General Topic: > Smart Spending

Summary: You need a budget. Pick one of these three budget systems to take control of your money. (Tweet This!)

It's almost impossible to make money without being on some kind of budget. While some people think budgets are sexy, I think they can be a lot of work.

Here I cover three different types of budgets systems. We'll cover the pros and cons, which may help you pick the right system for you.

Budget System #1. Meticulously Keeping Track

There are a lot of systems that are quite tedious. Some of them require a lot of time tracking with a pen and paper or an Excel spreadsheet.

There is also an Envelope System where people put cash in envelopes at the beginning of the month and use it to pay their bills. They are forced not to go over budget because there's no money left in the envelope.

For beginners or those in debt, keeping track of every expense can be critical to their financial success.

budget system boy

Budget System #2. Reviewing in Retrospect Using Software

I use credit cards to make all my purchases. This allows me to earn rewards and cash back on almost everything I buy. It adds up! I pay them off in full every month using their "autopay" option. I never have to remember to write a check and I don't have to buy and stamps.

Using credit cards also gives me an unexpected benefit. I can use tools like Personal Capital or <a href="https://www.mint.com/>Mint to review the previous month's spending in various categorizes.

It doesn't prevent me from over-spending at restaurants like the envelope system, but I can review my spending at the end of the month and correct my mistakes next month.

This is great because all the organization is done for you. Instead of spending hours meticulously document each item you spent money on, you can spend a half hour at the end of the month and learn a lot.

Budget System #3. Don't Budget at All

I'm borrowing this from Mr. Money Mustache who "make(s) spending decisions based on [his family's] values." He does this by asking the following questions:

  1. Will buying this really improve my overall lifetime happiness?
  2. Is there another, more efficient way to meet this same need?
  3. Can the same benefit be had if I delay the purchase?

I use a similar set of guidelines, but I'm a little more "loose" with my spending. If the product is low-priced and just a one-time buy, I try not to get too bogged on the process. The questions are in the back of my head, but I rely on my instincts and trust that my frugal habits will make the right decision.

When things are more expensive or the kind of thing that I'm going to buy over and over again, I spend more time thinking about the purchase. The more expensive something is the more I think about it. I might put an hour into deciding whether a year of Amazon Prime is worth it. At the high end, I'm going to put in several weeks of research before deciding on a car to buy.

In either of cases, I'm going to ask myself similar to questions like Mr. Money Mustache. However, instead of asking if something is really going to improve my overall lifetime happiness, I instead think about whether the purchase is going to reduce stress in my life. It may lead to the same answers for most people, but I feel like being more specific helps me on many purchases.

Conclusion and Further Reading

I can't tell you which budgeting system is right for you. For people who have difficulty with debt, it makes sense to meticulously track your budget. However, I recommend everyone strive to discipline themselves to manage their expenses with the second and third methods.

My feeling is that if I can get 80% of the value for 20% of the work (see Parento Principle) that's the way to go. In this case, I feel like I get 95% of the benefit with 5% of the work. That saves me time for other activities.

If you really just don't know where to start here are a couple of highly rated budgeting books.

  • The Budget Kit - 70 people collectively give this book 4.3 stars on Amazon. Spending under $20 could save you thousands.
  • The One Week Budget - 164 people collective give this 4.7 stars on Amazon. It seems like a great deal to get the Kindle version at a little more than $6.
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Budget, Money / Personal Finance, Smart Spending

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