Ever since I was a little kid, I’ve had an affinity for numbers. My father loves telling this story about how when I was seven, I corrected a guy’s math off the top of my head… of course, that correction worked against my father and cost him some amount of money. I love playing with numbers in spreadsheet programs and I even enjoy writing computer programs to manipulate numbers – after all, that’s what I did for a living for years and years.
At the same time, I know that there are a lot of people who don’t have that same affinity. Their gifts and talents lie elsewhere, and tables and rows of numbers don’t come easily to them.
The idea of a budget – one of those formalized budgets that you see in personal finance books – seems like torture. Rows and rows of numbers and calculations and estimations… for some people, that alone is more than enough to push them away from a valuable tool.
Here’s the thing, though: that’s really only one way to budget. There are other ways to organize your money and make sure that you come out on top without looking at lots of numbers. It’s inevitable that you’ll have to look at a few numbers, but nothing that exceeds what can be done on a piece of scratch paper.
Here are five methods for budgeting that don’t require tons of numbers to get you on top of your financial game… but, first, there are a few key principles to know that apply to all of these budgeting strategies.
All of these strategies have one big feature in common: they don’t require you to look at tons of numbers to get your finances in order. For some people, that can be invaluable. However, walking away from those numbers comes with some real challenges, challenges that are addressed by traditional budgeting but might be overlooked with these strategies.
So, here are four things that you should take to heart if you try out any of these budgeting methods.
First, don’t use credit cards until you can make these budgets work. Just don’t use them. The purpose of a budget is to make sure you’re living within your means and a full budget can do that quite well, but when you’re eliminating the numbers, you’re eliminating a few of the guardrails that can keep you from overusing a credit card. The best thing you can do is simply cut credit cards out of your life for a while until you’re really sure that you’re spending less than you earn on a month by month basis.
Second, budgeting requires time and patience, much like riding a bike. Your first attempt might not go all that well, but that doesn’t mean budgeting doesn’t work. It means that, just like when you were learning to ride a bicycle, you need to pick yourself up and try again.
Third, tracking your spending is incredibly useful, even if you’re not number-friendly. Simply looking back through all of your spending, even without adding up the numbers, can give you a real shock when you realize how you’ve spent so much of your money. It’s well worth it to spend some time every month going through your receipts, your bank statements, and your credit card statements to see all of the places where your money has gone.
Finally, there is no quick path to riches. It doesn’t exist. You’re not going to budget for three months and suddenly find that all of your financial problems have resolved themselves. What you will find, however, is that some of your problems have started to abate and that if you keep it up, they will eventually disappear. This isn’t a sprint – it’s a marathon.
Now, onward with the strategies.
Subtraction budgeting is probably the easiest form of budgeting that there is. It’s nothing more than a bit of addition and subtraction that you can do on a calculator on the back of an envelope, and in fact most people do some form of this already.
It’s easy. Just add up all of your bills in a given month. Then, take the amount you bring home and subtract from that the total of your bills and then subtract an additional amount for savings. The remaining amount is how much you can spend in a given month.
The “savings” part serves a few purposes. For one, it helps to cover you in the event of an emergency, like a car breakdown. It can also be used to cover irregular bills, like insurance. You’ll want to stick that “savings” part directly into your savings account.
But how much savings? One good way to do it is to save as much as you have to freely spend. So, if you have $400 left over after paying your bills, save $200 of it and use the remaining $200 to spend freely.
I suggest leaving the amount that you’re saving in your checking account and moving it over at the end of the month, simply as accidental overdraft protection. Just remember that you need to keep your balance above that amount.
When doing this, it’s important to remember all of your bills, including ones that are paid automatically. If you forget the automatic bills, you’re very likely to find yourself overdrafting.
This is so easy, anyone who can manage addition and subtraction on a calculator can do it. You’re just adding up numbers, then subtracting a few numbers, and that’s it. It tells you how much you have to spend.
One challenge that people sometimes have with budgeting is that the money isn’t directly in their hands. It’s abstracted, in the form of credit cards and checks and debit cards, so they can sometimes lose track of things and not truly grasp how much – or how little – they have available for spending. When that happens, it’s incredibly easy to make financial mistakes.
One great approach to solving this problem is to move to cash budgeting, which is sometimes also called envelope budgeting.
This one’s also very simple (which, I suppose, is the theme here). You just do all of your budgeting in cash, or as much of it as humanly possible. You cash your check, take it home, sort out all of the dollars and cents, and then directly use that cash for everything.
Yes, for bills, it’s easier to put it into your checking account and use online banking most of the time. However, for things like entertainment or groceries, cash is incredibly easy to use.
For the sake of convenience and for online purchasing, it can make sense to use some of the cash to fund a prepurchased credit card. That card can potentially be used to pay for small recurring bills like Netflix.
What’s the advantage of doing this? If you do budgeting this way, you see exactly where every single dollar goes. There’s no question about where your money is going because you see every dime and hold it in your hands.
Over the course of a pay period, you can literally watch your money deplete over time. The dollars and cents get spent on all kinds of things – food, household supplies, rent, utilities, entertainment (and probably more on entertainment than you realized), and on and on and on…
When you see the money going out like that, you often start to realize that maybe some of the things you’re spending money on aren’t the wisest of choices, which is the real benefit of budgeting.
This is a very clever simple budgeting technique, first introduced widely in the excellent personal finance book All Your Worth, written by Elizabeth Warren and Amelia Warren Tyagi.
