Which Personal Finance Philosophy Is Right for You?
As we kick off 2015, why not make this the year you finally take control of your finances? While not every budgeting philosophy will work for every person, there’s something out there for everyone. Regardless of the method you choose, all of these strategies have the same basic goals: to make you more aware of your spending habits, to develop a more intentional system for managing your money and to help you achieve your long-term financial goals. Since there’s no single, perfect solution, start by checking out these famous budgeting philosophies to determine which route may your best fit.
Sometimes the simplest methods provide the best solutions. As the famous finance guru explains, this budgeting philosophy hearkens back to “grandma’s way to handle money.” The system is a straightforward one. First, budget each paycheck down to the last cent. How much cash will you need this month for food, for gas, for utilities, for entertainment? To the best of your ability, determine the amount you typically spend each month on these categories. After you’ve itemized your expenses, fill envelopes for each category with the pre-determined amounts. During the course of the month, if you spend all of the cash in one of the envelopes, you can’t spend any more money in that category until the next month.
It will take a little while to perfect your system, but it’s easier to figure out than you’d think. Plus, it works. There’s something about spending actual, physical cash that hurts you more psychologically than simply swiping a debit or credit card. Limiting yourself to a pre-determined amount of cash helps prevent impulse spending and over-spending.
This system may be right for you if… You can’t remember buying half of the things that end up on your credit card statement at the end of the month.
Alexa von Tobel, a Harvard graduate and former Morgan Stanley trader, developed this system for people who want to work toward their financial goals without depriving themselves entirely. It’s kind of like dieting—if you limit yourself to just celery and lettuce, you’re a lot more likely to fail right off the bat. Here’s the basic breakdown: 50% of your take-home pay goes to essentials, like rent, groceries, and transportation; 20% goes to your future, like emergency savings, debt repayment, and retirement planning; 30% goes to everything else, like shopping, travel, and entertainment.
The 50/20/30 System isn’t going to help you get out of huge financial hole, and it definitely isn’t practical for those of us trapped under a mountain of debt. But it is a great solution for people who are just trying to save a little extra money without completely changing their lifestyle.
This system may be right for you if… You’re in a good place financially, but you’d like to be more intentional about your spending habits.
Peter Dunn—aka “Pete the Planner”—also uses percentages to break down expenses, but it’s a little more complicated than von Tobel’s system. Here’s the full rundown: Dunn recommends spending 25% of your income on housing, 15% on transportation, 12% on groceries and dining out, 10% on savings, 10% on utilities and your phone bill, 5% on charity, 5% on clothing, 5% on entertainment, 5% on medical expenses, 5% on holidays and gifts, and 3% on miscellaneous expenses. (Don’t worry, we’ve double-checked the math here!).
At first, all these percentages can seem a little overwhelming, but there’s a method to his madness. Dunn argues that all people can do something to better manage their financial lives, no matter what their situation, and these percentages really help when you’re looking to set up a clear, concrete budgeting system. His percentages may need to be adjusted slightly from person-to-person, but they provide a fantastic starting point for any person looking to gain more control over their spending.
This system may be right for you if… You work best with straightforward guidelines and instructions.
A ubiquitous personal financial advisor, Suze Orman has developed several online tools to help individuals better understand and control their finances. Among these are the “Debt Eliminator,” which gives people an honest look at what they owe and what they need to do to fix it, and the “Expense Tracker,” which shows a clearer picture of how much money is coming in and how much money is going out each month. Orman’s tools provide a useful method for people to begin exploring personal finance without having to commit to a specific program.
This system may be right for you if… You want to be more aware of your current financial situation but aren’t sure about your specific goals for the future.
Personal Capital is an online budgeting app that works on both smart phones and computers. It synchronizes all of your accounts—checking, savings, credit cards, investments, etc.—to give you a clearer picture of your spending habits and finances as a whole. You can even opt to receive recommendations from one-on-one financial advisors on how to better manage your money. The service is super convenient, and it also includes additional features like retirement and investment planning. The company has a very strong security policy, but you should still consider the potential danger of putting your financial information online before choosing this method.
This system may be right for you if… You’re tech-savvy, prefer working on a smartphone or computer, and don’t have any issues trusting online services with your bank and credit card information.