Budgeting is not a one size fits all. You need to find one that works best for your financial situation and goals. In this article, I am going to introduce you to several different budgeting techniques.
If you don’t know which method to choose, analyze your financial situation and your goals. Perhaps you’re in debt and need a system to help you decrease spending, but you do not like a rigid budget system. Or, maybe you strictly have savings goals you want to reach. Once you decide what you want to accomplish you can pick a method that works best for you.
Now, let’s take a look at the different types of budgeting techniques!
I. The traditional budget
The traditional budget is the most familiar and mirrors the process we reviewed in this course. With this method, you list your income, list your expenses, and find the difference. After that, you set goals for how much you want to spend in each category, such as groceries, gas, and entertainment. If you are detail oriented, this is the budget technique for you because you spend time really digging deep and analyzing how you spend your money.
II. The 50/30/20 budget
The 50/30/20 budget is also known as the balance money formula. This type of budget is much more simplified than your traditional budget. With the 50/30/20 budget, you break down your expenses into three categories: needs, wants, and savings. 50 percent of your take-home pay should go towards needs, 30 percent should be devoted to wants, and 20 percent should get put into savings. Your needs will include only your vital necessities like mortgage and your car payment. Your wants are those expenses like memberships and subscriptions. One risk to this method is overspending because of the lack of categories to track, so it is important to keep that in mind if you use this method.
III. The 80/20 budget
The 80/20 budget is further simplified. With this method, your goal is to simply save a minimum of 20 percent. The rest is yours to spend freely. You can also modify this into the 70/30 budget, 60/40 budget, or even the 50/50 budget, depending on how aggressively you choose to save. This is also known as the Pay Yourself First budgeting method. This is best for those whose goal is to save money.
IV. The sub-savings account method
The sub-savings account method is a spin on the 80/20 budget. With this budget, you funnel your money into sub-savings accounts based on your goals. You open multiple savings accounts and give each one a nickname based on specific goals. For instance, a “house” account or “European vacation.” Then you set a timeline goal and divide the dollars by the timeline to see how much you should save each month. You will auto-draft money each month from your checking account into your multiple savings accounts. This one is also best for those whose goal is to save more money for certain things, activities, or experiences.
V. Cash only budgeting
This is commonly known as the envelope system. Here, you can allot your money to different categories such as groceries, bills, etc. and withdraw the total amount from your account and divide them into these sections, and put them in envelopes. Once an envelope is empty, you can’t spend any more money on that particular category for the month. This method is perfect if you need a rigid system but don’t want to track every purchase.
Each budgeting technique has its merits. You should decide which to use based on your financial situation and goals.
Now that you know more about the budgeting process and various techniques, you can move closer to creating a budget that works best for you and your family.