The idea behind this kind of budgeting is to split all of your spending into three categories – needs, savings, and wants. Things that fall into the “needs” category include basic utilities, taxes, mortgage or rent, basic food, basic transportation, and insurance. “Wants” include things like entertainment (cable and Netflix, for example), additional food (like high quality stuff or eating out), extra rent or mortgage for a large home or apartment, extra costs for an expensive vehicle, and so on – in other words, anything that goes beyond covering your basic needs.
Proportional budgeting means that you split your money among these three categories in a very clear way. For example, you might want to spend 50% of your money on needs, 30% on wants, and 20% on savings – you could describe that as a 50/30/20 budget. On the other hand, maybe you’re well off and spend only 20% on need, 50% on wants, and 30% on savings – a 20/50/30 budget.
This type of budget gets right down to the crux of two important personal finance issues that people should address in their lives.
First, it helps people clarify the difference between needs and wants in their life. The truth is that even the most frugal people often spend a lot of their money on wants, even if they define them in their head as needs. Home internet access? It’s a want. Cable television? A want. A big house? Most of that is a want. A brand new car? Anything above a reliable late model used car is a want.
Because of that, it often helps people realize how large of a portion of their money is spent on fulfilling personal wants and keeping up appearances. It turns out that for most people a lot of their spending is devoted to things that really aren’t necessary in life. It’s spent on stuff that is there to make life more pleasurable and the truth is that none of that stuff is needed. For me, looking at things from this perspective became something of a call to get smarter with my spending and to spend less on fulfilling minor wants.
I ended up spending a lot of time thinking about how some of the things I spent my money on that would be qualified as a “want” was really important to me (like home internet access) and other things were not (like buying a Gatorade at the convenience store or buying golf clubs).
In the end, proportional budgeting is really most useful as an exercise to look at how you’re actually using your money. As you’re putting it together, you’ll really gain a great insight into where your money is going which sets up a great opportunity to reflect on those choices.
Two Bank Budgeting
“Two bank” budgeting is built around the concept of paying yourself first. In fact, that’s exactly what’s happening – you’re putting money in the bank for yourself before you do anything else with your money.
With this type of budgeting, you start by opening a checking account at a second bank. It’s in this account that your actual paycheck will be deposited in the future, so the next step is to instruct your workplace to deposit your check into this account rather than your normal one.
Once that’s in place, you instruct your new bank to automatically transfer money into your old account a few days after you’re paid. So, if you’re paid every two weeks on a Friday, set up an automatic transfer to occur the following Wednesday or so.
Here’s the trick – you don’t transfer the full amount of your paycheck. Instead, you just transfer most of it – maybe $100 less than your actual paycheck.
So, let’s look at a full example of this. You get paid $1,000 every two weeks. This money now goes into a checking account at a new bank. Then, a few days after that, $900 gets automatically transferred into your normal checking account. $100 remains behind in the new account each paycheck.
What happens next? You live off of the money in your normal checking account to cover the things you need and want in a given pay period. The money left behind in the other account stays there until you have an emergency or face a big expense. In other words, it serves as an emergency fund / car replacement fund / down payment fund … or whatever big purpose you might have for it.
Essentially, the purpose of all of this is to automatically enforce savings in a place where it’s not easily accessible. You can’t just go to your local bank or use your ordinary ATM card to tap this money – it’s at another bank, almost completely out of mind until you need it.
It also forces you to live on a little bit less money than before. This isn’t a bad thing; it simply requires you to chop off some of your least important expenses.
If you like this idea of automating your savings, you can take it to a grand scale and go with full automated budgeting.
To do this, you need a bank with a robust online banking system and, ideally, the ability to create “sub-accounts” to make things a little easier. Capital One 360 is a great example of this type of bank.
All you do with this kind of budgeting is set up every single bill to be paid automatically, so you don’t have to worry about it. You simply set up all of your bills to be paid automatically close to the due date, as well as set up savings transfers that happen automatically.
What about extra spending, or spending on things that have an uncertain amount, or spending that happens in stores? The best method for that money is to transfer it to a central checking account, out of which you only spend money on things like food and household supplies.
At this point, this is basically the kind of budgeting that we use for our family. Almost every bill is paid automatically, and money goes automatically into separate savings accounts for various specific goals (like our next car replacement cycle) and for our overall investments for financial independence. We also set money automatically aside for “free spending,” too.
Once you’ve got this set up, it’s about as easy as can be. For us, paying bills amounts to checking the account once a week or so to make sure everything is good or to transfer money from our “free spending” account into our main checking account.
The one big trick is that if a bill is suddenly larger than normal or someone makes some bad spending choices, this whole thing can go off the rails and you can start racking up some overdrafts. You have to have good control over your spending for this to work – and a good buffer in your checking account is a good idea, too.
Another strong idea here is to make sure you have sensible overdraft protection, ideally hooked up to a savings account with a healthy balance. That way, if you do make a mistake of some kind, it’s not going to impact you in a seriously negative way.
Each of these strategies has benefits and flaws. Some are very simple to calculate but don’t provide a whole lot of nuance or help in your day-to-day decision making. Others take a ton of up-front work but help a lot with day-to-day choices.
The overall point is this: budgeting doesn’t have to be a giant spreadsheet. It doesn’t have to be endless lines of numbers. It doesn’t have to be endless calculations.
In the end, a budget is merely a tool to help you to reach a point where you can easily spend less than you earn, start paying off your debts, and start saving. All of these approaches manage to do that without overwhelming you with numbers.
If a bunch of columns and rows overwhelm you, don’t worry. There are other approaches. Good luck.