Budgeting: Does One Size Fit All?

[Chett]

I was recently asked to speak to a group of women on the topic of budgeting. The person organizing the event asked me to outline the best way for people to budget and make sense of their personal finances. As I got off of the phone and began to think of how I could present this topic I realized there is no way I can approach this topic with a one answer solution.

For example, what if some one asked you, "What is the best way to lose weight?" Do you think the answers would vary according to the person you asked? More importantly do you think the strategies and methods of dieting would depend on the person who was going on the diet? For every person who finds a diet that works, they've tried many more that have NOT.

Budgeting is no different. It is simply the practice of putting your finances on a diet and figuring out which one works best for you. Each person is different and there is no one answer that applies to everyone.

My wife and I tried the traditional budget for years. You know, listing your expenses in one column, subtracting it from your income and then blowing the rest. We didn't do a good job of sticking to our flexible expenses (groceries, gas, and entertainment) and we didn't project our budget very well, too often letting "unexpected" expenses derail our plans and send us back to the credit cards. Every failure seemed to further validate we were stuck and there was really no point in trying to get on track. I know from my days of trying to lose weight the feeling is very similar.

After life pressed us into a corner (we call it life, others might call it stupid decisions) we finally found a budget that would work. In fact it wasn't a budget as much as it was a spending plan.

This method allowed us to plan our month before it began. We spent every dollar on paper and thought of every conceivable expense, including birthdays, anniversaries, and holidays for the coming months. If the expense wasn't planned, chances are we weren't spending money on it. This was our version of extreme budgeting, but our life and financial situation demanded we live this way.

As we paid our way out of debt we began to realize this type of budgeting wasn't sustainable for us. It was great for getting out of debt, but we wanted to have a little more freedom in our spending, now that we pulled ourselves out of the hole we dug. We began by setting short term and long term financial goals that were attainable based on our income and discretionary income. We still planned out all of our fixed expenses, we simply began to budget money for enjoyable events and personal desires, like an addition to our home.

Now five years after we finally got a handle on budgeting we have moved to a more automated or painless system of budgeting. First we began by a process I call "Batching our Bills" This allows us to pay all of our expenses in a five day window so we can get a clear picture of how much money we have left each month. After our expenses are paid we use a system called the Balanced Money Formula. The principle here is that you designate a percentage of your income to meet 3 areas: Savings, Wants, and Needs.

We have automated this entire process through online banking, investing, and bill paying. Now the day we are paid 20% of our income goes towards savings and investing (actually a little more than 20%) 50% is set aside for our "Needs" bills, and the other 30% remains in our account to spend as we see fit for the rest of the month. This budget has given us the flexibility we need to enjoy the money we make, while providing the structure and security that a typical budget can provide.

While the last budget mentioned works best for us at this point in our lives, I don't recommend it for everyone. It does take a lot of awareness of where you are financially, and an established emergency fund. My point in this post is there are no "One Size Fits All" budgets. They will differ by person, or couple and they are not static, rather very dynamic. Budgets change as your life changes. The first key is knowing yourself and what has worked for you in the past and what hasn't.

What type of budget are you using now and how long have you used it? Have you found your budgeting, or methods of tracking and managing money have changed over time, or have you found something that has stood the test of time and temptation?