What is the Best Budget Type for Managing Personal Finances?
- Melissa Mittelstaedt
- Feb 16, 2023
- 4 min read
The type of budget (spending plan) you choose is as unique as your fingerprint. Okay, maybe that's too far, but there is definitely more to the story…
Although it would be easiest for me to tell you the ________ approach is the best budget type for managing personal finances--that wouldn’t be fair to you. Each budget type can work; it just depends on what feels right for you & your brain.
I’m going to take you through two overarching philosophies and three different budget types. Something that’s important to remember is that you can always mix and match pieces from each to create your own style!
Budgeting Philosophies
Before we dive into the methods, I'd like to share some helpful overarching philosophies: Zero-Based & Flow-Based.
Zero-Based
With this philosophy, each dollar is given a job.
Example
Your monthly take-home = $12,200
Investments/Retirement = $1,850
Expenses = $8,200
What's Left = $2,150
Now, you decide what to do with that $2,150. Will it be transferred to your High Yield Savings Account to be used on vacation? Do you need it to replenish your emergency fund? Do you have your eye on a course you'd like to take?
That is giving every dollar *a job.*
Without at least some variation of the zero-based philosophy, you'd just leave it in your checking account. Two things work against you when you leave money floating around in your checking account:
You earn next to no interest in checking accounts. Hoarding money in a checking account is like saying… “Hey inflation, how you doin’?!” and waving.
If there is something you are saving up for, how will you know if you've saved enough? Your checking account has money in it that's already allocated, so just looking at that balance will lead to spending more than you actually have.
Flow-Based
This is where you’re checking in weekly (or a few times a month) on your cash flow, and as long as your accounts aren’t going negative (or below the buffer), there’s no need to track every dollar.
Now that you have the philosophical foundation, let’s dive into the actual methods.
Identifying the Best Budget Type for Managing Your Personal Finances
As I mentioned above, everyone's preferences differ regarding the level of detail you want to see and the modality you wish to use. Some folks love keeping it in a notebook, others live for their Excel spreadsheet, and many prefer an app connected to their financial institutions.
The one main thing to remember is... try something. If it doesn't work for you, move on to the next. Don't just give up.
Line Item Budgeting
If you like lots of detail and diving into the nitty-gritty, this method is for you!
It is indeed the most granular of the approaches. You create categories for all of your expenditures, for example:
Mortgage/Rent
Utilities
Food
Entertainment
You can get even more detailed if you want insights into a specific category. Line-item budgeting works with any system (paper/pencil, a spreadsheet, or an app) and works best with zero-based budgeting.
Inflow Calendar
If you like to look at things through a cash flow lens, this option is for you!
Using a monthly calendar, document lump-sum payments on the dates they come in.
[NOTE: If you don’t pay yourself on a specific cadence, this is your sign from the universe to do so.]
Then document which bills are going out during that same period, ensuring the inflow exceeds the outflow. If it doesn't, now would be a good time to call your mortgage company, credit card company, or loan provider and request a change in the due date. Most entities are very flexible when it comes to due dates. They want your money and would rather not chase you down for it.
In the example shown in the image below, I opted to use blue to represent money coming in and going out of one “paycheck”, and green to represent money coming in and going out of the other “paycheck.”
Now, we aren’t 9-5ers, but that doesn’t mean we can’t act like it sometimes!
The One Number
AKA the "No Budget" or “Reverse Budgeting” – so many names for one amazing concept.
If you aren't a fan of tracking lots of detail, this is the budget for you!
Step 1: Determine how much you want to save this month. This number signifies your Goals.
Step 2: Determine all the essential items you pay for each month. This number signifies your Fixed Spending.
Step 3: Determine all your irregular expenses throughout the year. This number signifies your Non-Monthly Spending. To learn more about non-monthly expenses, head to this blog post.
[Note: That blog post is written from the business finance perspective, but it applies to both business and personal spending.]
Step 4: What's left is your 'One Number' -- which you get to use however you like. This number signifies your Flex Spending.
HOT TIP: Some folks like to have two separate checking accounts (or credit cards) to make this easier: one for all Fixed Spending items and one for everything else. That way, you can quickly see how much you have left in that bucket of money at any moment.
Excellent work; you've made it through each of the options! For good measure, here's the list one more time:
Line Item Budgeting
Inflow Calendar
The One Number
Budgets/spending plans are like living, breathing documents. They bend and move with you. They aren't perfect, and you won't be perfect using one, and that's okay. But eventually, you find more freedom!
Like the idea of having someone help you build this for your own personal finances? My Financial System Set-Up is designed for exactly that. Here’s the link to my inquiry form.
Melissa Mittelstaedt
Financial Consultant | Accredited Financial Counselor®
