Budgeting can be hard especially if you do not have a guide on how to do it properly. It can also a little bit complicated since there are many different budgeting methods. So, let us discuss them one-by-one for you to have a clearer idea.
There are many ways how budgeting can help you in your financial status in life. Through budgeting, you can prevent overspending by planning ahead where your money should be spent. It helps you to achieve your financial goals by giving you feedback and adjust if necessary.
And maybe, you included it not just once but for many times already to be one of your New Years Resolution. However, you failed to do so. So, let me guide you on the different budgeting methods that you can choose from.
Different Budgeting Methods
1.) Traditional Method
In the Traditional Budgeting Method, you are creating a forecast on what will happen or what will be your future expenses. You are basing your monthly budget from your past expenses.
How To Do It
You base your budget on your previous months’ expenses, ideally at least three months. From it, trace what and how much are your reoccurring expenses – groceries, utilities, mortgage and categorized them.
You first start with your income and write down all of your categories for expenses on which you are planning to spend your money. You then set how much in each category you are going to allot from your net income.
For easy tracking, make four columns using either excel or spreadsheet: categories (expenses), allotment (budget), actual, balance (remaining).
Pros
This is ideal for detailed-oriented people. It is already proven to be effective. You do not have to start from scratch in creating a budget since you can refer to your past expenses. You can identify how small purchases you made can add up.
Cons
It is not that flexible and you are assuming that you only have regular and almost the same expenses each month. It takes time and effort to track all your expenses which some people hate to do. You need also to update it weekly to trace how much money you left.
2.) Reverse Budgeting Method
Other people refer to this as “Paying Yourself First” because its main principle is “out of sight, out of mind”. The idea is to save money first before you have a chance to spend it. Basically, the idea is to save first then spend.
How To Do It
You can set-up a different savings account. Every paycheck, set aside first a portion of your income intended for your savings goal. The rest budget it for your monthly expenses. Be sure to prioritize your basic needs – food, house rental, transportation, etc.
Pros
It prioritizes savings hence you can really have one each month. Saving money first can make you think that you only have low income making yourself spend less and within your means. This method can also be utilized in debt repayment.
Cons
You are less concerned about tracking your expenses thus it is important that you stick to your budget plan.
3.) Cash Only Budgeting
Also known as the Envelope Budgeting Method. In this method, you only use cash, no debit or credit cards.
How To Do It
Identify your major expenses or categories. Set one envelope for each category and a spending limit. So, if you have 10 categories then you need 10 envelopes also. Label each envelope for whatever its purpose. At the start of the month, withdraw your money. Budget it and put your money into the envelopes.
So, if you have a Php 8,000 monthly budget for your grocery. After withdrawing the cash, put it directly in your “Groceries Envelope”. If there is no more money left, then you need to stop spending money on your groceries. It is really important that you will buy first those that you really need.
Pros
It is ideal for those people who struggle for overspending and for those who really want to be in control of their budget. As long as you stick on spending only the money on the envelope for whatever its purpose.
Cons
The high risk in using this method is, chances are you will lose your envelopes. Just take any necessary cautions to avoid losing your envelopes. Better put it in a secure area and make it a habit to put it always at the same place so you know exactly where to find it.
4.) Balanced Money Formula
It is popularized by Elizabeth Warren and her daughter Amelia Warren Tyagi in the book they co-authored together “All Your Worth: The Ultimate Lifetime Money Plan”. This is also known as the 50-30-20 Method.
How To Do It
Divide your net income into three categories. The 50 percent is for your needs, 30 percent is for your wants and the remaining 20 percent is for your savings.
Needs. This refers to the things that you can’t live without or your basic needs. It includes food, house rental and alike.
Wants. This refers to luxuries in your life. It includes buying a new gadget, eating in a restaurant or watching movies.
Savings. This can include your retirement fund, emergency fund or for your debt payment.
Pros
Less hassle since you only have three categories compared to the Traditional Budgeting Method. You do not need to constantly track your money and you have the flexibility on how you are going to spend on your wants. Having also 20 percent intended for savings can make you earn faster.
Cons
You are prone to overspending since it is not very detailed. Let’s say, you spend too much on dining out that you forgot that you still need to pay for your cable and internet bills.
You should also be careful in identifying your needs and wants. It is not ideal also for people who have unsteady income.
5.) Zero-Based Budgeting
Your entire income should be totally spent and save leaving you exactly a zero balance at the end of the month. This gives you a clear idea of where your money will go. You do not focus much on your past expenses but on what you are going to need in the future. Your expenses should be justified if cannot then eliminate it.
How To Do It
In a piece of paper, draw a line at the center. Write all of your income on the left side and on the right side write down all of your expenses including your savings. It is really important that you do not forget to include your savings or else, there is no point in budgeting at all.
After writing down all of your income sources and summing it up, you can now then proceed in writing down your expenses. I strongly suggest that you should start first in how much you should save, pay yourself first. As you write down all of your expenses, try to add it up. Continue doing this until your expenses equal to your total income. Just make sure that your expenses are not greater than your income. If that’s the case, reduce your expenses first not your savings.
An easy and alternative way is to use an excel or spreadsheet. You can input a formula that will automatically add up your income and expenses. It is very easy also to track if how much money you still have.
Pros
If you are the type of person that wants to budget every penny you have, then this is for you. What’s good in this method is that it is flexible, you always start from scratch every month allowing you to eliminate unnecessary expenses from the previous month. You can learn also not to spend more than what you earned. You are also very clear about how you are going to spend your money.
Cons
It is time consuming due to proper planning and tracking of your expenses. You really need to track every expense. In making the categories, make sure that you included all of your expenses.
6.) The Half Payment Method
This is good for you if you are a weekly earner or living paycheck to paycheck.
