The Quest for the Best Budget

We can do two things with our money: spend it or save it. (Actually, there are other possibilities — eating it! smoking it! — but we'll limit our discussion to what sane people do.) For most people, spending is in the driver's seat, getting the largest chunk of monthly cash flow and — let's be honest — a lot more fun. Yet we all know that we should be saving money, and that a good deal of our spending is the financial equivalent of eating a Twinkie: It provides a short burst of pleasure, but no lasting value. In fact, it can undermine future well-being (and possibly make us fat).

Many financial planners suggest that the first step toward reaching a spending-saving détente is analyzing your spending and creating a budget. But there are few problems with traditional budgeting:

  • It's difficult to monitor every specific category — e.g., utilities, food, clothing, entertainment — and make sure you're spending just so much and no more.
  • It can be time-consuming and tiresome.
  • It focuses more on spending — and often the restraint of spending, which can feel like a straitjacket — while saving can seem like an afterthought.

I myself have found budgeting more difficult as my family has grown and my life and finances have become more complicated. So after a good deal of thought and research, the Brokamp family is flipping the process around. Rather than seeing how much we spend and then saving the rest, we're determining how much we need to save, and then spending the rest — what I'm calling “goals-based budgeting.”

The benefits:

  • It doesn't require that you track every penny (though it does require regular monitoring and calculating).
  • It doesn't require that you remember how much you're allowed to spend on each category. Rather, you just keep tabs on one important number — how much you have in the bank — and adjust spending accordingly.
  • Money is kept in separate accounts and labeled with specific purposes.
  • For those who find spending difficult (yes, such people exist), this provides peace of mind that important goals are being funded, so it's okay to enjoy something now.

Sound good? Here's how to do it.

Step One: Figure Out How Much to Save
Goals-based budgeting begins with — surprise! — your goals. Once you've identified them, you have to figure out how much they'll cost, and how much you need to save on a regular basis to achieve them. Those topics require some soul-searching and number-crunching that deserve more than a passing mention. But in this article, mention them passingly I will, and point you to other articles, such as The Best Ways to Boost Your Retirement and How Much Should You Save for Retirement?, as well as some Foolish online calculators.

Step Two: Square Up What's Left Over
Now you need to make sure your savings calculation is compatible with your expenditures. This is where having a record of past spending comes in handy (nay, necessary). If you figure you'll have to save 40% of your income to meet your goals, yet you spend 80% of your paycheck, you'll have to adjust spending, goals, or both.

Step Three: Put It All on Autopilot
One article I came across while searching for a better budget was “To ‘B' or Not to ‘B'” on the website of Certified Financial Planner Sherrill St. Germain, a fee-only advisor in Nashua, N.H., and a member of the Garrett Planning Network. She calls her method “reverse budgeting,” and it starts with automatic transfers of money to several accounts. This includes her Roth 401(k) and health savings account, but also separate savings accounts with specific names, such as:

  • “Emergency Fund”
  • “Taxes” (which, as a self-employed person, she must pay quarterly)
  • “Maui” (her vacation)
  • And, possibly coming soon, “Mountain Bike”

Her online bank, ING Direct, allows her to maintain and label separate accounts (as do several other banks).

Note: J.D. is a huge fan of targeted saving. Here's his article on how to open multiple accounts at ING Direct.

 

That takes care of the goals. For the spending part, St. Germain recommends an annual analysis of expenditures. Based on that analysis, have a certain amount transferred to your checking account each month to cover living expenses. This is the one number you have to keep an eye on as the month progresses, and will help you decide if you should purchase that pair of shoes or spiffy gadget. On the other hand, if it looks like you're on track, you can spend guilt-free. Also, if you tend to have big-ticket items that show up annually rather than monthly — such as life insurance premiums or holiday gift giving — consider having a separate savings account for those.

Step Four: Monitor Regularly, Tweak as Necessary
This system requires that you check your monthly expenses account once or twice a week to make sure you're not running out of money before you've run out of month. As St. Germain wrote:

If that account dips below its predefined acceptable level, that's a red flag that something's not going according to plan. Could be overspending, could be under budgeting. Either way, it's time to dig into the details, figure out what's going on…

The monitoring of your goals doesn't have to happen as often — maybe once a year — but it too is a crucial step in making sure you'll have enough money when you need it.

