"Do not save what is left after spending, but spend what is left after saving" - Warren Buffet
Aug 1, 2016
Financial Security
No financial plan can be complete without a budget of some sort. There are definitely different ways to go about it but the goal is always to keep track of what you earn vs what you spend.
Aug 1, 2016
Financial Security
No financial plan can be complete without a budget of some sort. There are definitely different ways to go about it but the goal is always to keep track of what you earn vs what you spend.
I have found several budgeting strategies: Zero Sum, Buckets, and Save-Spend.
Zero Sum strategy means that you want to keep your spending below your expenses and at the end of the month always having a balance greater than $0. Having a positive balance means that your income has exceeded your income. Anything that remains at the end of the month can go into a savings account or be invested or be rolled over to the the next month. Of all the strategies, this is the most basic and therefore easiest to manage. However, it does have it's limitations. The biggest limitation to the Zero Sum strategy is that it does not prioritize saving and investing. Often times if we do not save first before spending, we end up not saving anything at all. In my younger days I used to use the Zero Sum budgeting strategy. At the time, I had no debt and no big goals for my financial future so this strategy worked decently. I was also only working part time so I did not feel as if I was even able to save what little money I had earned for the future. I would not learn until much later in life that if I had saved and invested earlier, I would be much more well off financially than I am today.
A second form of budgeting is the Buckets method. In the Buckets method, you would put your money into separate buckets for each type of spending. So $500 for rent, $300 for eating out, $100 for shopping, etc. If a given bucket runs out of money, then too bad, you will have to do without until you refill it the following month. Anything left at the end of the month is used to pay down debt, save, or invest. The Bucket method is very helpful in accessing what exactly you are spending money on. It requires discipline to maintain that level of spending on each category and often it may be tempting to dip into other buckets when one bucket runs low. The down side to the Buckets method is the lack of flexibility. If one month your cell phone bill runs high, then you may not have enough in your bucket to pay off the bill. At that point, you may have to reconsider how much you place into each bucket and may have to borrow from your other buckets which also throws off your budget. Also, some systems can become overly complicated when you get too many buckets. You may end up with buckets for car payments, house payments, insurance, gas, internet, tv, phone bill, eating out, playing games, movies, etc and become difficult to maintain in the long run. Many people have had success with the Buckets method and it is a strategy that Dave Ramsey's the debt guru advocates. If you are able to sustain it, the Buckets method is a great way to pay down debt and invest in the future.
The final technique to budget is the Save-Spend method which mean you save or invest a certain percentage then you are free to spend the balance however you please. The typical breakdown would be 20% savings, 30% miscellaneous expenses, and 50% fixed expenses. Fixed expenses are expenses that do not fluctuate much month to month and often include housing, student loan payments, and utilities. 20% savings means money that will either be put into a savings account, 401k, Roth IRA, or some other form of investment. That leaves 30% remaining to spend however you wish, meaning travel, eating out, dining out, etc.By investing first and preparing for your fixed expenses, you are able prioritizing your future. You may have to pass up on that new TV, but you will have funds available for retirement. This method also helps you figure out how much you can buy to live on, such that if your fixed expenses exceeds 50% of your budget, then you must find a way to reduce your expenses or increase your income.
Of the 3 methods, the one that works the best for me is the Save-Spend method. The Zero-Sum method is good but part of financial planning is planning for the future. I know that if I spend first, I will likely not have enough money to save and invest for later. The Buckets method may be helpful, but because it is complicated, I do not believe I would be able to commit to it for many months to come. The Save-Spend method offers me the flexibility that I need, so that if I ever want to see if I can afford a new toy, I can just look at how much I have left after I have put away what I needed.
A second form of budgeting is the Buckets method. In the Buckets method, you would put your money into separate buckets for each type of spending. So $500 for rent, $300 for eating out, $100 for shopping, etc. If a given bucket runs out of money, then too bad, you will have to do without until you refill it the following month. Anything left at the end of the month is used to pay down debt, save, or invest. The Bucket method is very helpful in accessing what exactly you are spending money on. It requires discipline to maintain that level of spending on each category and often it may be tempting to dip into other buckets when one bucket runs low. The down side to the Buckets method is the lack of flexibility. If one month your cell phone bill runs high, then you may not have enough in your bucket to pay off the bill. At that point, you may have to reconsider how much you place into each bucket and may have to borrow from your other buckets which also throws off your budget. Also, some systems can become overly complicated when you get too many buckets. You may end up with buckets for car payments, house payments, insurance, gas, internet, tv, phone bill, eating out, playing games, movies, etc and become difficult to maintain in the long run. Many people have had success with the Buckets method and it is a strategy that Dave Ramsey's the debt guru advocates. If you are able to sustain it, the Buckets method is a great way to pay down debt and invest in the future.
The final technique to budget is the Save-Spend method which mean you save or invest a certain percentage then you are free to spend the balance however you please. The typical breakdown would be 20% savings, 30% miscellaneous expenses, and 50% fixed expenses. Fixed expenses are expenses that do not fluctuate much month to month and often include housing, student loan payments, and utilities. 20% savings means money that will either be put into a savings account, 401k, Roth IRA, or some other form of investment. That leaves 30% remaining to spend however you wish, meaning travel, eating out, dining out, etc.By investing first and preparing for your fixed expenses, you are able prioritizing your future. You may have to pass up on that new TV, but you will have funds available for retirement. This method also helps you figure out how much you can buy to live on, such that if your fixed expenses exceeds 50% of your budget, then you must find a way to reduce your expenses or increase your income.
Of the 3 methods, the one that works the best for me is the Save-Spend method. The Zero-Sum method is good but part of financial planning is planning for the future. I know that if I spend first, I will likely not have enough money to save and invest for later. The Buckets method may be helpful, but because it is complicated, I do not believe I would be able to commit to it for many months to come. The Save-Spend method offers me the flexibility that I need, so that if I ever want to see if I can afford a new toy, I can just look at how much I have left after I have put away what I needed.
I downloaded the EveryDollar app to my Android phone yesterday and I'm finding that very easy to use. I'm getting a better look at the "big picture" but I'm not ready to give up Excel just yet.
ReplyDeleteI think I will do a review of a few useful apps. I really like how convenient an app can be when you are out and about.
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