How the subtraction budget can help you

January 30, 2018
The subtraction budget is one of several strategies that personal finance advisors often cite. This strategy is one of the simplest, so it is worth trying to understand, especially if other budget plans did not work for you.
How the subtraction budget can help you

How does a subtraction budget work?

  • Add up all your bills for the month. Then, subtract the total bill amount from your monthly income.
  • Decide how much you want to save for the month. Subtract this from the new total.
  • The number after these two subtractions is how much you have to spend on necessities and entertainment for the month.

This sounds overly simplistic

A subtraction budget is very simple, you are right. However, it does everything that you need a budget to do:

  • It makes certain that all your bills are paid.
  • It makes certain that you are putting some money in savings every month.
  • It tells you exactly how much you have left to spend after all your bills have been paid.

How much should I try to save?

This depends on how much you have left over after you have paid your bills. It might be better to think of this as a percentage equation rather than a dollar amount. You could say that you want to save 50% of your remaining income. If you have $400 left after paying your bills, you would then use $200 for savings and $200 for spending. You should find a percentage that you are comfortable with. 50% might seem like a lot, so you could try for 25%. That would still be a significant amount ($100 in our $400 per month example).

The most important thing is that you make the savings consistent. $100 per month is better than $300 one month and $0 for the next six months.

What other budget plans are there?

You can choose a different budget plan if you want, or you can combine the subtraction method with another budgeting strategy.

  • Cash budgeting (also known as the “envelope method”). You have a stack of envelopes, and each one is for a different spending category. You put the amount of cash that you can spend for the month in the envelope and you have to make it last for the entire 30 or 31 days. With this strategy, you can physically see how much you have left to spend in each category.
  • The percentage method (proportional budgeting). Rather than figuring out a dollar amount, you assign a percentage of your income that you will spend on each category. This works for people who do not take home the same amount of money month after month.
  • Automated budgeting. With this budget, you put as much of your bill-paying as possible on auto-pilot. This means setting up automatic payments with a bank account or credit card and also automatically transferring money into a savings account. Obviously, you will still need some cash or a debit card to cover food and gas, but the rest will take care of itself.