Managing money doesn’t need to be difficult. Don’t get me wrong, budgeting will still require some effort, but creating sustainable solutions requires simplicity. The reason budgeting gets so much attention is because it’s your blueprint, or plan, for pairing your priorities with your finances.
It’s like going on a backpacking trip into the woods. If you’ve done the work to get your supplies prepared, it’s going to allow you to have a great time. If you don’t, well it’s going to be a rocky road and you might be starving half the trip without a fire. The great thing about going through this process is that it takes care of the necessary things while giving you the foundation to make space for the fun.
I want to walk through a simple way to look at your finances so you can stop wondering where all the money is going and put yourself in charge. The process that I encourage breaks your spending into 4 simple buckets of Needs, Invest, Save, Wants.
Needs (Backpack)
If you don’t have a good pack, you’re probably screwed. This is the bucket of all the necessary things you need to pay to be an adult. Think of rent/mortgage, utilities, groceries, cell phone bill, car payment, car insurance, Spotify, Netflix. Anything that is a non-negotiable that you’re going to incur every month; put that here.
Invest (Sunscreen)
This is the thing you’re doing for your future self. You know how annoying it was as a kid to stop and put on sunscreen? Well, now I’m thanking my parents. It’s the same thing with investments. This is where your contributions to a 401(k), IRA, or any other weekly/monthly investment contributions go.
Save (Extra Water)
You’ll hardly go wrong having extra water on your excursion. Are you putting away money every month towards specific savings goals? Chances are you probably aren’t (it’s ok). This is part of the fun. Having specific savings goals is imperative for helping your future self out.
What are the other things in your life you want to prioritize? Trips? Wedding? House? Seriously open your mind on this one. This is the best part!
Wants (That Badass Sleeping Pad That Feels Like Floating on a Cloud)
This is where you get to have some fun. We’ve allocated funds for the previous 3 buckets and now you get to go crazy with the rest. Food, drinks, clothes, etc. Have at it! You want that $5 latte? No judgement here.
Let's Walk Through an Example
Here is an example of Jane Doe’s budget. Jane is 25 and is taking home (after taxes) $60,000 per year.
Needs
She lives with a roommate so she pays a modest amount in rent and utilities each month while setting money aside for food, car, healthcare, phone, etc. She’s covering her basic living needs.
Invest
Jane has also made it a goal to contribute to her retirement where she is saving $1,000 per month. This is a solid amount for Jane and put her in a great position to have security later in life.
Save
This is where the budgeting pays off. You’ve taken care of your essentials (living and investing) and now you get to decide where you want to focus the rest of your resources.
Growing up with siblings and always having roommates, Jane has been dreaming of the day she gets to buy her own place. She is saving up money for that future place someday.
She also has an itch to travel. Before having a budget, Jane always got anxious when it came to booking a trip. “What should I spend? How long can I go? Where can I stay?” Traveling is one of her favorite things in the world and now she’s stressing out about it?! That sounds terrible.
Now Jane has allocated $400 a month, almost $5,000 per year, to go travel wherever she wants without turning it into a panic attack. Now when she thinks about booking trips, she’s contemplating an AirBnb versus a plush hotel, not fretting if she has enough money to take the trip.
Wants
This is where you get to keep having fun and put your money towards your priorities. Jane has approximately $700 left to spend on her wants. This is your monthly ‘Live Your Life’ fund. Happy hours, new restaurants, online shopping. This is your chance to paint your life with the things you enjoy.
Sum It All Up
Jane ended up spending $375 in her Wants bucket, which leaves her with $325 leftover. She could choose to spend that money on other wants, bump up savings goals, or add to her investments.
Life also happens. Things will come up that you inevitably didn’t think of. What you thought you were going to spend wasn’t what you had expected. Think of it as a map to guide you through your financial life.
Tools
There are many different ways to accomplish your goals. If you like using apps, then tools like Mint or YNAB will assist you along the way and give you additional benefits like credit monitoring, spending notifications, and many more. Some folks like to use an envelope cash system.
Conclusion
Budgeting isn’t glamorous. It takes some time, but I promise that the reward will be worth it. Money should be a tool that allows you to design your life as you envision it, not be stressed out every time you reach for your wallet. While this doesn’t mean that there won’t be bumps along the way or decisions to make, it does mean you’ll be better prepared when those things happen. Take some time to do this activity. Begin designing the life you’ve envisioned.
