What’s the Best Way to Budget?
I read a post recently at MyMoneyBlog entitled “How do YOU budget?” I wasn’t sure how to answer that question. What does the word “budget” mean? I think for most people it means pre-determining how much money can be spent on each expense category per month; for example, $100 for food, $30 for entertainment, $75 for gas, etc. This type of budgeting is often compared to losing weight by dieting because, like dieting, it’s tedious and requires a lot of motivation to stick to it. It seems to focus too much on the “means” rather than the “end”, and that’s not satisfying. This is not the way I budget.
Another way to budget – the way I prefer – is to compare all your monthly expenses (out-goes) to your monthly income (in-goes) with the goal of being cash flow positive each month. This type of budgeting seems to be more effective because it eliminates the tedium of budgeting for each specific category. To stay consistent with the “losing-weight” comparison earlier, I would compare this second type of budgeting to playing sports as a way to lose weight and become healthier. Unlike dieting, playing a sport is enjoyable to most people, but can still achieve the same result (weight loss). The out-goes vs. in-goes method of budgeting, like sports, focuses mostly on the end result – win or lose. To simply see each month if I’ve won (out-goes < in-goes) or lost (out-goes > in-goes) is much more motivating and easier to stick to than the first method. Budgeting for each individual expense category becomes unnecessary because the motivation to “win” encourages me to manage all my finances responsibly.
Which type of budgeting do you prefer?
7 comments March 14th, 2006