Do you know how much money you\u2019re actually spending? Or does your end-of-the-month bank balance come as a surprise? Why is it important to budget your expenses?<\/p>\n\n\n\n
Many people don\u2019t budget their expenses: They just spend whatever is left after all their essential bills (e.g. rent and utilities) have been paid off. This is because creating a budgeting strategy that works for you is time-consuming, work-intensive, and complicated. <\/p>\n\n\n\n
Here are several budgeting strategies so you can either choose one that works for you or use them as an inspiration to create your own. <\/p>\n\n\n\n\n\n\n\n
Most people are guilty of having no idea where their money goes or how much they\u2019re spending on different things. As a result, they constantly feel guilty about spending money because they don\u2019t actually know how much money they have to spend. So, each purchase could mean a nasty surprise on that month\u2019s credit card bill.<\/p>\n\n\n\n
To prevent that from happening, you should get into the habit of budgeting your expenses in advance. However, there\u2019s no one-size-fits-all budgeting strategy. You should choose a strategy that works for your income, financial goals<\/a>, lifestyle, and personality.<\/p>\n\n\n\n Here are four budgeting strategies to help you take control of your money.<\/p>\n\n\n\n The first budgeting strategy we\u2019ll discuss is the bucket method proposed by Scott Pape in his book The Barefoot Investor<\/em><\/a>. This strategy is geared towards paying off your debt and growing your wealth at a slow yet steady pace<\/strong>. Under this strategy, you\u2019ll first create five bank accounts, each for a distinct purpose:<\/p>\n\n\n\n Then, you\u2019ll divide your monthly take-home pay into three categories or \u201cbuckets\u201d and direct the money to the corresponding account.<\/p>\n\n\n\n This category consists of money that you\u2019ll spend on a daily basis, as well as savings you\u2019ll put away for longer-term purchases. Each month, your take-home pay will be deposited in your Day-to-Day account. Then, you\u2019ll redirect some of it into your other accounts.<\/p>\n\n\n\n In general, aim to spend only 60 percent of your take-home pay on essentials, like bills, shelter, food, transportation, and insurance. This will leave you 40 percent to put toward other purposes.<\/p>\n\n\n\n Here\u2019s how it\u2019ll work\u2014each time you\u2019re paid, have your Day-to-Day account automatically direct:<\/p>\n\n\n\n You\u2019ll use your Treat account for treating yourself regularly to whatever you like to buy. Maybe it\u2019s pumpkin spice lattes, or new clothes.<\/p>\n\n\n\n Since it\u2019s a debit account, it comes with its own card. Write Treat on it with a Sharpie so that you can tell it apart from your Day-to-Day spending card. Once you\u2019ve used up your Treat dollars for the month, you\u2019re not allowed to dip into other accounts for that purpose. You\u2019ll have to wait until next month.<\/p>\n\n\n\n The money directed to your Happy account (a savings account) allows you to save for bigger expenses that you can\u2019t buy with one paycheck, like a vacation. In other words, you\u2019re saving to make a larger-than-normal purchase that brings happiness to your life.<\/p>\n\n\n\n Depending on what you\u2019re saving for, you may want to increase or decrease the percentage you direct toward this account. For example, if you\u2019re saving for a $1,200 plane ticket to Tokyo, and you want to buy it in three months, you\u2019ll need to put $400 dollars in your Happy account for three months to reach that goal. If you normally only put $300 per month toward this account, you\u2019ll have to modify your other monthly expenses. For example, you could divert a smaller portion of your take-home pay into your Treat account, putting the remainder in your Happy account instead.<\/p>\n\n\n\n You\u2019ll use the money in this account to deal with \u201cfinancial fires.\u201d Financial fires are anything you want to concentrate a good chunk of money on paying for, such as eliminating credit card debt<\/a> or student loans. It could also include larger expenses than you\u2019d normally save for in your Happy account, such as a downpayment on a home.<\/p>\n\n\n\n This category consists of your long-term savings: your money for your super, as well as any investments you own, like rental properties or shares. <\/p>\n\n\n\n Backstop is an account that holds money separately from the Blow and Grow category. It is both its own spending category (like Blow and Grow) as well as a separate bank account. Your Backstop money must be at another bank so it should feel mostly off-limits, unless you need it in an emergency, like getting laid off from your job.<\/p>\n\n\n\n \nTITLE: The Barefoot Investor In his book The<\/em> Total Money Makeover<\/em><\/a>, Dave Ramsey lays out a simple budgeting strategy that is intended for everyone\u2014from high earners to people with thousands of dollars in debt. He calls this strategy Dave Ramsey Zero Based Budget<\/a><\/em> (the template can be downloaded here<\/a>).