Budgets are designed to help you to plan your financial decisions, aligning your income with your current and future expenses. With numerous budgeting methods to choose from, how do you decide which one is right for you?
The most appropriate budgeting mechanism is the one that you will be able to stick with and use on a consistent basis. Understanding their respective characteristics will help you to adopt the best one for you.
What are the Main Types of Budgeting Methods?
There are a number of different budgeting methods, including:
50-30-20 budgeting rule: Known for its ease and simplicity, the 50-30-20 rule basically states that you should divide your after-tax income into buckets of 50% for needs, 30% for wants, and 20% for savings and investment.
Zero-based budgeting: Pioneered in the corporate world, zero-based budgeting is a labor-intensive budgeting framework that accounts for every single dollar you earn.
“Pay yourself first” budgeting: This type of budgeting mechanism seeks to instill a save-first mentality, by putting aside money towards your savings and investment goals before allocating money to any other expense.
Envelope budgeting system: This is a cash-based system, wherein you place the money you plan to spend into envelopes that are designated for express purposes.
Essential Question about Budgeting
Every budgeting system has its own unique advantages, and each of them can help you to effectively manage your finances. As you decide which framework to use, make sure to answer the following essential questions about budgeting:
(1) What are your financial goals? The most compelling reason to create a budget is to help you achieve your financial goals. As you embark upon this task, think about your priorities. Are you looking to institute a savings mentality? If so, then the “Pay Yourself First” approach could be the best fit. Alternatively, are you looking to rein in your spending by cutting down on consumption? If so, the envelope budgeting system could be the most appropriate choice for you, as it is designed to make your spending choices tangible and concrete.
(2) How closely do you need to monitor your spending? For many, a budget can serve as a loose guideline for how they wish to spend their money. This contrasts with others who want to closely monitor how much they are spending each month. Before deciding on the best budget for you, think about how closely you want to track your spending choices. For those who are keen on understanding where every dollar goes, zero-based budgeting or envelope-based budgeting could be the right fit.
(3) How much effort do you want to put into budgeting? Related to the previous question, there are some budgets that demand a large amount of effort to establish and adhere to, while there are others that require significantly less work. Most individuals recognize how much time and energy they tend to devote to their finances, and you should therefore avoid choosing a system that will require more upkeep than you are comfortable committing to. The 50-30-20 rule is a good starter budget, as it offers a straightforward organizing principle that is relatively easy to build and implement.
Did You Make the Right Budgeting Decision?
Budgets are only as good as their ability to help you manage your spending decisions. It does not matter how extravagant a budget you have created if you simply fail to align your finances with the guidelines you have designed for yourself.
Fortunately, there is a simple way to understand if you have made the right choice regarding the best budget for you: determine if it has effectively helped you fine-tune your spending decisions.
For instance, if you decided to use an envelope-based system, are you now staying within the allotted cash you have budgeted each month, or are you borrowing from other envelopes? Likewise, if the “pay yourself first” method does not leave you with enough money to pay for groceries, chances are you should either use a different system or decrease the amount you are putting aside for the future.
Budgets are not meant to be straightjackets that prevent you from living your best life, but rather a tool that you can continue to use in order to achieve your financial objectives. If you notice that your chosen budget is not helping to propel you along your desired path, this could be a good indication that it is time to use a different method.
Conclusion: Budgeting for the Future
Working with a budget will help you to institute healthy financial decision-making into your daily life. Designing a spending plan will guide your consumption choices, and allow you to put money aside for your long-term goals.
In essence, a budget will help you balance out your current needs with the desires of your future self. Seeing your spending decisions in unemotional, black-and-white numeric figures (or envelopes full of cash) make these trade-offs crystal clear.
Every type of budget can help you to plan and achieve future goals. Understanding the various characteristics for each will allow you to determine which one is the best fit to help you achieve yours.
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