7 types of budgeting for your personal finances!
Updated: Aug 24, 2021
Adopt any of these budgeting styles to manage your expenses and stay on track towards your financial goals.
Budgeting is the most important tool when it comes to getting a stronger grip over your finances. By creating and following a budget you can decide how you're going to spend your money according to the goals that you have created. Your goal could be to increase your savings, build an emergency fund, set aside money for your next vacation or repay loans, credit cards or any other debt.
However, budgeting isn't quite fun and it is no surprise that many aren't even creating a budget. Although it has been proven that those who do follow a budget are financially well off than those who do not. Here are 7 methods of budgeting to help you get serious about your finances -
1. Incremental Budget. Incremental budgeting takes figures from the previous month or year and adds or subtracts a certain percentage across different expense categories to give you a current budget. If you do not have a previous budget you can start with rough estimates and track your expenses to see how it fares. This method works great when you plan to have a 10% increase in your entertainment expenses or a 20% reduction in outdoor dining expenses.
2. Zero-Based Budget.
Zero based budgeting is based on the concept where every dollar that you have earned is budgeted. In other words, income minus expenses equals zero. This does not mean that you are spending your entire income. A certain amount is transferred to your savings account and towards repayment of debts. You are required to plan your expenses as accurately as possible which makes zero-based budgeting a time-consuming method. If you go over in one spending category you need to make up for it by taking amounts from other spending categories.
3. Cash Only Budget.
This budgeting method allows you to only use cash for all your spending categories. Set aside a certain amount of cash for each category. This method is also called the envelope system. You can put the cash in envelopes labeling them as groceries, household, utilities etc. If you run out of cash for groceries, for example, you may use the cash set aside for other categories. However, if you do that too often, you may run out of cash for the month. This method works great for those who wish to avoid their credit and debit cards. Besides, knowing that you only have a certain amount of cash to spend, you become stricter with your financial choices.
4. 50-30-20 Budget.
The most popular budgeting method used, this involves allocating 50% of your income towards your needs, 30% of your income towards your wants and 20% towards savings and investments. The most important part for this budget to work for you is the ability to distinguish between your needs and your wants. Needs are those that you are absolutely required to pay and those that are necessary for your survival. Your wants includes the things that you spend money on but are not essential.
Related - The 50/30/20 rule when it comes to Budgeting!
5. 60-10-10-10-10 Budget.
Very similar to the 50-30-20 method, this budgeting method involves allocating 60% of your income towards committed expenses such as mortgage, food, basic clothing and other needs. The remaining 40% is divided among four categories with 10% each. These are for a retirement fund, long-term savings, short-term savings and your wants such as dining out and other entertainment expenses.
6. Pay yourself first Budget.
This method focuses primarily on savings and debt repayment. You begin by setting aside a certain amount of money towards your savings and debt repayments while spending the rest however you see fit. By doing this you prioritize and pay yourself first. Do remember to take into account all the necessary expenses such as rent, utilities and food etc. so that you don't fall short on funds for them.
7. No-budget Budget.
A budgeting method that works well for some people, this involves having no budget at all but keeping an eye on your bank balance and automating bill payments. This works well for those with a higher level of income, who do not need to track their expenses as they earn enough for their savings and debt repayments. However, if you are prone to overspending, this method could hurt your finances.
Related - 7 tips on how to stop spending money on unnecessary things! 7 warning signs you are living beyond your means
Implement the 30 day rule to control your Spending Habits!
The Ultimate Guide To Getting Your Finances Back On Track is a book that aims to help the user in being smarter about their finances. This guide contains seven sections - Financial Goals, Expenses, Savings, Income, Loans & Debts, Budgeting, and Investments. Each of these sections explains everything you need to know about Personal Finance in simple terms. By the end of this book, you will have learned the fundamental principles that will help you in maximizing your income, decreasing your expenses and increasing your savings that will overall kickstart your process of truly building wealth.
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