“A budget is telling your money where to go instead of wondering where it went.” — John C. Maxwell
After years of writing about money, I’ve spent the past year diving deeper into personal finance through one-on-one coaching sessions. These meetings have revealed a common trend: many people don’t know how much they’re earning or spending. Their finances feel like a mystery. Paychecks go into the bank, money is spent until it’s gone, and very few track their spending. The result? Planning becomes nearly impossible.
When I recommend budgeting, I often encounter resistance. Budgets have earned a bad reputation as restrictive and tedious. But here’s the truth: a good budget isn’t a burden—it’s a powerful tool to take control of your finances. When tailored to your lifestyle, a budget helps you achieve your goals faster and lets you spend money on what truly matters to you.
Why Do Budgets Fail?
Many people struggle with budgeting and give up, frustrated by the process. Common issues include:
- Overcomplication: Simpler budgets are often more effective.
- Lack of Personalization: Budgets need to align with your values and goals.
- Unrealistic Expectations: Budgets should reflect your actual income and spending habits, not an idealized version of yourself.
- Tedious Systems: If budgeting feels like a chore, it’s unlikely to stick.
To succeed, a budget must be simple, reflect your reality and aspirations, and be easy to use.
Building a Budget That Works
When starting to budget, many people create overly detailed plans that become hard to follow. Instead, successful budgets tend to be straightforward. Below are three popular budget frameworks that balance simplicity and effectiveness.
1. The 60% Solution
Originally proposed by Richard Jenkins at MSN Money, the 60% Solution simplifies budgeting into manageable categories:
- 60%: Committed Expenses (taxes, living costs, insurance, charity, regular bills).
- 10%: Retirement savings.
- 10%: Irregular Expenses (vacations, major repairs, new appliances).
- 10%: Long-Term Savings/Debt (big purchases or debt repayment).
- 10%: Fun Money (dining out, hobbies, indulgences).
Jenkins emphasizes keeping Committed Expenses under control to reduce stress. By keeping these costs below 60% of your income, you free up money for savings and fun.
2. The Balanced Money Formula
From the book All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Tyagi, this framework divides your net (after-tax) income into three categories:
- 50% Needs: Housing, transportation, groceries, insurance, and essential clothing.
- 20% Savings: Includes debt repayment and retirement contributions.
- 30% Wants: Non-essentials like dining out, entertainment, and hobbies.
The authors stress that spending more than 50% of your income on Needs can lead to financial imbalance. Keeping these expenses low allows you to save more and enjoy life without financial stress.
3. Andrew Tobias’ Simple Rule
In The Only Investment Guide You’ll Ever Need, Tobias offers a minimalist approach:
- Destroy all credit cards.
- Invest 20% of everything you earn and don’t touch it.
- Live on the remaining 80%.
Though simple, this framework works for those who thrive on discipline and minimal complexity.
Choosing the Right Budget for You
Budgeting isn’t one-size-fits-all. The right system depends on your financial situation and personal preferences. Remember, the goal is to make your budget work for you, not the other way around. Start with a framework that feels manageable, and adjust it as needed.
If you’re new to budgeting, try tracking your spending for a month to understand where your money goes. Use this information to create a plan that prioritizes your values and financial goals.
By embracing a budgeting method that suits your lifestyle, you can transform your finances and enjoy greater control over your money. With time, you may even find that budgeting becomes second nature—a powerful tool that empowers you to build the life you want.
Automating Your Budget: A Practical Guide
Budget frameworks are great for seeing the big picture of your finances, but they’re not much help without a system to put them into action. A successful budget requires tools and habits that make the process efficient and sustainable.
Back in the 1970s, my parents often attempted to budget. They’d sit at the kitchen table, painstakingly creating a plan in a spiral notebook. Mom tracked expenses for a few weeks but eventually abandoned the effort—it was too time-consuming and frustrating. Fast forward to today, and technology has made budgeting far easier and less labor-intensive.
Using Tools to Simplify Budgeting
Nowadays, apps and software can streamline your budgeting efforts. Popular tools like Personal Capital are excellent for tracking spending, although tracking alone isn’t the same as budgeting. If you’re not monitoring your expenses, you can’t tell if you’re sticking to your budget.
