Track Your Cash

Hello Aspiring Chillers,

There are many different approaches to budgeting. While each method has its merits, combining a few different strategies is likely the most effective approach for most people. In this article, we'll explore five diverse budgeting methods. There's something here for everyone, depending on your personality and the amount of time you want to invest in managing your finances.

Top 5 Methods

1. Zero-Based Budgeting (ZBB): Allocate every dollar of your income to specific categories like expenses, savings, or investments. With ZBB, your income minus your expenses should equal zero, ensuring every dollar is purposefully used.

2. 50/30/20 Rule: This rule, popularized by Senator Elizabeth Warren in her book "All Your Worth: The Ultimate Lifetime Money Plan," suggests dividing your after-tax income into three categories: 50% for needs (like housing and food), 30% for wants (like entertainment and dining out), and 20% for savings and debt repayment.

3. Envelope System: A cash-based budgeting method where you allocate cash for different spending categories into separate envelopes. When an envelope is empty, no further spending is allowed in that category for the month, promoting discipline and preventing overspending.

4. Pay Yourself First: Prioritize savings and investments by setting aside a portion of your income into these accounts before addressing bills or other expenses. This method effectively builds savings and investment portfolios over time.

5. Value-Based Budgeting: Focus on aligning your spending with your personal values. Identify what's most important to you and ensure your spending reflects these values, leading to more satisfaction and fulfillment from your financial decisions.

Get in the Habit

We've discussed this before, but it bears repeating: small habits drive success. Start by paying attention to your finances daily. Incorporate checking your bank account into your morning routine. Being aware of your financial status is key to growth. Turn saving and earning into a fun activity with various tricks and strategies. Remember, the goal isn't to react emotionally to the numbers but to work towards improving them consistently.

My Theory

I am not a fan of Zero-Based Budgeting (ZBB), but I understand its appeal to those who need to know where every dollar is going. However, I believe if you can achieve over 90% of the benefits while spending less time, then you're ahead in the happiness score of life. That's why I generally don't recommend ZBB for our chill approach. Over the past nine years, I have blended the other four methods to great effect.

For beginners, I recommend the 50/30/20 rule for its simplicity and effectiveness in achieving early financial freedom. Adapting this rule to fit your values can be powerful. From 2015 to 2019, during my FIRE journey, I adjusted the percentages to save 50% of my income, allocating 20% for needs and 30% for wants. This aggressive approach may not suit everyone, but it's effective for those seeking a fast track to financial freedom.

Extras

Some additional thoughts that didn't quite fit elsewhere in this article: Avoid being overly frugal to the point of it becoming a topic of conversation among your friends. Find a balance between following your budget and maintaining social harmony.

Regarding cash payments, I advocate using cash only when:

1. You get a discount of more than 2% for using cash.

2. You struggle with credit card spending and tend to accumulate debt.

Stay tuned for our upcoming article on credit use, a key aspect of financial management.

I'm here to help you all! Please reply to this email and share your biggest frustrations with Cash Management and Budgeting.