Are You Using the Right Budgeting Method?
Sticking to a budget is key to achieving financial goals like paying off credit card debt or saving for a down payment on a home. But unless you have a plan for your money, it will seem to make a plan of its own. While it's easy to see how a budget can help you take charge of your finances, continuing to follow that budget for more than a month can be incredibly challenging.
If counting every penny makes you feel like a prisoner to your finances, you may be experiencing a budget mismatch. Let's explore several budgeting strategies to help identify one that might better fit your personality and lifestyle.
Pay Yourself First Budget
Instead of prioritizing your bills, you prioritize yourself (your savings) with this budget. As soon as you receive your paycheck, deposit a preset amount into a separate savings account. The amount you set aside will be based on your specific money goals. Use the remaining funds to pay bills and other expenses.
The Pay Yourself First Budget might be right for you if you need help prioritizing savings. But you might find it difficult to follow if you have high debt payments that take up most of your earnings.
Traditional or Line-item Budget
When people think of budgeting, many envision a sheet of paper with a line drawn down the middle. On one side is a figure representing income, the other side is a list of expenses. The difference between the two is the amount left over for savings. This is a basic description of a traditional or line-item budget. Today, of course, you're not limited to pencil and paper for this budgeting method. Budgeting software, mobile apps, and Excel spreadsheets are alternatives for the tech savvy.
The Traditional or Line-item Budget might be right for you if you're detail oriented or if your income varies each month.
The envelope method allows you to easily set limits on your spending. It works by using physical or electronic envelopes as expense categories. You assign a set amount of money to each category. Once the envelope is empty, you can no longer spend in that category until your next payday or the following month.
The Envelope Budget might be right for you if you frequently spend money on things that aren't in your budget. But you have to be careful, because it's also easy to "borrow" from other categories using this system.
This budget is often recommended for those who are new to managing their money. Its simplicity makes it appealing. You create three main categories of spending: Needs, Wants, and Savings.
Start by taking 50% of your income and assigning it to the Needs category. From this allotment, you pay your bills (including any debt payments). The next 30% of your money goes to the Wants category. This is where you can spend money on non-necessities like product upgrades and entertainment. The Savings category is where you put the remaining 20% of your income.
The 50/30/20 Budget might be right for you if you need a flexible spending plan that you can start today. But this flexibility still requires you to set limits to avoid overspending. Since you're paying less attention to the details within each category, you might spend more in the Wants category when you could be saving more toward retirement or other financial goals.
The goal of this budgeting strategy is to get your budget to zero. That means that every dollar has a name, and at the end of the month there's nothing left over – intentionally. Similar to the other budgeting systems, you'll set aside money for necessities first. With the Zero-sum Budget, the balance is used for spending and saving as you see fit.
The Zero-sum Budget might be right for you if you enjoy seeing how your choices impact your bottom line. This budget requires attention to detail and is not as flexible as other options.
The "right" budget for you is the one you'll stick to every month. It's okay to mix and match features of several budget styles to create your ideal spending plan. Regardless of which method or tool you use to manage your finances, you must be honest with yourself about your spending habits. Being realistic about your income and expenses makes it easier to achieve your financial goals.
Article by Tracy Scott