While keeping a close eye on spending is vital for financial security, few people enjoy doing so. Several creative approaches for effective budgeting and money management are available.
- The 70% Rule is percentage-based with 70 percent of income for necessary expenses. Followed by 20 percent going into savings by using automated direct deposit. The other 10 percent is for retirement and investing for future financial security. The 70% Rule is useful for those with saving as a priority, and want a simple budgeting method.
- The 50/30/20 Rule is a variation of the 70% Rule, with three categories. First, 50 percent of your income goes toward necessities. Then, 20 percent is for financial goals, such retirement or paying off debt. The remaining 30 percent can be spent as desired. This approach may not work for many people, but can be a good starting point for successful money management.
- Budget by Paycheck uses a calendar to track income and expenses. Color code your paycheck, expenses, and extra money to assign a bill payment to a paycheck on a calendar. Any “extra” money should be given a “job,” such as savings, debt repayment, or fun. This approach is useful if you desire structure and like having a visual tool.
- Envelope Budgeting is a traditional method with labeled envelopes to identify expense categories. Cash for the budgeted amount is put into each envelope. You only spend the amount in an envelope, which provides strong control of your spending. Instead of cash, you may use a card or envelope to record the amount spent for each category to stay within your limit. Several budgeting apps are also available with visual envelopes to monitor spending.
- Gift-card Budgeting manages your money by dividing your spending into categories and loading the amount onto a phone gift card. This system is similar to traditional envelope budgeting. Determine the amounts for various spending and saving categories. Then, buy gift cards for each category, such as a food store card for groceries, which will limit your spending for each budget item. With gift cards on your phone, you will always have them with you and will know the balances. Buying gift cards at moola.com can result in special deals and bonuses.
- You Need a Budget (YNAB) is a software system and app featuring partner budgeting, goal tracking, personal support, and secure data. YNAB emphasizes these principles: every dollar is assigned a category; large expense items are broken into manageable amounts; budget flexibility when situations change; and planning for the future, without scrambling for today. The personalized support and online YNAB community discussions, included in the cost of the software, prepare you for successful budgeting on your own.
- Kakeibo, pronounced “kah-keh-boh” and translates as “household financial ledger,” is used in Japan to manage personal finances. This method emphasizes recording financial activities with physical writing (no apps or computer), and uses four categories: (1) needs, (2) wants, (3) culture, such as books and museum visits, and (4) unexpected, for medical expenses or car repairs. Then, you reflect on these questions: How much do I have available? How much would I like to save? How much am I spending? How can I improve? Kakeibo may not control your spending but it can make you more mindful of how you spend money.
- Zero-based Budgeting gives every dollar a specific task for spending, saving, or investing. This method encourages you to create a revised budget each month based on changes in income or expenses, which provides financial flexibility. This system may not be useful for people with irregular incomes.
- Value-based Budgeting involves allocating income based on importance (value) to you rather than budget categories. While some items need to be paid (housing, food), how much you spend on these items depends on how much you value them. If eating out is a priority, your food budget will be higher than for someone who eats mainly at home. This approach can help you stay within your budget since you created the spending plan based on personal preferences. Beware that saving for a goal might be a low priority but should probably receive stronger recognition.
- Pay Yourself First Budget is simple and emphasizes your financial future. Based on the amount earned, determine how much you want to save. The remaining amount is divided among necessary expenses and other spending. The process can be awkward when a conflict exists between income available and a desire to save a large amount. Many people combine this method with other budget systems to ensure coverage of needed living costs.
Other actions that can make budgeting fun include:
- Money Nicknames. By naming your bank accounts and budget categories with creative names can create a fun attitude and personalized connection for money management activities. Also, use a Sharpie to label your debit and credit cards with a name or a specific use, such as “Hey, bills only!” or “Treat yourself today.”
- Bae Day involves setting aside a specific time, usually on payday, to review your budget and plan your spending. Bae, which stands for “before anything else,” involves a self-appointment to take action before anything else happens to your money. You can make Bae Day fun by dressing up for this self-care occasion, going to a special location, or playing favorite music.
