What is the number one way to generate wealth?
If you answered, “saving your money and investing it wisely” then you would be correct. Winning the lottery would also be an acceptable answer, but that is unlikely to happen. Many of us struggle saving money because our paycheck comes in each month and at the end of the month there is no more money!
So how do we break this arduous cycle of spend, spend, spend?
Simple – a personal budget.
The word budget is everyone’s favorite six-letter word.
If you are you in debt – you need a personal budget.
Maybe you want to invest and you don’t know where to start… Start with a budget.
My husband and I were able to pay off $97,000 in debt once we got our spending under control… How did we do that? Personal Budgeting.
What’s the Main Reason to Use a Personal Budget?
Budgeting is your playbook for your finances. Without a solid, well-thought-out playbook, you will continue to spin your wheels when it comes to finances. Budgeting not only includes ear-marking money to your monthly bills and debt – budgeting includes setting aside money for your investments.
So what is the most effective way to budget?
Before you read this article, here’s a video I thought you might like:
Budgeting Methods to Help You Create Wealth in 2024
1. 50-20-30 Rule
I saw an article on Forbes discussing the 50-20-30 rule that explains the methodology pretty well.
The 50-20-30 rule is pretty simple: 50% of your income should go toward living expenses and essentials; 20% should go toward debt elimination and savings/investments; 30% should go toward flexible spending like vacations.
30% of flexible spending seems like a pretty loose amount of flexible spending… At least to me. If you were to flip-flop debt reduction/savings with flexible spending, what could that mean?
Well, let’s look at a simple example of a family that makes $100,000 per year. Saving 20% vs 30% after working for 30 years with an 8% return:
How would you like an extra $1.1 million by making a pretty small change? I think I’d like that, and I’m sure you would like that too.
Here is a link to an article on Learnvest that provides a few examples for implementing the 50-20-30 rule if you want to dig into this deeper.
Next, I’ll dig into some other personal budgeting recommendations.
2. Personal Budget on an Envelope Method
The envelope method is exactly what it sounds like. You allocate cash for each budget item you have every month into different envelopes. Different personal budget items may include groceries, going out to eat, and entertainment.
When you run out of money for a particular budget, that is all you can spend until next month. You should not transfer money between the different envelopes – that kind of defeats the purpose of this budgeting method.
If you plan to use this budgeting method, this is how I would set it up:
- I would set up automatic electronic payments for all of my bills. Hopefully, your savings are automated too. For example, my 401(k), Roth IRA, a taxable account and HSA contributions come out each month directly from my paycheck. If you are still tackling debt and not saving too much right now, then you can skip this step.
- I also set up each of my payments to happen on the first day of the month. This way I know the amount of extra money I will have early in the month.
- If you structure your budget the same way, you will have a remaining balance each month that you can use for the rest of your budget items. Simply go to the bank or ATM and withdraw the amount you need for each budget item.
- Hopefully, you still have some money left over that you can transfer into savings!
There… Simply and easy.
I would recommend this method to anyone that is really struggling with budgeting. The only way you can mess up this budget it by running to the bank or ATM. I would bet that if you burn through all of your cash and make a run to the bank, your conscious will make you feel extra guilty for breaking your budget!
3. Online Tools to Aid in The Personal Budget Process
Online tools can help you automatically track your budgets. Tools like Mint, Personal Capital, and YNAB (you need a budget), enable you to set your budgets and link your bank accounts so your budgets get tracked automatically.
I’ve been using Mint for about six years and I started using Personal Capital about nine months ago. I’ve researched YNAB a little, and I’ve heard good things about it. But I have not used YNAB myself because I do want to pay for a budgeting app.
3 Online Personal Budgeting Tools
You Need a Personal Budget
YNAB is a budgeting tool that enables you to tie your bank accounts into a single place that tracks your spending. You can set goals, budgets and ultimately track your performance real-time with YNAB.
Like I mentioned earlier, I do not have first-hand experience with YNAB. Therefore, my review is going to be short and sweet… Check it out. If it looks like it will work for you YNAB offers a free 34-day trial. I know, 34 days is an odd number, but I’m sure they have a reason for offering their product free for 34 days.
