4 Common Budgeting Methods
August 9, 2021
What are common budgeting methods for personal savings?
- Zero-Based Budget
- 50/30/20 Budget
- Envelope System Budget
- Pay-Yourself-First Budget
Most people don’t know that using a budget method will help them control their investments and future income. It is the most fundamental tool in financial planning, and choosing the right technique is integral to achieving your financial goals. To get you started on improving your finances, here are some of the common budgeting methods for your personal savings.
This is a method that gives every bit of your money a job to do. The concept is simple — income minus expenses equals zero. In this budgeting method, you take your income and allocate it all into different accounts. This method is best for those with a set income each month, or for those who can estimate their monthly earnings.
However, the name of this budget can be misleading. Zero-based doesn’t mean that you are spending everything on needs and wants — it just means you’re utilizing all of your money in ways that are useful to you. This includes investing your income in other endeavors, depositing it into a savings account, and so on.
With this budgeting trick, you must plan out all your expenses and needs as accurately as possible, and then allocate the rest to other accounts. If you miss a large expense or accidentally go over one spending category, it could throw your system into disarray.
The 50/30/20 Budget
This method is more straightforward and provides more room for error than the previous one. With the 50/30/20 budget, the idea is to break down your incoming cash into categories:
- 50% of your income will be for necessary expenses
- 30% of your income will be for unnecessary expenses (i.e. wants)
- 20% of your income will be for your savings or debt payments
This method is especially helpful for new budgeters because it’s fairly uncomplicated and requires less tracking of your expenses. Implementing this financial trick can help you succeed and save some cash as long as you stay within the ranges provided for your needs and wants.
The main drawback to the 50/30/20 budget is that it isn’t practical for those who are in a lot of debt or need to obtain large savings, as most of the money will go into your expenses.
The Envelope System Budget
The envelope system budget is similar to the zero-based budget but is done all in cash. With this, you plan out how to spend your money each month, and create categories for your variable expenses. For each category, there will be a corresponding envelope where you will put the money you plan to spend on that particular expense.
The categories you could make on this budget method are things like hobbies, groceries, beauty supplies, clothes, and more. When you want to spend on a category, you simply use the cash in the envelope. Once that envelope runs out of money, you’re not supposed to spend any more of your cash on that category. This helps to control your spending to a specified budget.
This is a good method for those who prefer visual cues to help control their spending. The feeling of personally holding your money each time you decide to pay for something will help you keep in mind how much you’re spending each month. However, this method may not suit those who feel uncomfortable with having most of their money on hand.
The Pay-Yourself-First Budget
The pay-yourself-first budget is a method that focuses on savings and debt payments. This technique helps to align your spending with your financial values and puts your financial future before your immediate expenses.
When you practice this trick, you can take a look at your monthly income and decide how much to put towards your financial goals — like eliminating debt, retirement, vacation funds, et cetera — and use the rest for monthly expenditures.
This is useful for those with high-interest debts or several future goals. This method is also good for those who struggle with putting down a lot of savings per month, or don’t want to focus too much on their expenses.
It may take some time to choose and get used to the right budgeting methods for you. So, consider your personal preferences and how you want to achieve your goals, and choose an arrangement that you feel would help you best in your finance management.
Learn more about handling personal finances and other related topics from Benito Keh! As an entrepreneur in the Philippines, he knows the ins and outs to help you out. Get in touch with him now by clicking here!