- Money Mate Date helps achieve accountability related to finances. Your Money Mate will keep you in line for financial activities. The relation can involve a quick call to make sure that monthly bills are paid, or an emergency text to avoid impulse buying.
- Arts and Crafts. Create, or locate online, a poster to visually view progress on savings or debt reduction. Color in the poster little by little as you save or pay down student loans. Also consider using photos to represent budget categories or financial goals for more motivating money management activities.
For additional information on creative budgeting ideas, here are some links to click on:
- Have students talk to others for information about budgeting actions that have been successful.
- Have students create a video, poster, or other visual with ideas for creative budgeting activities.
- What are reasons people are unable or unwilling to practice successful budgeting?
- Describe the actions a person might take for effective budgeting.
Traditional wisdom encourages you to pay off your mortgage faster by taking a 15-year mortgage instead of 30 years, or by paying an additional principal amount each month. However, these actions have risks. If you encounter financial difficulties and don’t have an emergency (reserve) fund, you could face foreclosure. Be sure your emergency fund has enough to cover several months of mortgage payments to avoid losing your home.
Some financial advisors suggest that if your reserve fund earns a rate greater than your mortgage rate (also taking into account tax benefits), you may decide to invest rather than pay down your mortgage. This approach could give more flexibility when encountering an economic downturn, which might include refinancing your mortgage at a lower interest rate.
Also, beware of organizations promising to help you make additional mortgage payments. You can do this on your own, without the fee they will likely charge.
For additional information on paying off your mortgage early, click here.
- Have students talk to others about the benefits and drawbacks of paying off a mortgage early.
- Have students develop a visual to compare paying off a mortgage early with saving and investing additional funds instead.
- What are the benefits and drawbacks of paying off a mortgage early?
- Describe actions to take when trying to decide if to pay off a mortgage early.
Banking options continue to expand. Neobanks refer to financial services providers that appeal to information-hungry consumers comfortable with technology. Many are FinTech start-ups that offer checking and savings accounts, debit cards, loans, and budgeting guidance through digital channels and mobile apps.
Neobanks typically do not have physical bank locations, although some partner with existing banks or credit unions. Some consider PayPal an early neobank example as a result of being linked to bank accounts and payment cards. More recent examples of neobanks include GoBank (a brand of Green Dot Bank), SoFi Money, Varo Money, Wells Fargo’s Greenhouse, and Chase’s Finn.
Commonly viewed benefits of neobanks are:
- lower costs than most traditional financial institutions; access to large ATM networks with no fees.
- attractive to underbanked and unbanked consumers who use prepaid cards, check-cashing services, and consumer credit companies.
- clear communication of fees and charges; usually no overdraft penalties since you can only spend what is in your account,
- enhanced technology for basic banking activities as well as algorithms for budgeting, money management, and wise spending.
- ease of loan approval with technology-based methods for obtaining credit, along with access to loans by smaller enterprises.
Some concerns associated with neobanks include:
- a lack of physical bank branches.
- may not be chartered as financial institutions with government regulators, also lacking deposit insurance.
- no recourse may be available when malfunctions occur with an app or mobile connection.
- not appropriate for individuals who make cash payments and deposits.
As banking alternatives evolve, neobanks will likely become more numerous expanding into new products and services. At the same time, traditional financial institutions will seek ways to offer FinTech products to serve an expanding technology-oriented customer segment.
For additional information on neobanks:
- Have students propose services that might be offered by neobanks to enhance financial literacy and improve money management skills.
- Have students create a video or in-class presentation that communicates the positive and negative aspects of neobanks.
- What actions would you recommend to others before using a neobank?
- Describe possible actions that might be taken by traditional financial institutions to counter the potential loss of customers to neobanks.
Most every organization uses metrics to determine success. Also referred to as key performance indicators (KPIs), these numeric measurements can be used to assess financial success and progress toward goals. When selecting personal financial KPIs, be sure to: (1) identify what’s important to you for your financial goals; (2) create a system to track your progress, in writing, with a computer file, or an app; (3) involve all household members in the decision process.