In the End, Do What Works for You
Having a plan for every dollar is probably the ideal from a financial perspective. But we know that system doesn't always work for most people. A goals-based budget is another way to approach the process, and at this point it's a work in progress (feel free to suggest your own budgeting tips in the comments below). But the best budget is the one that is adjusted for your situation, habits, and tolerance for looking at little numbers.

More about...Budgeting

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
38 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Derek
Derek
9 years ago

Excellent article! The most important part of every budget is to have something left over for savings and investing, so why not budget that portion out first? Many banks can do this automatically as well, making it very easy to sock that money away in the savings account. My wife and I very much enjoy this method of saving. When we waited until the end of the month to see what our savings amount was, it often varied and was very inconsistent, but when it is taken out in the very beginning of the month, what do you know it’s… Read more »

Brad@cashnovella.com
9 years ago

The best advice I ever received regarding a budget was putting as much as possible on autopilot. From direct deposit to auto transfer to savings.

Jacq @ Single Mom Rich Mom
Jacq @ Single Mom Rich Mom
9 years ago

I’ve used this method for the last 9 years or so and it’s worked for me. Initially, I started just taking 20% off the top and as my income grew, I got to the point of living on one paycheck and saving the other. The big annual expenses like car insurance and holidays just came out of the hard to access savings account though. When I got a bonus or any kind of “extra” money, that went into savings too. It’s like living paycheck to paycheck (like we used to do before we got credit cards) only with savings built… Read more »

Kestra
Kestra
9 years ago

If only I knew how much I need to save. Since one of my biggest priorities is financial independence I try to save as much as possible. But what if I die young? What if I get way more government pension than I’m planning for? (I’m not really planning for any). Who knows? The only not-very-good solution I have is to buy things when I really really want them. And otherwise save as much as possible.

Tara
Tara
9 years ago

My favourite part of this article was the last sentence: “But the best budget is the one that is adjusted for your situation, habits, and tolerance for looking at little numbers.” I think this is what a lot of people miss, including PF bloggers. What is important is that people have a spending plan, NOT that they follow the spending plans that the bloggers set up. I personally aim for a budget that reasonably accurately models my natural spending behaviour (staying far within my means), while still also allowing for amounts to save – I mostly use a budget so… Read more »

Nicole
Nicole
9 years ago

Yeah, that’s what we do. Save first. Liz Pulliam Weston has a great article about when budgeting to the penny is appropriate and when it isn’t necessary. We have enough slack right now that the no-budget save-first plan works very well for us. When we had less money we did need to track every penny.

Sam
Sam
9 years ago

While I have it as a goal to move to a more precise budget, I really prefer our current system of a spending plan. We pay out our regular bills, we allocate money to savings (short, mid and long term targeted savings) and then we each get the same allowance for day to day spending for half the month. Allowance covers things like eating out, entertainment, gas, clothes, gifts (except not holiday gifts), grocery, personal care, dry cleaning. The allowance system works pretty well for us in that we each get spend on what is the priority for us during… Read more »

Wayne Mates
Wayne Mates
9 years ago

We have been using these principles for years and it works. Money comes right off the top into savings and investments. We don’t even know it’s missing. We know roughly how much gets spent each month on a variety of living expenses so it works well without a detailed budget.

We have also found that using this method, we are still able at the end of the month sweep extra cash out of the checking account and put it into savings.

HollyP
HollyP
9 years ago

It really depends on where you are in your financial life, and what your needs are. I used this type of financial plannign successfully for years. We had enough, and as long as the Family P kept lifestyle inflation in check it was no problem. We recently had to go back to the track the pennies method due to a significant reduction in income while MrP goes back to school. It is more important now to know whether we are keeping in line with the controlled spend-down of our savings so that we’ll still have enough by the time MrP… Read more »

April W.
April W.
9 years ago

After years of never having any money left to save after bills and spending, I changed my method to putting aside savings first. It made a huge difference. I still haven’t perfected the budget for us, but it works for the most part. Savings first, bills second, spending last.

CH
CH
9 years ago

While I like on-line banking, there are some problems that remain and could make this very difficult for people. Specifically, the lack of a physical branch to go and have problems resolved resulted in me being barred from my emergency fund account for six months. In my case, someone in a federal or state identity database (I have still not been told what database it is to get the problem fixed) entered my name and address incorrectly. When ING went to verify this caused my account to be flagged a few months after I had started putting money into the… Read more »

Stephanie
Stephanie
9 years ago

I think this is a great option. I am getting married soon and trying to determine a budget that my future husband will be on board with. This would allow for all of our saving needs to be met without me pulling my hair. Thanks, this is a great article!

