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Back to Basics: Budgeting

Back to Basics: Budgeting

| January 26, 2016

“We must consult our means rather than our wishes.” 
― George Washington

According to a 2012 study held by the National Association of Personal Financial Advisors, 56% of adults lack a budget. This means that half of the people visiting my blog post do not budget their money. You might be thinking to yourself that you might not need a budget because your account is never in the red or you always have money left over at the end of the month. Even if you fall into one of these categories, you might be shocked to find out where your money actually goes.

I am surprised how often I hear from people of all ages that they were not taught how to budget. My generation gripes all the time how “Personal Finance 101” is not taught in school. We are left to figure it out on our own and unsure where to seek assistance.

In my prior employment, I counseled and educated people on their finances. Sometimes it was a “Personal Finance 101” discussion, how to tackle debt or retirement planning. However, the most common topic discussed was how to budget. Talking to the multitude of people during my time there, I learned that one method of budgeting will not suffice for everyone. I have spent hours trying different methods for myself and others. I have narrowed the alternatives down to the ones I find below to be most effective.


Using a simplified spreadsheet on a computer program such as Microsoft Excel is one I find to be the easiest and least complicated. Most of all it forces you to manually input the data, which means your budget will only work when you are updating the numbers on your spreadsheet. This way you are tracking exactly what you are spending. How can you live by a budget if are not paying attention to where your money is coming and going?

Envelope Method

I once heard another finance professional say, “Give every dollar a job.” That is what the envelope method does. Instead of using a debit/credit card to pay for everything, you withdraw the physical cash you plan to live on. Then, you divide the cash into various envelopes that are designated for certain expenditures such as groceries, gasoline, entertainment, and so forth. Once there is no cash left in the envelope, you are done spending in that category for the month. This forces you not only to spend those dollars wisely, but also to avoid swiping your credit card unconscientiously.

50/30/20 Method:

When conversing about budgeting with clients, many say they are unsure how they should be allocating their income for each expense. The 50/30/20 method does just this. It says 50% of your income should be going towards your living expenses. This includes mortgage/rent, car payments, utilities, loan payments, food, and all other necessary items in order to survive. The next 30% should go towards discretionary spending such as entertainment, hobbies, and vacations. The last 20% should be going towards savings or if applicable, additional amounts to be paid towards your debt.

Any Computer Software or Phone App

There are many computer programs, websites and phone apps that basically do the budgeting for you. I like these only for the reason that they can automatically take information from your bank account and download it into the program. Many will have the capability detecting what budget category a bank transaction should fall under. They can give you graphs of your spending and show you how much you spend on each category monthly, which helps to see what your spending habits are. Two issues: first, the transaction may go into the wrong category; and second, it does not force you to actually track what you’re spending. This is the lazy way of budgeting and in a sense not very effective. This might work for someone who is not in the red at the end of month, but curious about their spending habits.

The various budget methods are all very different from each other, but all have the same goal in mind: staying within your means and making better decisions about spending. I find myself questioning if I really need to buy that $5 latte from Starbucks or another pair of shoes. Luckily I can look at my budget and see if this is a viable purchase or if I should wait to buy those shoes next month when they go on sale. I think we both know what the answer should be.

If you know of a friend or family member who is need of some budget counseling, please feel free to contact me at 312-923-8700. A budget is the foundation of a sound financial future. 


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.