Budgeting is a crucial financial tool that helps individuals gain clarity and control over their money. The right approach for your financial plan depends on your situation (and your personality!). Usually, when I first start working with clients, the first thing they want to know is if I’m going to make them track an itemized budget monthly. The odds are good that, unless you were already following an itemized budget monthly before you became a client, one of these more hands-off approaches will be a better fit for your plan.

Today, we’ll delve into three budgeting methods: Traditional Budgeting, Reverse Budgeting, and Flow-Based Budgeting.

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1. Traditional Budgeting

Best for: Paying Down Debt

Overview: Traditional budgeting is what you imagine when you hear “budgeting.” This approach requires individuals to outline their expected income and expenses for the month and to set intended limits for each category of expenses. This sort of detailed budgeting works best with a tracking app.

Pros:

          • Provides a detailed understanding of spending habits.
          • Helps identify areas of highest spending.
          • Can be tailored to specific financial goals, such as debt payoff or saving for a particular purpose.

Cons:

          • Requires consistent attention and discipline to maintain.
          • Can feel restrictive.
          • Can be overwhelming.

 

Recommended Tracking Apps:

        • RIP Mint 🪦

My husband and I used Mint for 12 years, and I loved that it was low-maintenance and free. It let us see guidelines and trends, but it also made it easy to jump back in even if we fell off the wagon for a while. Mint is retiring this year, so stay tuned for my suggested replacement. I’ve heard fantastic things about Monarch and CoPilot. I’m trialing these now. I’m also revisiting RightCapital for budgeting since that’s the financial planning software I already use with my clients.

        • YNAB

If you’re ready for a more cutthroat approach to budgeting, I recommend YNAB. YNAB (“You Need A Budget”) shows no mercy – if you overspend in a category, you’ll get a pop-up asking you which other category you want to reduce to account for the overspending. You can only click out of this pop-up to review your budget after you decide! On the plus side, YNAB has a strong community of budgeting nerds online (primarily on Reddit). Community can go a long way in helping you through a tough budgeting transition if you need to make drastic changes.

 

2. Reverse Budgeting

Best for: Those spending less than they earn.

Overview: Reverse budgeting focuses on savings goals. Instead of starting with expenses, figure out how much you need to save monthly to meet your retirement, college, travel, and other goals. If you’re meeting those savings goals monthly, there’s only a need to track where the rest of the money is going if you want to. Set up automatic account transfers to meet your monthly savings goals without fail, then be sure those funds also invest automatically, if appropriate.

Pros:

          • Hands off. Very little time or maintenance is required.
          • Guarantees a specific saving rate.
          • Provides flexibility for discretionary spending.

Cons:

          • Doesn’t provide a detailed understanding of spending habits.
          • Only works if you have excess cash flow every month.

 

3. Flow-Based Budgeting

Best for: Those wondering “where does the money go?” each month

Overview: Flow-based budgeting is all about narrowing the scope of money decisions. I was introduced to this concept at a financial planning conference this year by presenter Natalie Taylor. Instead of looking at your “needs” vs. “wants” in your budget, flow-based budgeting looks at what is automated vs. what requires you to make an active decision.

Pros:

          • Simplifies decision-making: if there’s money in the spending account, you can spend it; if not, you wait.
          • Weekly refresh provides a clean slate, which can be encouraging for those who might have overspent in the past.
          • Reduces the need for continuous tracking.

Cons:

          • May not be meticulous enough for those who need to pay down debt under a particular timeline.
          • Those with irregular income may struggle to determine the right weekly amount.
          • May require some extra setup time to open new accounts and change payment information.

 

How it Works: 

Designate three different accounts or cards for the following three categories.

          1. Fixed Account: AKA the monthly autopay account. This account is for monthly commitments already on autopay, like your mortgage, subscriptions, and utilities.
          2. Flex Account: AKA the weekly spending account. This account is for expenses that require an intentional purchase, i.e., groceries, gas, shopping, etc. Make an initial estimate of weekly expenses, add some cushion room to that estimate, and replenish the account each Saturday. You’ll need to adjust this some as you get up and running.
          3. Non-monthly Account: This account is for expenses that tend to recur annually or sporadically. These tend to be larger items and may or may not be on autopay. Examples include property taxes, holiday spending, car repairs, and annual travel.

If you want to do this with separate credit cards instead of separate accounts, pay down the flex spending card every Saturday to reset the spending amount. The main goal is that once you’re set up and humming along, all you need to reference for your spending decisions is the balance in that flex spending account (or on that card). It’s much easier for your brain to decide if you can afford something if all you have to do is look at the balance of one account.

Tips:

      • If you need to cut your spending, you’ll still need to look at trimming expenses from your fixed account.
      • If you set up a new subscription in the fixed account, reduce your transfers to the weekly spending account accordingly.
      • If you and your partner have separate accounts, set up separate fixed accounts, flex accounts, etc. Or set up a different combination that mimics the setup you have now.

 

Conclusion

Budgeting is personal. What works for one person may not work for another. The key is to find an approach that aligns with your goals, lifestyle, and temperament. Whether it’s the detail-oriented approach of traditional budgeting, the savings-first mindset of reverse budgeting, or the simplicity of flow-based budgeting, there’s a strategy to help everyone take control of their finances.

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