Daniel
Daniel
9 years ago

We do this and slowly up our contributions to savings. This is sort of the opposite of lifestyle inflation, call it lifestyle deflation. We push saving until our ‘daily’ account decrease month over month and then back it off a bit.

Regarding use of online banking, we do this, but we have multiple accounts set up. We have a traditional bank account that transfers to an ING account so that our emergency fund and money used for monthly expenses is readily available.

Everyday Tips
Everyday Tips
9 years ago

I do not have a formal plan. I just spend as little as possible and make sure the basics are covered. I do have automated savings though, and any extra goes into a vacation fund. However, some months are worse than others, and there isn’t much left over! (Darn car repairs!)

Kevin M
Kevin M
9 years ago

We do a version of this as well – with as much automated as possible. We determined how much to contribute to savings, Roths, HSA and 401(k) along with the goal of keeping our credit card bill at a certain amount each month (all our spending is done on the credit card). If our card balance is getting close to our limit by the end of the month, we try to cut back or see if it is just a one-time expense.

Buddy
Buddy
9 years ago

Great article, Robert! Early on, I learned the mantra “Pay yourself first”.

Trina
Trina
9 years ago

I’ve been doing this for about 10 years, but never had the language to explain what I was doing. Thanks for spelling it out so clearly!

Anne
Anne
9 years ago

I found making a budget very helpful at first for figuring out just what I spend and on what. When I did the numbers and realized I would have very little for savings and emergency fund after all the debt payments I was making, it prompted me to go out and find a second part-time job to keep me in the black. Prior to that I had a vague idea I could do it all with my day job. The number crunching showed otherwise. Now, two years into my debt repayment journey, I have automatized as much as I can… Read more »

MutantSuperModel
MutantSuperModel
9 years ago

Interesting piece. I think I may be moving in this direction but am not quite there yet. Mostly, I’m still stuck on tracking my spending to get a really good picture of what I’m doing. But, I really do need to save. I haven’t paid myself first in a while and that needs to change.

I really love reading everyone’s budget strategies. They are all so varied and deeply personal but each one really does provide me with a special insight or idea.

mark
mark
9 years ago

I think that the idea of targeted savings is great, but the idea of multiple savings accounts is tedious. The type of savings accounts should reflect what you want that money to do. For instance short term savings, i.e. a bicycle, a television, or a new iPhone does not even need to leave your checking account. If you know what every dollar in your checking account represents, you would know that of that $5,000 there is a specific amount allocated to those short term items. Medium term savings items can take advantage of high interest rate savings accounts, but you… Read more »

Kait Palmer
Kait Palmer
9 years ago

We used to track every single dollar…but its just so time consuming!

Now we use Mint and set budgets, and it tracks everything for us. If we see we’re getting close to the budget for food, we try to make do with what we have.

And automatic deposits into our savings and vacation accounts are fantastic! And you don’t really even notice the money is gone!

brooklyn money
brooklyn money
9 years ago

Mint.com’s new “Goals” feature basically automates this. It is so easy. Tracks all your expenses and tells you how much you are saving. I can never recommend it enough.

K.C.
K.C.
9 years ago

My wife and I have used a “goal-directed” budgeting for thirty years. We just always called it a budget. What’s the point of budgeting if it isn’t to achieve a goal? Savings has always come off the top for us. We discovered a long time ago that if we saved “what was left” at the end of the month, there was never anything left to save. We track spending against the budget very closely even though our spending habits are well ingrained. We do it for the information it provides. The author quotes the financial planner St. Germain as saying… Read more »

Andrea @ Consultant Directory
Andrea @ Consultant Directory
9 years ago

Because I’m self employed as a consultant, I know my income can fluctuate. So I went for the longest amortization possible for my home and I instead save the difference between that and my ideal amortization. I put this big chunk of money into a bank account every month. That way, if things get really tight, I have an extra emergency fund. And, if they don’t, I can do a balloon payment to shrink my amortization back to where it would be. I know I am paying some interest for this, but it works out to only a few hundred… Read more »

Tara C
Tara C
9 years ago

I came to this same conclusion 6 months ago, and it’s working well for me. I write up a budget for the year, including savings goals, and then set up all my automatic transfers accordingly. That way I don’t have to track every penny and I don’t miss my savings goals.

