Which budgeting technique is right for you?
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Budgeting: The not-so-exciting activity you know you should be doing – but can’t always find time for.
Budgeting is more than a spreadsheet that tells you how much you spend. It’s a powerful personal finance tool that helps you:
- Discover bad spending habits
- Calculate how much your emergency fund should be
- Figure out how much income to save (because, yes, you need to be saving)
- Stay within your financial lane so that you can accomplish your goals (like traveling the world)
Budgeting isn’t the most exciting topic or activity, but there’s more than one way to budget. Whether you’ve been budgeting for years or you’re looking to get started, here are four budgeting techniques for you to try.
Related reading: The best apps for money management
With a traditional budget, your goal is to figure out how much you’re spending and what your money is going towards. The idea is to build a budget around your lifestyle using this simple formula: income – expenses = net income.
To create a traditional budget, you’ll need to calculate how much you earn and how much you spend. If you use credit cards to pay for most of your expenses, this will be easy. You can download your spending activity from the last few months and consolidate everything into one excel sheet.
Here’s an example:
Income: $4,000 (after taxes)
Total Expenses: $3,200
Net Income: $800
If you categorize your expenses, you’ll have a blueprint of your spending habits. From here, you can spot unnecessary or excessive purchases. Based on your findings, set personal spending limits for each category. You can be as detailed as you want and organize it as you see fit.
Related reading: Ways to use a credit card responsibly
If you like detail and want more insight into your spending habits, the traditional budget might be for you.
The zero-based budget allocates every dollar of your income into buckets. A zero-based budget is based on a different formula: income – expenses = 0 (hence, the name). In this format, your savings are treated like an expense.
Total Expenses: $4,000
Net Income: $0
Similar to building a traditional budget, start by compiling your expenses into one spreadsheet. Next, label each expense – but this time, be more specific.
A zero-based budget holds you accountable for every dollar you spend. A dollar added to one bucket is a dollar subtracted from another.
The zero-based budget is best for people who (a) have plenty of time to budget and (b) want as much detail into their spending habits as possible.
If you’re worried about time, the 50/30/20 budget might be better for you.
The 50/30/20 budget splits your expenses three ways: 50% for needs (like rent and groceries), 30% for wants (Amazon shopping, anyone?), and 20% for saving. No need to set individual limits for every expense. The goal is to stay within the percentages.
Sticking with our example, you’ll see that the 50/30/20 budget is much simpler.
Needs: $2,000 (50%)
Wants: $1,200 (30%)
Savings: $800 (20%)
When you start using this technique, you’ll need to define your “needs” and “wants.” Needs should be vital to your livelihood, like rent, utilities, groceries, bills, and so on. If Netflix is a staple in your life, sure – throw it in. But keep in mind the total size of your necessities bucket doesn’t change. If you make room for Netflix, you’re taking away from something else that might actually be important.
If you’re prudent and want to reap the rewards of saving down the road, you can flip this budget to a 50/20/30 format. You’ll save 30% of your income each month and spend up to 20% on whatever you please.
Related reading: How I saved up for my dream wedding – reader success story
If you want to take the simplest budgeting route possible, the 80/20 budget is best for you. It divides your income into two segments: 80% for life expenses (needs and wants) and 20% for saving.
Expenses: $3,200 (80%)
Savings: $800 (20%)
All you need to do is add up receipts, credit card statements, etc. and make sure your expenses are no more than 80% of your income. Save the rest.
It’s simple, it’s quick, and it ensures you’re still saving money – without the granular spending limits.
Budgets aren’t one-size-fits-all.
Choose a budgeting technique that takes your time and preferences into account. Are you a detail-oriented person with plenty of free time and willingness to budget? Try the zero-based technique. If you’re dabbling with budgeting, go with the 80/20 method. You can always mix it up and try another approach later.
At the end of the day, the goal is to maximize every dollar you earn – so any budget is better than no budget.
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