How To Do It
You need to identify first what and how much are the expenses that you are regularly paying each month – house rental, car payment, etc. When you received your paycheck, set aside an amount equivalent to half of what you are regularly paying every month.
If your creditor allows half payment, the better. When you received your other paycheck, add it up to the other half that you set aside already. Now you can pay your bills fully.
Pros
You will always have money paying for your debt or rental while ensuring that you still have money to cover your daily expenses.
Cons
You may get confused about tracking your bills and splitting it. The timing of your paychecks and due dates can also be troublesome.
7.) The 60 % Solution
It is first introduced by the editor-in-chief of MSN Money Richard Jenkins. It is similar to the Balance Formula that it uses a percentage instead of a fixed amount of money.
How To Do It
Here, 60 percent of your income is for “committed expenses”. It includes clothing, food, mortgage, insurance and alike. The remaining 40 percent is divided into four categories with 10 percent each.
These categories are:
- ) Retirement
- ) Long-term savings (emergency fund, stocks)
- ) Short-term savings (vacations, irregular expenses)
- ) Fun money (wants)
Pros
You do not have to account every penny.
Cons
It may be hard for some people to reduce their expenses to 60 percent of their income. Paying also your debt using this method may take longer.
8.) Values-Based Budgeting
Your budget will depend on what you “value” in life. You are going to incorporate your values and what’s important to you with your financial plan. This can help you to prioritize what you want in your life and to attain it.
How To Do It
Write down what you value in life. If you like traveling, then your expenses will be focused on it. If you like buying books, write it down. You are not going to spend your money that is not on your list. For example, you are not going to buy the latest gadget since currently it’s not included on the list.
Pros
It is applicable to those people who naturally enjoy saving first and being frugal. You do not need to track every expense you made.
Cons
This is for those who have a high income. If you are not that well aware and disciplined regarding your spending habits, then this is not for you.
9.) Priority-Based Budgeting
This is very similar to values-based budgeting.
How To Do It
Make a list of what are your priorities in life starting from the most important down to the least important. If you are already at your spending limit, do not buy the items that are least important.
Pros
It helps you to determine what are your essential needs.
Cons
If you are new to money management, it is not recommended for you.
10.) Percentage-Based Budgeting Method
It uses a percentage instead of a fixed amount. It is easy to use. The previously mentioned Balanced Budgeting Method and The 60% Solution uses percentage also in allocating your income.
How To Do It
Define what will be your general categories and set each a percentage of your income.
Pros
It is more flexible and simple. You can easily adjust the percentage for each category. It does not require also much tracking of your expenses.
Cons
You cannot easily identify your spending habits thus it is not easy to trace your spending problems. Overspending also may arise especially if you do not have self-control. Be careful also in differentiating your needs and wants.
Examples of Percentage-Based Budgeting Methods
Two-Category Rule
The first four rule is somehow basic that it has only two categories – expenses and savings. It varies only on the percent distribution. If you are not really into details, you can choose to start from these rules.
- ) 80-20 Rule. The maximum amount that you can spend is 80 percent of your income and the rest 20 percent is for your savings.
- ) 70-30 Rule. It means 70 percent of your monthly income is for your expenses while the remaining 30 percent is for your savings. Here the expenses cover both the needs and the wants.
- ) 50-50 Rule. You just equally divide your income for your expenses and savings.
Three-Category Rule
These rules are derived from the previous rules that the main difference is that you divided your expenses category into two – needs and wants. This is more detailed compare to the previous rule.
- ) 50-30-20 Rule. The 60 percent is for your needs, 30 percent is for your wants, and 20 percent is for your savings.
- ) 60-20-20 Rule. The 60 percent is for your needs, 20 percent for your wants and the other 20 percent is for your savings.
- ) 70-20-10 Rule. The 70 percent goes to your needs, 20 percent to your savings, and the remaining 10 percent is for your tithe.
Four-Category Rule
These are for those people who are somewhat detailed-oriented.
- ) 40-30-20-10 Rule. The 40 percent goes to your savings, 30 percent to your necessities, 20 percent for your wants, and the remaining 10 percent as your tithe. This is somehow conservative but you can save fast since most of your income goes to savings. It is ideal for those who have a decent income and can live an average lifestyle.
- ) 30-30-30-10 Rule. You allot 30 percent each for your needs, wants, and savings. The remaining 10 percent as your tithe.
After reading all of those different budgeting methods mentioned above, you still hate to budget. You are still looking for a very easy route. A method that you don’t feel that you are budgeting. Then try this method below.
“No Budget” Budget
It is also known as an anti-budget method. It is highly recommended that you set an automatic transfer of your savings to your other account. Be forewarned that it is only for those people who are not an impulsive spender.
How To Do It
Decide first how much you want to save each month. After that, spend your remaining money any way you want. You can spend the leftover money on buying clothes or exploring new places. Or a better decision would be to buy books to expand your knowledge. Increase your financial IQ as what Robert Kiyosaki suggests.
Pros
Very simple. Do not necessarily require tracking of expenses. No hassle.
Cons
It is risky and very prone to overspending. Additionally, it is really important that you prioritize saving first and have it automatically transfer to your other savings account. You should also have self-discipline when it comes to spending otherwise you will always be short of money.
Summary
So, if you gonna ask what’s the best budgeting method for you?
The answer would be.
There is no definite single budgeting method that will work for everyone. You and I do not have the same net income. We do not have the same priorities in life. I do not know what is your personality and the lifestyle you have.
But as a guide, you can start choosing one of the budgeting methods mentioned above until you can find what suits you. You can even make your own budgeting methods by combining some of them.
Just remember, in making a budget prioritize to save money first for yourself. In the long run, you can develop saving money as one of your habits.
If you already budgeting your money in a long time, what are your insights? Share it in the comment section below.