Some common KPIs you might consider monitoring include:
- Credit score, which is affected by missed debt payments and involves your ability to access loans in the future.
- Savings rate is vital for future major purchases and planning for retirement. Financial advisors recommend saving 10-15 percent of your income.
- Discretionary spending measures a person’s level of expenses related to meals out, fancy clothes, vacations, and other non-necessities, so money can be saved for more important goals.
- Net worth (total assets minus total liabilities) measures financial health progress, which can increase by paying off debts and increasing saving and investing.
More creative KPIs are available for advanced personal financial planning. The Financial Health Index combines several financial metrics to provide a measure of overall financial health. The Financial Independence Number indicates the amount of money needed to live off the investment returns of your net worth. Living Within Means Index measures if necessary expenses are covered by a person’s income.
For additional information on KPIs for personal finance, go to:
- Have students create a visual design that might be used to monitor progress for one or more personal finance key performance indicators.
- Have students talk to others about actions they take to monitor their financial progress.
- Refer students to the Road Map/Dashboard feature at the end of each chapter of Personal Finance or Focus on Personal Finance to view additional examples of key performance indicators.
- What are the benefits and limitations of personal finance KPIs?
- What are other KPIs that might be valuable indicators of personal finance success?
A lifetime of skillful financial decisions starts with experiential learning at a young age. To increase financial literacy for the next generation, consider these actions:
- Give children a payday. Instead of a weekly allowance with simply giving money, create a system of earning these funds. Connect their household chores to earned amounts with a weekly payday. This practice can teach a child that people are paid for work to earn money for their living expenses.
- Create awareness of opportunity cost. Every financial decision has trade-offs. Once money is spent, that money is not available for other uses. Keeping money in a clear jar allows the young person to visually see what funds are available, and when the money is gone.
- Allow children to experience borrowing. If a child wants to buy something but does not have the money, set up a signed loan agreement with repayment terms. Also create a plan for the amount owed to be taken from future household earnings. Have the young person physically pay the money to better understand how credit works.
- Connect them in the budgeting process. Include children in the discussion of family finances and the household budget to help them understand where money is spent. Consider creating a chart with spending amounts, or use slips of paper representing money that are used to pay the bills each month.
- Teach wants vs. needs. Shoes or a clothing item may be a need but not a high-fashion version. To cover the cost of the higher-priced item, young people should be required to earn the amount for the additional expense.
- Use money games. These activities can help children understand earning, saving, wise spending and other basics of money management for a financially sound future.
For additional information on financial literacy for children, click here.
- Have students conduct online research to locate other actions used by parents to teach their children smart spending and wise money management.
- Have students talk to parents to obtain suggestions that might be used to teach wise money management to children.
- What are the financial, social, and relational benefits of children learning smart spending and wise money management early in life?
- Describe possible money management learning activities for children that involve creative use of technology.
Many young people making high salaries still say they feel broke. A “Henry,” short for “high earners not rich yet,” is someone who lives an extravagant lifestyle combined with their student loans has very little money left over. These “working rich” place a strong emphasis on travel, and often limit their spending on food and clothing in order to afford luxury trips. While many have a desire to get their finances in order, very few take appropriate actions to do so.
Henrys are characterized by a higher-than-average income, little or no savings, and a feeling of low material wealth. Most of their earnings go toward current living expenses rather than building wealth with investments.
For additional information on high earners not rich yet, click here.
- Have students conduct online research to determine various financial attitudes and behaviors of people in different age categories and life situations.
- Have students prepare a video that recommending actions to the people described in the article.
- What factors might be influencing the financial activities of the people described in the article?
- Describe possible financial concerns associated with these financial attitudes and behaviors, and recommend corrective actions that might be taken.
Kakeibo, pronounced “kah-keh-boh” and translates as “household financial ledger,” is a method used in Japan for managing personal finances. For over 100 years, this system has helped people make smarter money decisions.
