What is budgeting?
To put it simply, according to Atypical Finance, budgeting is “a living and breathing plan for you money so you do not spend too much or too little.” In other words, it is a spending plan that helps you keep track you current and future income and expenses.
However, the usual connotation for the word ‘budgeting’ is limiting. We think that budgeting our personal finance will only hinder us from enjoying the finer things in life. That may be just an excuse for us to acknowledge our bad spending habits, don’t you think?
Two Sides of the Coin
Contrary to what other people think, budgeting actually helps you reach your financial goals and achieve financial stability without sacrificing those ‘rewards’ we grant ourselves here and then. When we create a budget, you keep track of where your hard-earned money go and eliminate practices like spending money on things that are unnecessary. And while it may be a hard pill to swallow for some, budgeting will put your bad financial decisions like overspending, failing to create an emergency fund, putting debt payments on hold, etc. into light and hold you accountable for it, because who else manages and spends that cash but you?
Taking more focus on the good side, budgeting will give you more control of your cash flow so you’ll avoid falling into the same spending patterns again. Budgeting will help you spend your money wisely, and onto things that actually matter. It will help you create realistic financial goals, align your monthly budget with your monthly payments, and prepare for unexpected expenses while having enough money for personal wants and needs.
While budgeting may feel a bit daunting for first timers, it has great returns once you get the hang of it. But before you go and pick out which method best suits you, it’s better to asses first where does your money go. Take some time to collect old shopping receipts or bank statements to get a better grasp on your spending habits. It will give you a clearer picture on where you spend money most on and how you will tweak your monthly income to cover your monthly expenses. Once you figure out the specifics of it, it will be easier for you which budgeting method you will use.
Remember, there’s no such thing as a universal budgeting method; what worked for someone else might not work for you. So it’s vital to understand and compare each method to find out what will suit you the best.
Best Personal Budgeting Methods
Zero based budgeting method
If you’re the type to be patient in listing and recording every spend up to the last cent, then this budgeting method might work best for you. The equation of this method is simple: income minus expenses is equal to zero. But this doesn’t mean that you’re literally going on a zero balance after calculating everything out– you are not under or over the radar.
First, write down all of your expenses, say for example in a month, and yes, that also includes the pack of gum you bought from the convenience store. You may need to fish out those bills, receipts and credit card statements to accurately map everything out. Make sure that the sum matches your total income for the month.
Though undeniably time consuming, this ‘down-to-the-dollar’ budgeting method allows you to track your spending and living expenses without leaving a room for error. If you’ve been budgeting for a while and has memorized your expenditures, this might be a better option for you. This is also perfect for people who want total control of their money.
50-20-30 Method
Also known as the balanced money formula, this method is based on the principle of dividing your income into three categories: 50% on needs; 30% savings; 30% wants.
Your needs are pretty self-explanatory; these are the things you need in your daily life. Debt payments, student loans, retirement plans, car payments, and emergency fund fall into savings and the remaining percentage is your fun money.
Since this method is simple and straightforward, it’s a great option for budgeting beginners. Just make sure to draw a clear line between what is a ‘want’ and ‘need’ to effectively utilize this method.
Another good thing is that you can tweak or make adjustments at this method for it to effectively fit your needs. Say for example, you want to prioritize clearing up your debts so you want to allocate a higher percentage for that.
You just need to watch out for overspending tendencies with this method.
‘No Budget’ Budget
This budgeting method doesn’t literally mean that you won’t do anything budgeting at all. You just don’t have to spend money you do not have. Instead, you’ll keep track of your bank account. This even negates the need to track your expenses, you just have to make sure there’s enough amount left on your checking account to cover all of your bills and spend the rest (responsively) on everything else.
This may seem a laidback way to budget, but this works well with people who doesn’t have time to meticulously track every spend they make. This is also applicable to people who receives a hefty paycheck with good money discipline.
Cash-Only Budgeting
Commonly known as the envelope system, will require you to use solely cash. Just like in a zero based budget, you list down all of your expenses and use an envelope to represent every category. Then you will withdraw the cash you need to cover the total amount of budget.
For instance, you are planning to go out to buy some groceries. Take the envelope labeled ‘grocery budget’ and only use the cash inside to pay for your items. It’s that simple.
If there are any occurrences you run out of bills, you can take some cash from the other envelopes but it is not advisable to do it often as it will create a snowball effect and you may find yourself running out of money at the end of the month!
If you’re a struggling over spender, this method might be the perfect one for you. It’s purely straightforward: if you run out of cash, then that’s it! You can take a credit or debit card with you but for emergency purposes only.
Pay Yourself First Budget
This money management method focuses on savings and debt repayment. If you want to clear out those credit card debt and other loans, then you may want to focus on this one. By paying yourself first, you are slowly but surely securing a retirement or an emergency fund through a savings account or a retirement plan. In this method, you are treating your savings as ‘bills’ that you need to put first before everything else.
Basically, you will allocate a specified amount for your savings and debt payments each pay day. The rest of your paycheck will cover the rest of the expenses.
Why Is Budgeting Important?
- It helps control your spending
Let’s face it, it’s hard to keep track of our daily spending without a budget plan reminding us to stop spending already. Budgeting also keeps you from spending beyond your financial limit and helps you realize that every coin spent counts. Having a concrete number of your expenses helps you keep track of that budget monthly. - Keeps you on track with your financial goals
Everyone wants to achieve financial independence, but the road going there is a long, winding one. Thanks to budgeting, it helps us to stay on track towards your financial goals. It also helps us create realistic goals which are achievable. - Keeps you from feeling financial overwhelmed
One of the ways to prevent yourself from being financially overwhelmed is by budgeting. You don’t spend beyond your means, you have extra money in case of unexpected expenses, and you have your savings to prepare you for a retirement life. - Helps you avoid or get out of debt
Budgeting keeps us from spending money on things we couldn’t afford. Let’s admit it: at some point in our lives, we borrowed money to pay for some luxury and fall into debts eventually. We can avoid these circumstances again through budgeting.
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