In 1890, Sakichi Toyoda invented the Toyoda wooden handloom, a device used to weave yarn or thread, and thus began an entrepreneurial journey, eventually leading to the Toyota Motor Corporation several decades later.
What does an automaker, let alone one that started as a handloom manufacturer, have to do with budgeting?
One of the core principles of the car company is known as “Kaizen,” Japanese for “improvement,” and is encapsulated in The Toyota Way, a set of principles that underlie the company. Much of Toyota’s success can be attributed to continuous improvement.
How This Applies to Your Finances
If we want personal success, we must strive toward the same in our life and our finances. The first step toward improving anything is measuring it. Budgeting is the most basic financial step in measuring your money.
If you don’t know how much you’re making and how much you’re spending, how can you expect to get ahead financially? You can’t even begin to worry about how you should invest your first $1,000 if you haven’t even saved your first $1,000.
Most people don’t budget because it’s a hassle. Not everyone wants to save receipts, enter them into a spreadsheet and calculate how much they might have overspent. Fortunately, that’s not the only way to budget.
There are several ways, three of which I’ll discuss, and you can pick the one that resonates with you.
1. Track Your Spending
Whether you use software, like Mint or You Need a Budget, tracking your spending is the oldest budgeting strategy in the book. With software like Mint, which can pull in transactions and categorize them on your behalf after training, you don’t need to keep receipts and enter them in after the fact. It will read your bank statements for you and handle the busy work.
You Need a Budget is a popular budgeting package that allocates last month’s income to next month’s expenses — making it more of a budget planning tool and less of a budget tracking tool. By looking forward, you can plan for next month rather than react to last month’s activity.
Both of these rely on you, as the user, to track all your expenses down to the penny. If you like the idea of tracking, but hate the idea of tracking to the penny, track to the dollar instead. A popular strategy is to round up every purchase to the nearest dollar. All those rounded up cents can be money that gets swept into savings at the end of the month.
2. Envelope Budgeting
Envelope budgeting is a clever solution that uses physical envelopes as budget categories. Label each envelope with an expense category, establish a spending limit, and divide up your cash into those envelopes. Remember to save one of those envelopes for “savings.” At the start of each month, allocate your resources accordingly and try to stay within the limits of each envelope.
Envelope budgeting works well for people who like to plan their expenses ahead of time and want to rely on cash. Using cash all the time might surrender some cashback or points on credit card spending but it also helps you avoid credit card debt. (Keep in mind, having and using a credit card can diversify the types of accounts you have appearing on your credit reports, which can help you build better credit scores.)
3. Pay Yourself First
Pay yourself first, also known as reverse budgeting, is when you save first. Whether that’s contributing to a retirement account or transferring money to a savings account each month (or both), paying yourself first takes care of the benefits of budgeting first. After you’ve saved your money, you can spend the rest on whatever you’d like because you’re already saving.
This is great for folks who don’t like the idea of tracking every last penny of their spending. By saving first, you get all the benefits of budgeting without the hard work!
I pay myself first and use the 20-30-50 ratio for saving (20% to savings, 30% to housing, and 50% to personal spending) as a guideline.
Budgeting is critically important and everyone should be able to find a method here that they can stick with. Once you’ve established a budget, you have options on how to increase your savings. You can look for ways to cut your expenses or ways to make extra money. Both will help you get ahead and begin moving forward financially.
[Editor’s Note: You can use this free tool to track your financial goals, like building good credit scores, each month on Credit.com.]
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