Similar to other budgeting systems, kakeibo is designed to help you understand your relationship with money by recording all financial inflows and outflows. As proven by research, this recordkeeping method emphasizes physically writing your financial activities making you more aware of bad money habits. Kakeibo can help you become completely honest about your spending with the use of four categories: (1) needs, (2) wants, (3) culture, such as books and museum visits, and (4) unexpected – medical expenses or car repairs.
Kakeibo encourages you to ask yourself these questions before buying any non-essential items, or things you buy on impulse:
- Can I live without this item?
- Based on my financial situation, can I afford it?
- Will I actually use it? Do I have the space for it?
- How did I come across it in the first place? (Did I see it in a magazine? Did I come across it after wandering into a gift shop out of boredom?)
- What is my emotional state in general today? (Calm? Stressed? Celebratory? Feeling bad?)
- How do I feel about buying it? (Happy? Excited? Indifferent? And how long will this feeling last?)
In addition, to spend more mindfully, Kakeibo recommends that you:
- Leave the item for 24 hours.
- Don’t let major “sales” tempt you.
- Check your bank balance regularly.
- Spend in cash.
- Put reminders in your wallet – use a sticker: “Do you REALLY need this?!”
- Change the environments that cause you to spend.
For additional information on kakeibo, go to:
- Have students conduct a survey to determine reactions to this budgeting system among people in different age categories and life situations.
- Have students prepare a visual summary of some of the characteristics of the budgeting system.
- What elements of this budgeting system might people find beneficial? What are possible drawbacks?
- If you were to implement this system for your life, which actions would you select to do first?
Many personal finance reports are published with advice that may not provide the best guidance. In an effort to avoid buzzwords and troubling phrases, consider these suggestions:
- determine who conducted the research; a company may sponsor a study that lacks the rigor of academic or government researchers.
- be wary of research that reports feelings or predictions rather than actual behaviors and actions of respondents.
- consider the number of people in the study and how the respondents were selected.
- avoid generalizations that about a certain age group, such as Millennials, Baby Boomers, or Generation X.
Don’t revise your money management activities based on some survey or research report. If your current actions are working, then you are on the correct path.
For additional information on avoiding personal finance nonsense, click here.
- Have students conduct online research to locate a recent personal finance study to evaluate the validity of the advice offered in the report.
- Have students create a video presentation reporting both valid and nonsense personal finance advice.
- What problems could occur if a person uses inappropriate financial advice?
- In addition to the suggestions in the article, what actions might a person take to determine the validity of personal finance advice?
When considering a career change, the following financial suggestions are offered:
- have an appropriate amount of savings for unexpected expenses during the transition.
- create a budget to live frugally; cut living costs to be prepared for sudden expenses.
- reassess your investment portfolio to reduce risk exposure and possibly eliminate fees.
- seek advice from a financial advisor.
- determine how a career switch might impact your ability to save.
For additional information on financial advice when changing careers, click here.
- Have students talk to a person who recently changed jobs to obtain information about their experiences.
- Have students create a video presentation with suggested actions when planning to change careers.
- What relationship exists between a person’s career choice and money management activities?
- Describe additional financial planning actions that might be appropriate when considering a career change.
To spend less and save more, consider an “anchoring” system. One example of an anchor is the price of an item to determine if that is an appropriate amount of money to spend for the item.
Anchors prevent shoppers from being overwhelmed by the many choices, prices, and features. You can create your own anchors by:
- setting the maximum price you are willing to spend for an item.
- considering the value of an item in relation to the number of hours you have to work to pay for it.
- comparing the cost in relation to another item. If you buy coffee costing $2.50 a cup and want a sweater costing $50, view the sweater as costing 20 cups of coffee. Your “coffee” anchor will help you determine how valuable the sweater is to you.
When buying a home, you may be encouraged to look at properties outside your price range. Anchoring yourself at a price limit will avoid overspending, make you feel more in control, and encourage wiser financial decisions.
For additional information on financial anchoring, click here.
- Have students talk to several people to obtain information about how they determine the price they are willing to pay for an item.
- Have students create a video presentation that demonstrates various anchoring methods.
- How might anchoring help improve personal financial literacy and money management activities?
- Describe anchors people might used to determine the price they would be willing to pay for an item.