Personal Capital
I’ve been using Personal Capital for about nine months. Personal Capital is differentiated from Mint or YNAB because of its advanced investment analysis tools. Almost every Personal Finance (PF) blog that I read recommends Personal Capital and it isn’t due to their nice commission payout that those PF blogs receive for every sign up they get.
The product works well for tracking balances in your bank accounts and investment accounts. Not too many people talk about the budgeting tool that Personal Capital has. But I have to admit that I really like it. Here are a few reasons why:
- It is simple to set up different budget groups.
- Personal Capital sends emails each week on your spending performance and compares it to the previous week. I really like this feature because I am a competitive guy… Each week I try to spend less than the previous week. Unfortunately, I haven’t been doing so hot.
- The application creates nice charts that help you understand where your money is going (from a graphical standpoint).
The investment analysis is awesome. I love being able to quickly see how my investments are performing. Much like the weekly snapshot I receive for budgeting, the same is true for my investments. I get a weekly snapshot of how my holding’s performed AND Personal Capital benchmark’s my portfolio against the S&P500 and other well-known indexes.
I highly recommend Personal Capital and it is FREE!
Mint
I use Mint, and for the most part, I like it. I’ve been using Mint a number of years for budgeting.
I like how you can create personal budgets and track all of your expenses in one spot. Mint creates fancy looking pie graphs or bar charts so you can dig into your spending. You can even compare your spending month over month or year on year.
Another nice feature of Mint is that you can track your investment accounts… Tracking your investments in Mint doesn’t have all of the tools that Personal Capital does.
I’ve found myself logging into my Mint account less and less and logging into my Personal Capital account more.
4. Creating a Personal Budget in Excel or Google Sheets
This method has been my go-to method because it requires you to be involved. Using Excel or Google Sheets requires more time and energy compared to some of the online tools or other “set it and forget it” methods.
Using a method like this requires you to be more accountable. When my family first started working on our budget, I would get a manual download of all our expenses. I would format the download into a .csv file that I could import into Excel.
Next, I would go through line item by line item and build my own categories and assign each expense to a specific category.
This was eye-opening.
Using a Google Sheets personal budget template (or a personal budget spreadsheet in Excel) method was when I first realized our food budget – including going out to eat and groceries – was pretty out of whack…
5. Pen and Paper
I was hanging out with some family the other week and the topic of children not being taught cursive in school was brought up… I’m not sure if this is a big deal or not. But it got me thinking about the good ol’ pen and paper budget. I had a checkbook for a short period of time and it is an efficient and easy way to track your money.
Who would have thought that writing down each transaction and subtracting it from a given starting balance would be so effective! I only used a checkbook until I was about 22 years-old (I’m thirty years old now). I had to write a check once in a great while between age 22 and now, but I don’t worry about balancing my checkbook anymore.
However, it got me thinking that using a checkbook keeps you 100% accountable to track your expenses. So why don’t we use this method anymore?
The credit card companies won. They made, and still make, a great deal of money off of consumers that do not pay their credit card bill in full each month. A good chunk of the interest that credit card companies collect goes right back into their marketing fund so they can find more people to take out credit cards.
Writing checks isn’t the only way to use the pen and paper method. You could save all of your receipts and manually add up how much you are spending.
11 Common Personal Budget Categories
- Housing (for most people, this is usually their highest expenditure)
- Food
- Transportation (bus, gas for car, car insurance expenses)
- Medical and other health-related expenses
- Investing and Saving – don’t forget this one!
- Insurance
- Utilities
- Clothes
- Personal Spending
- Recreation (you can always see a great movie)
- Discretionary budgeting items (things like boats, boat expenses)
Conclusion
If you are struggling with your budget, you can always hire a personal budget coach or look for personal budget consulting services!
I hope one of these five budgeting methods appeals to you so you can get started kicking your budget in the rear! Any budget is better than no budget.
Good luck with your wealth-creating journey.
If you enjoyed this post, you might also enjoy this one: How Much Money Do You Need To Never Have To Work Again? Let’s Do The Math.
And this one: Roth Conversion Ladder and SEPP: How to Access Your Retirement Accounts in Early Retirement
And this one: How Do You Know When It’s Time to Sell Your Business? It’s Not All About the Money.
You should also consider subscribing to my blog. I publish one article a week on small business and wealth creation. You can subscribe here.
Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.
