Methods of Budgeting
In my last post, we talked about budgeting and I'm sure by now you know what a budget is and why budgeting is important in achieving your financial goals.
So today I'm going to be talking about different ways you can make your budget, follow me closely.
1. Zero-based Budget
Under this approach, your income minus your expenditures should equal to zero.
So Zero-based budgeting is a method whereby you allocate all of your money to expenses, savings and debt payments.
If you have a fixed income monthly and you can reasonably estimate your monthly income, you should consider this method while budgeting. After calculating your monthly income, add up your monthly spending and savings to equal that income amount.
Note: It’s important to plan out all your expenses as accurately as possible. If you go over on one spending category, you’ll need to take cash from another category to make up for it. And if you forget a large expense, it can throw your budget off. This is where tracking your expenses come in because you already have an idea of how much you spend monthly and it will make it easier for you to plan your expenses for the next month.
2. Pay-yourself-first budget
This budgeting system focuses primarily on savings and debt repayment.
Simply put, you set aside a specific amount every time you get paid for savings and debt payments, then spend the rest of your money by your discretion. By doing this, you can prioritize your savings and debt repayment goals and make do with whatever is left over.
This budget is best for someone who struggles with saving each month or doesn’t want to focus too much on budgeting each expense.
3. Envelope system budget
This budget is similar to zero-based budget but with a big difference, it's basically done with cash.
In an envelope budgeting system, you plan out how you’re going to spend your money each month and then get an envelope for each spending category. Then you withdraw as much cash as you need to fill each envelope based on your budget. But if you are someone who doesn’t feel comfortable having that much cash on hand or prefers using debit cards or electronic banking, this method might not work for you.
4. 50/30/20 Budget
Now to my favourite, the 50/30/20 method. This method is straightforward and requires less work than zero-based and envelope budgets.
Under this approach, you arrange your expenses into three categories; 50% for your needs, 30% for your wants, and savings/debt repayments gets the final 20%.
This budgeting method is best for you if you are just starting to be intentional about your finances and it doesn't require the stress of tracking all your expenses, all you need is to be able to accurately distinguish between what is a need and a want to you personally.
But if you have a lot of debt or big saving goals, setting aside 20% for it might be unrealistic for you because it isn't a lot. But you customize the budget to fit your needs, for instance you may want to increase the savings and debt repayments category and decrease the wants category.
Okay let's stop here for now, I don't want to bombard you with a lot of information. Please, take some time to go through the four methods again and let me know which one works best for you in the comment section below.
Bye for now.
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