Managing expenses can be tricky. When it comes to finances, budgeting can help you make sound decisions.
A budget is a financial plan calculated to fit a defined period.
Knowing what your budget is allows you to understand how much money you have that you can spend on certain things. It’s also a way to allocate funds to needs instead of wants.
Five Budgeting Methods To Consider
There is no one-size-fits-all when it comes to budgeting. A budgeting system can be different from person to person and can depend on monthly income, access, and other external factors. Here are five budgeting methods you can use.
The Zero-Based Budget
The zero-based budget method ensures that your income is spent on something purposeful until it amounts to zero. This doesn’t necessarily mean spending your entire income for the month and putting nothing away. The way this works is to list down all your expenses, from essentials (groceries and bills) to extras (entertainment and shopping). You should also include the amount you intend to put away for savings. When you calculate all of those minus your monthly income, the result should be zero.
Zero may not always be the result in this top-down budgeting approach and that’s okay. It just means that there is money left over, which you can use to save for other things like a retirement or emergency fund. Getting zero in this method requires practice. The monthly expenses can also change and require adjustments to a new budget when using this method.
The Pay-Yourself-First Budget
If building savings is your primary goal, pay-yourself-first budgeting is the right method for you. This system ensures you put away money before figuring out what to do with the rest. For this method, determine how much you want to save for each paycheck. Immediately route that money to a savings account once you get paid, so you don’t have to worry about it. Then, you can use the remaining funds for bills, utilities, and personal expenses.
This method is handy for people who want to build retirement savings and emergency funds or save up for a significant expense later, like upcoming vacations or a downpayment for a new mortgage.
The Envelope System Budget
One of the oldest forms of budgeting methods is the envelope system method. This system involves actual cash and avoids the use of debit cards and credit cards. This method requires two things: 1) envelopes and 2) strict financial discipline regarding budgeting.
For this method, start by listing down several spending categories and determining the amount needed for each. A spending category can be personal, utilities, restaurants, or gas money. Label each envelope with the name of the category and the amount of funds allocated for that. Take out the cash amount budgeted for each category from your pay and place it in the envelope. Take the respective envelopes when you need to spend money on specific categories. The cash within the envelope is strictly the only amount you can spend. Envelope budgets may sound rudimentary, but it works for some people, especially overspenders. It helps them avoid unnecessary spending and taking out more money from their checking account.
The 50/30/20 Budget
The 50/30/20 budget is a flexible budgeting method that specifically divides your budget into three increments: 50% on necessities, 30% on wants, and 20% on savings. Here, you see that half the portion of your income goes to expenses like rent, grocery shopping, student loans, and other debt payments. You are also allocated spending money equal to 30% for more personal but not essential uses. This could be clothes shopping, eating at restaurants, or maintaining streaming subscriptions like Netflix so you can watch movies. The remaining 20% are deposits made to your savings account.
The most relaxed budgeting method is called the anti-budget. The name may suggest otherwise, but it is still a form of budgeting and is considered the easiest of all budgeting methods. Like the pay-yourself-first budget, it’s a type of bottom-up budgeting where you can prioritize paying yourself first through savings before paying bills. After taking care of those two things, you can use the remaining money for whatever you want. This method doesn’t have to be rigid where you must track where all of your money goes.
People use this budget by allocating 20% of their income to savings and 80% to the rest. The point of this method is to help people who hate budgeting put saving money as the top priority, followed by their bills, and finally have peace of mind knowing they have extra left over.
How to Choose the Right Budget System
No single budgeting system offers the best and most perfect solution. Figuring out a budgeting system that works for you requires practice and some trial and error. There are several things to consider when choosing the suitable budgeting method that suits you.
Your take-home pay may fit a specific budgeting method to build good financial habits and meet financial goals. You need a budgeting system that makes the most sense with your income, debts, and needs.
In other cases, lifestyle choices or the amount of effort you are willing to devote can also influence the budgeting system that works for you. Consider which method is easiest to practice for you and most effortless to stick with.
Why Budgeting Is Important?
The point of budgeting is to help make the right financial decisions. Financial stability is one of the most essential things in our lives. Knowing how to budget can help us achieve this and survive the money-run society that we live in today. Budgeting can let us see what our spending habits look like and how we can utilize our income in areas that we value the most.
Sticking to a budget is even more critical. Many people need help to do this. While finding the right budgeting system is helpful, sticking to a budget requires financial discipline, motivation, and lots of practice. You can use tools like budgeting apps or seek guidance and support from accountability partners, like household members, to help you with this process.
Regardless of the budgeting methods you decide to use, remember that budgeting can help you achieve a promising financial future.