Briana @ GBR
Briana @ GBR
9 years ago

For me, I’m thinking automation is the best way. I’m finding I’m adjusting my methods monthly. I’m thinking about having my paycheck automatically distributed into separate accounts: house checking (60% for expenses), personal checking (20% for free spending), personal savings (10%), and house savings (10%). I’m changing my budget as I see fit, and making sure everything’s accounted for, but it becomes tedious too

Shaun
Shaun
9 years ago

Good advice! I’m a big fan of getting the ‘dirty’ work done, then automating the process as much as possible with designated accounts.

Pay yourself first, do what works for you and the rest is easy!

Thanks again.

Lauren
Lauren
9 years ago

I like the idea of reversing the process and taking the savings out and then using what’s left for spending. Although it can be hard if you don’t have much to set aside to begin with.

David/moneycrashers
David/moneycrashers
9 years ago

Great concept–kind of approaching it from the back end.

You can’t lose that way, that’s for sure…

imelda
imelda
9 years ago

Not to be too harsh…but was there anything new or unique in this article? I didn’t read too carefully because it didn’t catch my interest.

As for the first sentence… here’s a thought: does investing count as saving or spending? Essentially, you’re purchasing something, and you’re also gambling with your money. Does that really count as saving?

Walter
Walter
9 years ago

Nice! It’s the way I do it, so obviously I think it’s BRILLIANT!

Jaime
Jaime
9 years ago

I’ve given up budgeting and spending plans. I found out that saving works for me. It all goes into my account at the bank. I also direct deposit my paycheck. When payday comes I use some money for paying bills & fun, the rest sits on that account. I like to save at least 30% of each paycheck, sometimes I save more than that. That way I don’t have to fret when an emergency happens or when a letter from the DMV comes telling me its time to renew my registration, I know I’ll be fine. Having money in that… Read more »

Sam
Sam
9 years ago

We also use multiple accounts at ING, I just do one auto transfer each pay period into my main ING account and then I divide it up. I like having multiple accounts because if I have a goal I like to see, i.e. vacation fund, the numbers moving towards my goal amount. It is easy to use multiple accounts at ING, and you just get one statement at tax time.

Long term savings, 401k is off the top before we get paid. IRA and short term savings are part of our budget and I pay them like I pay bills.

Mary Ann
Mary Ann
9 years ago

Great article, and enlightening comments. What a joy to read!

Brigitte
Brigitte
9 years ago

I started paying myself first YEARS ago, but 5 years of tracking every penny has become tedious and frustrating. There are too many bills and spending expenditures that aren’t monthly, and it’s frustrating to see that I’m over budget on my electrical bill every other month when clearly, 23 from last month’s budget that wasn’t spent + 23 from this month’s budget = the payment of 45.97. I still have THAT issue to deal with, but at least it’s only for that bill. After 5 years of penny-pinching in each category and robbing peter (clothes) to pay paul (cleaning supplies)… Read more »

Happy housewife
Happy housewife
9 years ago

I often feel vaguely guilty that my husband and I have never, ever budgeted in the traditional sense (planning what we’ll spend) but then I ask myself why I should feel bad, since we have so much more savings than most families in our circumstances seem to. But what you described is almost exactly what we started doing several years ago–except our system was even simpler: every month I would move a fixed, generous amount into ONE savings account, and leave it there. It wasn’t to be touched except for emergencies. Then I would keep an eye on our checking… Read more »

Rob Ward
Rob Ward
9 years ago

This is an interesting idea. For my wife and I, at least right now, it wouldn’t be savings as much as it would be for paying off debt.

Shane
Shane
8 years ago

Great article – I have done this for years and find it works really well. One thing to detail that was hinted at above: as part of my budgeted spending, I also have a “bill pay checking” separate from my main checking. I figure out what all of my fixed monthly costs are (rent/mortgage, auto, phone, cable, IRA, etc…), have the amount I need automatically placed in that account via direct deposit, and have all my bills from that account set-up on auto pay. By doing this, I don’t ever have to worry about late payments, etc… Note: I always… Read more »

shares