ahead and set your card up on auto pay to pay the entire balance off monthly. This will help you to stay on budget and not overspend. The other perk is that you won’t be paying any money in interest nor late fees. Another important aspect to be aware of when budgeting with credit cards is your utilization rate. The utilization rate is the amount that you have extended (the amount you owe) divided by your credit limit. For example, if your limit is $1,000 and you charge $550, your utilization on that card is 55%. Your goal is to keep your utilization rate <30%. If you’re spending more than that, you need to work on increasing your credit limit with your lender. The only purpose for this is to better your utilization rate which is 30% of your credit score calculation. If you’ve been with your company at least a year, it’s a simple phone call and they will raise it for you. However, be aware that the only purpose is to improve your utilization rate and NOT to be able to spend more than previously.
I am a big proponent of using credit cards, but only if you can pay them off monthly and can use them responsibly. However, if you’re prone to overspending and have a hard time staying on budget, a credit card can be more of a hindrance than a good idea. It might be better to instead choose a prepaid debit card to guarantee that you stay within your spending limit or stick with the cash envelope system.
Credit cards can be a good addition to your financial health in building your credit, but they can also be a huge pitfall if you make mistakes and don’t use them wisely.
Now is the time to figure out which one works best for you and your personal needs. Remember, the one that works best is the one that you’ll use. Give one a try and if you just aren’t using it, try another one. Whether you’re using the cash envelope system, an app or credit cards, there is absolutely a program that will fit your needs.
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