<\/p>\n\n\n\n Here are the basic steps to get started:<\/p>\n\n\n\n \nTITLE: The Total Money Makeover<\/a> Joshua Fields Millburn<\/a> & Ryan Nicodemus<\/a> (Minimalism<\/em><\/a>) recommend establishing a written monthly budget, following a few guidelines:<\/p>\n\n\n\n \r\nTITLE: Minimalism For those who don\u2019t like extensive budgeting strategies such as the ones described above, Ramit Sethi (I Will Teach You to Be Rich<\/em><\/a>) recommends practicing mindful spending<\/a> <\/em>instead of budgeting. Budgeting involves tracking every dollar you spend, all the time. In contrast, spending mindfully automates this process\u2014you decide in advance what you want to spend in a given area, then set up your system to funnel that money to the right areas automatically. Once your system is up and running, you no longer have to worry about tracking where each dollar goes, and you\u2019ll only have to revisit the system about once a year to make sure it still aligns with your goals.<\/p>\n\n\n\n Spending mindfully is also not the same thing as just being \u201ccheap.\u201d Cheap people are so fixated on cost that they ignore value. They obsess over saving<\/a> money for its own sake, whereas mindful spenders recognize that money is just a tool that\u2019s meant to help you build a rich life. Plus, mindful spenders make money decisions that only affect themselves, whereas cheap people often save money at the expense of other people (like by shorting a waiter on a tip). <\/p>\n\n\n\n In practice, spending mindfully means planning your spending in advance<\/em>. <\/strong>That way, you\u2019ll not only be confident that you\u2019re contributing enough to your savings and investment goals, but you\u2019ll know that any money left over is yours to spend however you want\u2014with zero guilt. Spending mindfully lets you spend extravagantly on the things you love without worrying if you can really afford it (or judging yourself for not saving or investing that money instead). <\/p>\n\n\n\n This approach is all about using your money to create your <\/em>version of a rich life. For some people, that means going out four times a week; for others, it might mean having a fancy car, traveling often, or founding a nonprofit. Spending mindfully means making your money work for you and your specific goals. <\/p>\n\n\n\n This means that spending mindfully looks different for everyone. For example, Sethi has a friend who spends $21,000 per year partying\u2014but who also maxes out his 401(k) contribution, hits his investment goals, and saves money by living in a small, bare apartment and never taking vacations. His solid financial foundation means he can afford to spend extravagantly on what he truly loves, guilt-free, because he knows he\u2019s still being responsible with his money. <\/p>\n\n\n\n \nTITLE: I Will Teach You to Be Rich Budgeting is one of the most important financial habits<\/a> you can develop, especially in our culture of instant gratification<\/a>. Many people spend money to their heart\u2019s content, without much regard for how their purchases take them further and further away from their long-term security. If you\u2019re serious about taking control of your finances<\/a>, you must create a budgeting strategy determining where your money will go\u2014otherwise, it will just disappear without you thinking about it. <\/p>\n\n\n\n If you enjoyed our article about budgeting strategies, check out the following suggestions for further reading: <\/em><\/p>\n\n\n\n The Psychology of Money<\/em><\/strong><\/a><\/p>\n\n\n\n Most of us assume financial success<\/a> depends on education and intelligence. But in The Psychology of Money<\/em>, finance expert Morgan Housel presents an alternate hypothesis: The key to financial success lies in understanding human behavior<\/a>. Housel posits that when you understand how emotions and beliefs influence your financial decisions, you\u2019ll make better financial decisions.<\/p>\n\n\n\n1. The Barefoot Investor Bucket Strategy<\/strong><\/h3>\n\n\n\n
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The Blow Bucket (General Spending Money)<\/strong><\/h4>\n\n\n\n
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10 Percent: Treat Account<\/h5>\n\n\n\n
10 Percent: Happy Account<\/h5>\n\n\n\n
20 Percent: Fire Account<\/h5>\n\n\n\n
The Grow Bucket (Long-Term Savings)<\/strong><\/h4>\n\n\n\n
The Backstop Bucket (Emergencies)<\/strong><\/h4>\n\n\n\n
\nAUTHOR: Scott Pape
\nTIME: 25
\nREADS: 70.3
\nIMG_URL: https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2020\/11\/the-barefoot-investor-cover.png
\nBOOK_SUMMARYURL: the-barefoot-investor-summary-scott-pape
\nAMZN_ID: XYZ
\n<\/p>\n\n\n\n2. Dave Ramsey Zero Based Budget<\/strong><\/h3>\n\n\n\n
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\nAUTHOR: Dave Ramsey
\nTIME: 32
\nREADS: 111.9
\nIMG_URL: https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2020\/11\/the-total-money-makeover-cover.png
\nBOOK_SUMMARYURL: the-total-money-makeover-summary-dave-ramsey
\nAMZN_ID: XYZ
\n<\/p>\n\n\n\n3. Minimalist Budget<\/strong><\/h3>\n\n\n\n
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\r\nAUTHOR: Joshua Fields Millburn and Ryan Nicodemus
\r\nTIME: 25
\r\nREADS: 27.1
\r\nIMG_URL: https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2019\/07\/minimalism-cover.jpg
\r\nBOOK_SUMMARYURL: minimalism-summary-joshua-fields-millburn-ryan-nicodemus
\r\nAMZN_ID: B006I7DDPI
\r\n<\/p>\n\n\n\n4. Mindful Spending<\/strong><\/h3>\n\n\n\n
\nAUTHOR: Ramit Sethi
\nTIME: 66
\nREADS: 171.7
\nIMG_URL: https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2021\/05\/i-will-teach-you-to-be-rich-cover.png
\nBOOK_SUMMARYURL: i-will-teach-you-to-be-rich-summary-ramit-sethi
\nAMZN_ID: XYZ
\n<\/p>\n\n\n\nFinal Words<\/strong><\/h2>\n\n\n\n