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Personal & Financial

Budgeting (And Other Skills You're Not Born With)

Susan Doktor

Budgeting (And Other Skills You're Not Born With)
Pekic via iStock

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We’re all born with needs. We start to establish wants a year or two into life, though they may feel just like needs in our little toddler hearts. Actually, the two may feel the same when we reach adulthood, too. That’s one reason why so many of us find it so challenging to manage our expenses. Fortunately, unlike toddlers, we have math skills. That’s pretty much all you need—in addition to a bit of willpower—to build a workable budget. 

Why Stick to a Budget?

There are obvious reasons to stick to a budget, like keeping a roof over your head, food in your belly, and debt collectors away from your door. But another compelling incentive is that budgeting is good for your health.

Financial stress is one of the most common causes cited by people who experience symptoms of depression and anxiety. It’s more widespread than other stressors, too. The American Psychological Association has tracked which stressors affect Americans most since 2007. Each year, money tops the list.

Feeling stressed is unpleasant enough. But the problem is compounded by the fact that emotional stress has proven physical health complications. In other words, if you could do without high blood pressure, a weaker immune system, diabetes, or insomnia in your life, you’d be well-advised to get a handle on your finances.

How you accomplish that is up to you, but you may want to explore some tried-and-true practices before you set out to reinvent the wheel.

Thanks, Elizabeth Warren

In 2006, well before hers became a household name, a soon-to-be-senator from Massachusetts penned a personal finance book called All Your Worth: The Ultimate Lifetime Money Plan. In it, Elizabeth Warren laid out one of the most straightforward budget frameworks you can use to manage your monthly expenses and build a long-term financial plan. She called it the 50-30-20 rule and, since she introduced it, it has been widely praised in the media and by many financial experts. It has also been adopted by millions of believers. Under the 50-30-20 rule, after figuring out your after-tax income, your budget would look something like this:


You spend 50 percent of your earnings on necessities. Your mortgage, rent, utilities, food, transportation, and healthcare costs fall under the heading of necessary expenses. If you’re like many new lawyers, student loan payments will also fall into the necessities bucket.


You spend no more than 30 percent of your income on your wants. Discretionary expenses would include dining out, sporting events and other entertainment, or keeping up with Kardashians fashion. Oh, wait. Kim is so passé, you better go out and buy new clothes! You get the idea. Under the 50-30-20 rule, the bottom line is 30 percent tops is all you can devote to wants.

Reaching Your Financial Goals

You spend 20 percent of your wages on reaching your financial goals, and saving and investing both fall into this category. You may have a particular reason for saving money—for example, amassing a down payment for a home or funding your 401K. But your goal doesn’t have to be that big or so far off in the future. You might want to save money to keep yourself secure in an emergency. Fewer than 40 percent of Americans have enough money in savings to manage a $1000 unexpected expense. Think, a new transmission. Your health insurance deductible if you need surgery. That sort of thing.

There are a couple of keys to making the 50-30-20 rule work for you.

  1. The first is that you have to be diligent about tracking expenses—even the small ones. Keep your debit card receipts for your morning coffee, lunch, and the Snickers you pick up at the convenience store. Many online banks include an automatic expense segregator to help you categorize what you’re spending into basic buckets. Some terrific personal finance apps can help you not only with tracking but also with doing the math.
  2. The second key to benefitting from a 50-30-20 budget is a little more complicated. It’s often hard to separate needs from wants. If you’ve been getting professional manicures since your parents paid for them in your teens, that fresh coat of polish may seem like a necessity after all these years. But it isn’t. You may love a good ribeye on the grill, but boneless chicken breast gives you as much nourishment and costs about 75 percent less.

If you’re having a hard time making the 50-30-20 rule work for you, chances are it’s because you’re putting too many wants in your necessities bucket.

Other Effective Budgeting Strategies

Zero-Based Budgeting

Zero-Based budgeting is somewhat of a misleading name for a strategy that many people find helpful. The concept is simple. You “spend” every cent of the money your earn so you’re left with a zero balance at the end of the month. That would be foolhardy were it not for the fact that saving and investing money are considered expenses in the context of a zero-based budget. In a zero-based budget, you’ll have more expense categories than with a 50-30-20 budget, but the thinking behind both strategies is similar. One nice thing about zero-based budgeting is that when you fail—meaning you’re left with some cash at the end of the month—you can, and should, allocate the balance to an important goal, like getting out of credit card debt.

Pay Yourself First

While some budgeting strategies seem to put saving and investing last on the list, the Pay Yourself First budget concept prioritizes them. “Yourself” is another word for your long-term financial goals under the Pay Yourself First scheme. You decide on an amount of money you want to set aside each month to secure your financial future. You put those funds where they need to be before spending another dime, whether that means making an extra mortgage payment or stashing the money in an IRA or savings account. Whatever is left, you’re free to spend however you wish. The Pay Yourself First budget strategy is a little more free-wheeling than the others we’ve discussed, but it may appeal to people who bristle at too much structure.

Be On the Lookout For . . .

No matter what budgeting strategy you decide to pursue, you’re going to need to take a close look at your expenses. Believe it or not, there are some totally meaningless ones in everybody’s life—dollars spent that do nobody a lick of good. Creating a budget is an ideal time to cancel any subscriptions you’re no longer using, for example. A terrific opportunity to find an ATM within walking distance that doesn’t charge you a couple of bucks to withdraw your money. And the perfect occasion to test whether canned organic tomatoes from Whole Foods really do taste better than the Kroger brand.

Your decisions as a consumer won’t determine your future wealth entirely, of course. But the few dollars you save each month by being a careful petty cash administrator can, over the long haul, help put a nicer roof over your head, your kid in a great college, or, if you like, weekly manicures back in your future.