Do you know how to choose the best budgeting system for you? Did you even know that there are different systems for budgeting?
If not, don’t worry. Below is a short but complete guide on the different methods of creating and managing your budget. It also describes the various types of people/financial situations each system is best suited for.
To discover which one is right for you, simply read through this list.
1. The 50/30/20 Method: The Easiest Budgeting System
The 50/30/20 method is a simple system for general budgeting needs. It organizes all of your expenses into only 3 categories, as follows.
- 50% of your income must go toward necessities like food and bills
- 30% is for things you want but don’t need
- 20% goes toward debt repayment and savings
This method is simple enough but also has its limitations. Specifically, for those who have a very large debt amount and/or no savings at all, 20% is not enough. Still, while this method won’t work for some, it will work for most.
Plus, it requires very little effort. Simply split up your paycheck the second you get it and you’ll be able to develop better spending habits by knowing exactly how much you have to spend toward everything.
2. The Envelope Budgeting System: Reduce Frivolous Spending
The envelope system is a great way to get your out-of-control spending habits back under control. Start by setting a budget for every spending category. You can use 50/30/20 if you want or some other method.
Next, when you get your paycheck, cash it. Split the cash into labeled envelopes for each spending category.
And that’s it. Each envelope has enough cash for your expenses. Once it’s out, it’s out until your next paycheck.
The reason this works is that it helps you see money as an actual, tangible resource. You also see that you only have a certain amount left.
For many people, credit cards seem like a magic money bag that never runs out. The envelope method breaks the illusion of electronic spending. You literally can’t spend more than you have when using cash only.
Unfortunately, the advantage of this system is also its downside: cash. At all times, you’re either carrying all of your money or none of it. If you attempt this system without cash, it requires disciplined expense tracking, which totally defeats the purpose.
3. The Reverse Budget: Build Your Savings
If you need to build up your savings but hate tracking your spending, the reverse budget is for you. First, decide how much you want to put in savings each month or paycheck. (Again, 50/30/20 is great for this.)
Next, deposit that amount in savings the second you get paid and leave it there. And you’re done.
Track the rest of your expenses if you need to. Or don’t. As long as you put away your savings first, the rest of your budget is up to you.
4. Zero Based Budgeting: Spend More Efficiently
Warning: this method is exclusively for meticulous planners who earn a steady paycheck. If that’s you, keep reading.
Zero based budgeting is so-named because it leaves $0 unaccounted for. With each paycheck, you calculate exactly where every dollar is going until there is nothing left.
This method is excellent because it leaves nothing to chance. But it requires a lot of work.
It works best with a spreadsheet and cash envelopes or else it’s nearly impossible to stick to the assigned budget. And you must have plenty in your emergency fund before you start. Otherwise, one unexpected expense will ruin your entire budget.
Which Budgeting System Is For You?
By now, you should certainly know which budgeting system is ideal for your needs. But, just in case, bookmark or print this guide. You can use it for reference if you decide to try more than one of these budgeting methods.