Let’s talk budgets.
Hello Loves! I’m continuing the next part of the mini-series on how to implement my 5 tips on the path to creating better financial habits.
In my previous posts, I briefly mentioned creating a living breathing budget. I’ve even suggested to use Mint.com to create budgets. Now, let’s discuss the different types of budgeting methods that are out there.
When I started budgeting, it was a long drawn out ordeal. I would gather all of my bills, pull up all of my online statements and I would write all of my expenses on paper. It was so much work and took entirely too long. From the paper budgets, I upgraded to using Mint and now I create a personal budget using an excel spreadsheet (I know how old am I?). The one mistake I made in those situations is that I was budgeting bottom-up versus top-down. What the heck is bottom-up and top-down budgeting?
There are two approaches to budgeting. One is more common for the average American that is living paycheck to paycheck. The second is an approach used for more seasoned budgeters and/or for folks that have more income to play with.
Bottom-up Method: This is my least favorite method but it is probably the most popular method amongst the masses. The long and short of this budgeting method is to focused on spending habits and managing those. I’ve touched on this in my previous post. Describes using Mint for a month to understand your spending habits and budget for what you spend on a weekly or monthly basis.
Top-Down Method: The second method is top-down budgeting. Top-down approach encompasses the ‘pay yourself first’ model. Users will pick an amount or percent they want to save each month. For my personal savings goal is $500 – $1000 each month spread across my savings, IRA and ROTH accounts. This method is really for individuals that are more disciplined with saving and that are more geared to investments. This is ultimately, the approach good budgeters should use. Don’t worry with practice and planning, you will get to this point soon.
Ultimately, there are no issues with either approach to budgeting as long as the end goal is to save money and spend more wisely. Which budgeting type are you?
Here comes the exercise. I promised there would be exercises in this mini-series and I’m holding true to that. I want you to pick a savings goal for each paycheck or each month if you can’t save for both. It doesn’t have to be a crazy amount, if you can only afford to save $20 that is still better than no savings. Next, move that money into either a savings account or into an investing account as soon as you get paid. The remain balance of your paycheck is what you have left to budget with.
For example: If you are bringing home $2000 per month, and your savings goal is 5% of your paycheck each month that is a savings of $100 a month (2000 * .05 = 100). Which leaves $1900 for paying bills.
Before you pay anyone else, put that $100 into your savings. You should have already identified your spending habits and have created a budget for the month. Now all you have to do is pay yourself first, then follow the budget you have created. Try that for 3 months and see how you fare.
If at the end of the 3 months you were able to save and encountered no issues, increase your savings per month. If you find that this is stressing your budget. I suggest reviewing your budget again for expenses that could be reduced or eliminated. Making small sacrifices financially can make all the difference.