According to a 2020 survey by the National Foundation for Credit Counseling, only 47% of Americans use budgeting tools to keep track of their spending. A budget, on the other hand, as the most basic instrument in the financial planning process, might make it easier to meet your financial objectives.
Not only does a budget help you keep track of where your money is going, but it also gives you more control over that process. Without a clear plan for your cash flow, you could be spending against your own best interests without even knowing it.
How a proper Budget can power your Financial Independence?
Budgeting isn’t always enjoyable, but it’s one of the most crucial steps you can do to better your financial situation. Here are a few examples of how living on a budget might help.
– It aligns your spending with your goals: You may decide how you’ll spend your money each month depending on what’s most important to you by setting and sticking to a budget.
– It can improve your debt repayment strategy: If you’re trying to pay off student loans, credit cards, or other types of debt, a budget might help you set aside more money so you can get out of debt.
– It can help you achieve your savings goals: A budget can help you figure out how much you’re going to save toward your goal at the beginning of the month, whether you want to save more for retirement, develop your emergency fund, or put money down for your next vacation.
5 Budgeting Methods to Consider
1. Zero- Based Budget
A zero-based budgeting strategy is straightforward: income minus expenses equals zero.
This budgeting strategy is best for persons who have a fixed monthly income or can at least anticipate their monthly income. Add your monthly spending and savings to equal your monthly income after you’ve calculated your monthly income.
It’s critical to budget for all of your spending as precisely as possible. If you go over budget in one category, you’ll have to make up the difference by taking money from another. And forgetting about a significant expense can throw your budget off.
A zero-based budget may be a better alternative for someone who has been budgeting for some time because there is less space for error. Even so, keeping additional cash in your bank account as a buffer is a wise idea. Also, keep a modest emergency money on hand in case you face a major unexpected bill.
2. Pay-yourself-first budget
Another simple budgeting strategy that focuses on savings and debt reduction is the pay-yourself-first budget.
Simply put, every time you are paid, you set away a particular amount for savings and debt payments, then spend the remainder of your money as you see fit. This allows you to prioritise your savings and debt payback goals while making do with the leftovers.
For instance, you might prioritise paying off high-interest debt first while gradually creating an emergency fund. However, once you’ve paid off your high-interest debt, you may concentrate on other savings goals.
Of course, prioritizing your necessary expenses and obligations is critical. However, because you’ve already taken care of what’s most essential to you, you don’t need to be concerned about where you spend your discretionary spending.
This budget is ideal for someone who has trouble saving each month or doesn’t want to spend too much time planning out each spending.
3. Envelope System Budget
This way of budgeting is similar to the zero-based budget, but there is one major difference: everything is done in cash. An envelope budgeting strategy is planning out how you’ll spend your money each month and using an envelope for each category of spending. Then, according to your budget, you withdraw as much cash as you need to fill each envelope.
Take your grocery envelope with you when you go grocery shopping, for example, and pay for your purchases with cash. If you run out, unless you choose to withdraw cash from other envelopes, that’s all you can spend in that area for the month. However, don’t raid other envelopes too frequently, as this might lead to a snowball effect, and you could run out of money before the end of the month.
The envelope system is endorsed by financial expert Dave Ramsey, so it’s a good alternative for folks who share his money ideals, which emphasize paying down debt rapidly and utilizing cash rather than credit cards.
However, it’s not a smart budgeting approach for someone who doesn’t like having a lot of cash on hand or prefers to use credit or debit cards.
4. 50/30/20 Budget
The 50/30/20 budgeting method is simple and requires less effort than the envelope and zero-based budgeting methods. The goal is to categorize your spending into three groups
- Necessary expenses (50%)
- Discretionary expenses (30%)
- Savings and Debt Payments (20%)
This budgeting strategy is ideal for rookie budgeters because it does not necessitate detailed spending tracking. You can stick to this budget as long as you understand what constitutes a want vs a need and allocate adequate funds to savings and debt repayment.
The biggest disadvantage is that the 50/30/20 rule may be impossible for people who have a lot of debt or want to save a lot of money because 20% isn’t a lot of money.
However, the good news is that you may tailor it to your own requirements. For example, you might wish to consider raising savings and debt repayments while minimising discretionary and necessary expenses.
To put it another way, don’t get too fixated on the 50/30/20 ratio. Make the concept fit your requirements.
5. The ‘no’ budget
This unique budgeting strategy is totally based on not spending money that you don’t have, as the name implies. Rather than making a budget, you should:
Keep an eye on the balance of your bank account. To keep track of your spending, use a budgeting app or your bank’s online banking or mobile app.
Keep track of when your recurring expenses are due. Keeping a list in a spreadsheet, Microsoft Word document, or on a piece of paper is one way to do this.
Set money aside for savings and additional debt repayments. Increase your automatic monthly debt payments and use automatic transfers from checking to savings wherever possible.
Spend the remainder of your funds without being overdrawn on your account. You’ll be better equipped to determine how much money is remaining after key costs if you keep an eye on your account balance.
While the “no” budget sounds easier than the other techniques we’ve discussed, telling oneself “no” isn’t always easy. This budgeting strategy works best if you’ve shown spending restraint in the past and are confident in your ability to do so again.