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Adulting with Budgets

It is important for everyone, regardless of what you make, where you live, or how you live to know how much money is coming in each month and how much money is going out, which is called a “budget.” There are many ways to budget and it’s important to find one that fits with your values and personality so you can stick to it. Truly, the amount of control and purpose you exert over your spending is up to you. Popular opinion suggests budgeting is restrictive and takes the fun out of life, however, if done right budgeting can give you confidence and freedom.

Here are some budgeting methods:

  • Traditional Budget

First, you list and add up your income. Then, you list and add up your expenses. Hopefully, once you subtract your expenses from your income, you’re left with a positive number. Lastly, you set goals for what you want to spend in each category. Source

  • Reverse Budget (sometimes referred to as the Pay Yourself First Budget)

First, you set aside a percentage of your income that will go to savings and retirement. Then, you allocated funds to your expenses (rent, food, utilities, etc.). Whatever is left over is what you have discretion to spend. Source

  • Zero-Based Budget

The result of a zero-based budget is that there are $0 left at the end of the month. That doesn’t mean you spend everything you make, however. Using this approach, you would also “pay” your savings account and retirement accounts. This method requires a lot of attention to detail and leaves little room for error. That said, you can include a “miscellaneous” line. Source

  • Envelope Budget

This one is similar to zero-based budgeting, except the only difference is that it is done with envelopes and cash. You label an envelope for each budget category, and when you are ready to make a purchase from that category, you bring that envelope of cash with you and spend from there. This method would be eye-opening and effective, however, is not particularly practical. Source

  • Balanced Money Formula (also referred to as the 50/30/20 Budget)

Using this method, you should allocate 50% of net income to necessities, 20% for financial goals, and 30% on discretionary spending. All you need to be able to do is differentiate a want from a need. If you’re spending 40% on “wants,” it’s time to tighten things up. Note that you can change the percentages and keep using the Balanced Money Formula, for example increase savings to 30% and decrease one or both of the others. Source

  • 60% Solution

Sixty percent of income goes to “committed expenses,” like food, clothing, household expenses, insurance, all bills, and taxes. The remaining 40% is divided equally four ways: retirement, long-term savings (emergency fund), short-term savings (vacations and other irregular expenses), and fun money. Source

  • 80/20 Plan

This one is a variation of the Balanced Money Formula, except you don’t need to differentiate between wants and needs. Simply save 20% and spend the rest on everything else. Source

  • The “No” budget

First, you need to know how much money you typically spend on bills and other expenses. Then, you make sure your account has at least that amount of money in it. Proponents of this “budget” suggest automating bill pay. Using a debit card helps too because this approach requires monitoring your account and learning to tell yourself “no,” so that you only use what’s available to you. That, and you basically have no budget at all.

  • Values-Based Budget

Once you account for your necessities and expenses, this method says you should budget for things you value and enjoy, like giving to charity, buying coffee, or trying expensive wines. The reasoning is that if you budget for things you enjoy, you’ll be more likely to stick to the budget. Source

With so many options for budgeting, there is no excuse for not having one!

  • Not a detail-oriented person? Try the “no” budget or the 80/20 plan.

  • Detail-oriented? Use the traditional or reverse methods.

  • Love numbers? Try the zero-based budget.

  • Dislike using credit cards? The envelopes method would work for you.

  • Value hobbies? Use the values-based budget.

  • Place a high value on saving? Try the 60% solution or use your own balanced money formula.

You could even start with one method and move on to others until you find one that works for best you, which is what we’ve done.

When I was starting out, I went with the traditional method to ensure I wouldn’t be spending more than I was making when I moved out of my parents’ house. Later, once I met my husband, we switched to a reverse budgeting approach, because we wanted to step up saving as much as possible in order to retire early. Now, we use our own version of the balanced money formula.

My husband and I contribute to our retirement accounts (401(k)s) separately. He then contributes to our non-retirement brokerage account. I contribute to a real estate savings account. Our savings amounts to 40% of our income right now. We have a spreadsheet with a list of our expenditure categories and what each one costs us every month, which adds up to 40% of our joint income. We both contribute equally to these “commitments” (a word borrowed from the 60% solution because they aren’t fixed expenses, nor are they necessities): mortgage, utilities, food, gym membership, entertainment, vacations, and gas.

Note that our values reflect vacations and entertainment, like eating out and going to shows. The remaining 20%, our discretionary spending, includes golf for him, pedicures for me, clothing, gifts, etc., and we pay for those on our own credit cards. We usually don’t spend quite all of that and end up reallocating into savings or investments (like our Roth IRA’s).

Here’s how our budget breaks down:

As you can probably tell, this is from our Excel budget file. We’ve just recently started using Mint. We’ll have to let you know how that goes.

Let us know which budget you use on Twitter @AdultingIsEasy.

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