Most financial experts agree that a budget is necessary in order to reach retirement. But when I researched online how to make one, most of the methods I found were highly administrative and felt like drudgery.
Instead, I streamlined my budget down to three main categories that helped me and my husband pay off $300,000 of debt and save enough for retirement in my 30s.
The Importance of Budgeting Is Not in Tracking Your Expenses
When I teach financial education, most students are confused when I tell them not to spend too much time tracking their expenses. The perception and therefore the aversion to keeping a consistent budget every month is it requires you to track every expense and record them along the way.
Recording those expenses would be similar to writing down the times you plan to brush your teeth or take a shower — it’s just checking things off a list that creates extra administrative work, but not a change in behavior.
You might need to track your expenses for the first three months you start a new budget if you really have no idea how much you spend. But after that period, you start to get a sense of where you need to plan and where you can automate paying expenses.
Instead, I learned that by having a spending plan at the beginning of every month based on the zero-based budget, I had a clear allocation for all of my income to be spent. There was no need to track many of the expenses because they would be paid no matter what — housing, utilities, car payments and other recurring bills.
The Category Names On My Budget Are Based On How You Live
When I first started to budget, I had more than 40 different line items on my list to capture anything and everything I might spend money on in a given month. That got tedious very quickly, and I found it hard to notice any significant patterns in my spending that would help me save more money.
Eventually I streamlined down to three major categories based off the word vivere in Latin, which means to live:
- Survive — basic necessities including housing, utilities, transportation, food and health
- Revive — current expenses that aren’t necessary but make life worth living for me, like eating out with friends, vacations, clothing, entertainment and hobbies
- Strive — anything that was helping me grow my overall net worth like emergency savings, debt payments, investing and expenses for my business
According to a NerdWallet survey, 84% of Americans with a monthly budget say they’ve sometimes exceeded their budget. But streamlining down to these categories and prioritizing the strive segment. I didn’t feel as guilty if I overspent my budget as long as I met my goals in strive first.
Broader Categories Helped Me Stay Motivated Rather Than Beat Myself Up
Once I condensed down to these three categories, I noticed some significant patterns where I could improve my financial decisions:
- My debt payments were taking up a higher percentage of our monthly income than I expected.
- We could free up more money toward vacations as long as we planned ahead.
- If we tried to work toward making strive 50% of our monthly income, we could speed up our retirement plan by decades.
By grouping line items together underneath these three larger categories, I felt less overwhelmed. It also gave me more flexibility to exchange spending among different items within each category.
For example, within the Revive category, if I spend more money than I intended on eating out, I would consciously lower how much I spent on clothing to maintain the intended amount within Revive.
If you’re a recovering perfectionist who felt discouraged by your budget in the past, this method can help motivate you. It does take some time getting used to a new skill, so give yourself three to six months to get consistent with budgeting.
Even if you don’t get it perfect every month, you’ll make more progress in your financial goals if you at least make a plan with good intentions.
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