For a more focused approach, many people swear by You Need a Budget (YNAB). Designed specifically for budgeting, YNAB helps you allocate every dollar and adjust your plan as needed. While there’s a small subscription fee, the value it provides often outweighs the cost.
Other options include standalone software like Quicken or creating personalized spreadsheets, which give you complete control. While spreadsheets require manual input and a bit of tech-savviness, they allow you to tailor your budget precisely to your needs. Ultimately, the best tool is the one you’ll actually use. Experiment to find what works best for your financial situation and goals.
The Envelope Budgeting System
For those who prefer a tangible, hands-on approach, envelope budgeting is a tried-and-true method. It’s simple and can complement any budget framework, from the 50/30/20 rule to more complex systems.
Here’s how envelope budgeting works:
- Categorize Expenses: Create envelopes for each spending category, such as groceries, utilities, or dining out.
- Allocate Cash: Withdraw money based on your budget and place the allotted amount in each envelope. For example, if you’ve budgeted $200 for groceries, put that cash in the “Groceries” envelope.
- Track Spending: Use cash from the appropriate envelope for purchases, noting amounts on the envelope to keep track of what’s left.
- Stick to Limits: When an envelope runs out, stop spending in that category. You can either wait until the next budgeting period or reallocate funds from another envelope, depending on your financial discipline.
- Handle Surpluses Wisely: At the end of the month, decide what to do with leftover cash. You might roll it over to the next month or put it toward savings or debt repayment.
For those who don’t want to carry physical cash, you can simulate this system using spreadsheets or apps like YNAB. This method works well because it makes spending real and tangible, helping you stay mindful of your budget.
Four Key Rules for Better Budgeting
Regardless of which system you choose, keeping a budget is easier if you follow these four principles:
- Perfection Isn’t Required: A budget is a guide, not a strict mandate. Your first few months may be messy—learn and adjust as needed.
- Focus on the Big Expenses: Saving money on small items is helpful, but cutting down major costs like housing or transportation has a much greater impact.
- Base Your Budget on Reality: Plan for your actual spending habits and income, not what you wish they were. Be honest with yourself.
- Keep It Simple: The more complicated your system, the harder it is to stick with. Find a balance between detail and usability.
Annual Budgets: A Broader Perspective
Many people focus on monthly budgets, but annual budgeting offers a clearer picture of overall spending. Research has shown that people are better at estimating yearly expenses than monthly ones. Why? Annual budgets force you to think about irregular costs, like holiday gifts or vacation expenses, that might slip through the cracks in a monthly plan.
To combine the benefits of both approaches:
- Create an annual budget to account for all expenses, including one-time and seasonal costs.
- Divide each category by 12 to arrive at monthly spending targets.
This method provides both a detailed overview and actionable monthly guidelines.
Final Thoughts
Budgeting doesn’t have to be overwhelming. Whether you rely on apps, spreadsheets, or the envelope system, the key is to find a method that fits your lifestyle and goals. Stick to the process, make adjustments as needed, and remember that progress matters more than perfection. Over time, you’ll find that budgeting becomes less of a chore and more of a tool to help you achieve financial freedom.
Budgeting Sets You Free
For many folks, “budget” is a four-letter word. Not for money bosses. A money boss views a budget as a useful tool with which she can help build the life she wants. At the same time, she knows that a budget isn’t fixed in stone. It’s always a work in progress.
When you use a budget, even one as simple as the Balanced Money Formula, you need to make constant adjustments. But once you get the most important expenses figured out (your Committed Expenses or Needs), you usually don’t have to worry about them much. Your housing payment doesn’t fluctuate from month to month, for instance. Your insurance premiums stay pretty constant. The same is true for your Savings. Once you get used to saving a certain amount, that becomes a habit.
Your goal, then, is to trim your Needs and boost your Savings until they’re both at respectable, sustainable levels. If you can keep these two broad categories where they should be, you can spend everything else on Wants.
Spending on fun stuff is less stressful when you know you can afford it. Budgeting isn’t a straitjacket. Budgeting sets you free.
Remember: If one budget doesn’t work, try another. Don’t just blindly use a budget from somebody else — even Dave Ramsey or Suze Orman. Use their ideas as a starting point, but tailor them so that your budget fits your life.