Which of the budgeting methods do you use to improve your financial health? A 2020 survey conducted by the National Foundation for Credit Counseling found that only 47% of Americans use budgeting tools to keep track of how much they spend. But as the most important part of financial planning, a budget can help you achieve your financial goals faster.
A budget not only assists you in keeping track of where your funds are going, but it also offers you so much control over all the processes involved. If you don’t have a clear plan for how your money will come in and go out, you might spend against your best interests and not even realize it.
Purpose Of Budgeting In Your Journey To Become Financially Free
Making a budget isn’t always fun, but it’s one of the most effective ways to enhance your financial health. Here are some reasons why is financial health important and ways that living on a budget can be beneficial.
- It makes sure that your spending fits with your goals. You can decide how to spend your money every month based on what’s most important to you if you make and stick to a budget.
- It can help you make better plans for paying off your debt. If you’re trying to repay student loans, credit cards, or any other kind of debt, a budget can help you save more money so you can pay it off faster.
- It can help you reach your goals for saving. If either you want to set aside money for retirement, build up an emergency fund, or save money for your next trip, a budget can help you plan how much you will save toward your goal at the start of each month.
5 Budgeting Methods To Consider
Before choosing a new or different way to budget, you might want to find out where your money is going so you know what needs your attention.
Megan Luke, chief operating officer at PNC Bank, said that a simple way to get started is to keep all of your receipts for a month or two for every penny you spend. “At the end of the month, sort the receipts into piles for food, gas, entertainment, etc. This will provide you with an overview of what you are spending now and give you a chance to find ways to make changes and maybe save.
You can also do the same thing with your online checking account or credit card account.
Once you know how you spend your money and where you can make adjustments, you can use one of these five budgeting methods to make it happen. There are no one-size-fits-all methods for making a budget, so it’s important to look at all of them and figure out what works best for you.
|1||The zero-based budget||Keeping track of regular income and expenses|
|2||Pay yourself first budget||Prioritizing savings and paying off debts|
|3||The envelope budget system||This encourages being disciplined about spending your money.|
|4||50/30/20 budget||Categorizing “needs” over “wants”|
|5||The “NO” budget||Avoiding and staying away from Debt.|
1. The “Zero Budget”.
A zero-based budgeting method is easy to understand: add up all of your expenses; if you subtract your income from your expenses, you get zero.
This method of budgeting works best for people who know how much money they will get each month or can make a good guess. After figuring out how much you make each month, add up how much you spend and save each month to get the same amount.
It’s important to plan your expenditures as accurately as possible. If you spend too much in one area, you will have to take money from another area in order to make up for the area you have or proposed to spend too much. And remember, forgetting a big expense could throw off your budget.
Luke said, “Zero-based budgeting takes the most time because you have to look into the details of each item.”
Since a zero-based budget allows less room for error, it might be better for someone who has been involved in their budgeting for some time. Even so, it’s smart to keep some spare funds in your checking account as a safety net. Also, it is important to have at least a small emergency fund just in case you have to pay for something big that you didn’t plan for.
2. Pay Yourself First.
The “pay yourself first” budget is another easy way to make a budget that focuses on savings and paying off debt.
Simply put, every time you get paid, you set aside a certain amount for savings and debt payments. The rest of your money is yours to spend as you please. By doing this, you can set your savings and debt-repayment goals in order of importance and make do with what’s left.
For example, you might want to first pay off the high-interest debt while you slowly build up an emergency fund. But as you pay off your debts with high interest rates, you could save for other things.
Of course, it’s important to put your bills and necessary costs in order of importance. But you don’t have to be overly careful about how you spend your extra money because you’ve already taken care of the things that are most important to you.
This budget is ideal for people who have trouble saving money every month or who don’t want to spend too much time budgeting each expense.
3. The Envelope Budgeting Method.
Of all the methods of budgeting, this one is comparable to the zero-based budget, but there is one big difference: you pay for everything with cash. In an envelope budgeting system, you plan how you will spend your money each month and give each type of spending its own envelope. Then, based on your budget, you take out the amount of cash you’ll need to fill each envelope.
You take your grocery envelope with you when you go shopping, for example, and pay for the items with cash. If you run out of cash for a category, well, that’s all you can spend in that category for the month on that item, unless you want to take money from other envelopes. Don’t go through other envelopes too often, though, as this may cause your cash to run out before the end of the month.
Dave Ramsey, a financial expert, is the biggest fan of this envelope system, so it’s a great choice for people who share his ideas about money, which are mostly about getting out of debt quickly and using cash instead of credit cards.
But it’s not a good way to budget if you don’t like carrying around that much cash or would rather use credit cards or debit cards.
4. The 50/30/20 Budgeting Method.
The 50/30/20 method of budgeting is simple and takes less work than both the zero-based and envelope budgets. The idea is to divide your expenditure into three groups:
- Expenses that must be sorted (50%).
- Spendings on what you want (30%).
- Savings and debt repayment (20%).
This is one of the budgeting methods that is recommended for people who have never done it before because you don’t have to keep track of every single expense. You can stick to this budget if you know the difference between wants and needs and if you need to save but not pay off too much debt. The biggest problem with the 50/30/20 rule is that 20% might not be enough, so it might not work for people with a lot of debt or big savings goals.
But the best part is that you can change it to fit your needs. For example, you might want to think about increasing the percentages for savings and paying off debt and decreasing the percentages for optional or other necessary spendings.
In other words, you don’t have to get stuck on the 50/30/20 ratio. Make the idea fit your needs.
5. The “NO” budget.
This different way of budgeting is all about not spending money you don’t have, as the name suggests. Instead of making a budget,
- Keep an eye on how much money you have in your checking account. Use a budgeting app, online banking, or a mobile app from your bank to keep track of this.
- Know when regular bills will be taken out of your account. One way to do this is to keep a list on a piece of paper, in a spreadsheet, or in a Microsoft Word document.
- Put money aside to save and pay off extra debt. When you can, set up automatic transfers from your checking account to your savings account and increase your monthly automatic debt payments.
- Spend what’s left in your account without doing too much. Again, maintaining a close eye on your account balance will help you figure out how much money you have left over after paying for essentials.
Even though the “no” budget sounds easier than the other ones we’ve listed, it’s not always easy to tell yourself “no.” Of all the budgeting methods, this one works best if you’ve been good at controlling your spending in the past and are sure you can keep it up.
Also, the best way to stick to this budget is to only use a debit card, which is linked to your checking account and automatically checks your balance.
Should You Change Budgeting Methods?
Not getting results and intending to change budgeting methods again, wait! even if you choose the right way to budget, it might take you a few months to get used to it, especially if you’ve never done it before. But like any other habit, it gets easier the more you practice it.
And before you quit budgeting, think about why you want more control over how you spend and save your money. Think about the goals you want to achieve and why you want to achieve them. Doing this can give you back the drive to keep trying to get better at budgeting.
Also, don’t be afraid to change your budgeting plan if you think other methods could work better. For example, if one way of budgeting isn’t working for you, try another, or make changes to any one so it fits your needs. And think about using an app to help you make a budget to simplify the process.
No matter what you do, you should make it a habit to manage your finances in a manner that helps you continue improving your financial health to achieve your goals. Any of these budgeting methods will help achieve that.