Whether you’re saving for a particular goal, or just looking to spend less and be more mindful of your Money, you need a budget.
If you’re new to Budgeting, it can be a bit daunting when you’re trying to get started. There are so many different types of budgets and budgeting methods floating around these days and it can be overwhelming and make you want to quit before you even get started.
Thankfully, it doesn’t have to be hard to get started with budgeting. There really is no wrong way to budget – it’s just about finding the right type of budget for you.
Today I’m going to share 5 different types of budgets and who they’re suited for, so you can find the perfect budgeting method for you.
1. Zero-Based Budget
Let’s start with my personal favorite – the Zero-Based Budget. This is one of the more involved budgeting methods. It does take more time than some of the other types of budgets, but it’s fantastic if you really want to know where your money is going and put every dollar to work for you.
How Does It Work?
Zero-Based Budgeting has one main goal, and that is that your income minus expenses each month should equal zero.
This doesn’t mean that you should have no money left at the end of the month, but rather that you should be allocating all of your income to a specific budget category. Essentially this means that you’re giving every dollar a job.
Who Is It Good For?
Zero-Based Budgeting is ideal if you want to have full control over your monthly spending. Since you need to track every expense, it’s great for identifying and cutting down on areas in which you tend to overspend.
It’s also a good method to use if you tend to have money left at the end of the month that you spend on stuff you don’t really need. By using a Zero-Based Budget, you can identify how much of your income you won’t be using for essential expenses. This allows you to allocate the surplus to other important categories, such as saving for a house or vacation.
The Downsides
One of the big disadvantages of Zero-Based Budgeting is that it can be pretty time-consuming. If you struggle to find time in your busy schedule, this may not be the best budgeting method for you.
Zero-Based Budgeting can also be tricky if you don’t have a predictable income since you need to balance your income and expenses so they equal zero. However, this can be managed by budgeting based on your previous month’s income.
For example, if you earn $3,500 in June, you would count this as your income at the start of July and zero out your budget based on that amount. I prefer to budget based on my previous month’s income as it ensures that I’m not spending money that I haven’t earned yet.
2. Cash Envelope System
How Does It Work?
The Cash Envelope System is exactly what it sounds like – a cash-based budgeting method.
When using the Cash Envelope System, you withdraw a set amount of cash from the bank each budgeting period and divide it into separate envelopes for each category of your budget.
Once you have spent the cash in each envelope, you’re done for that category. With this system, you’re not allowed to “borrow” cash from another category or swap over to using your credit or debit card once the money runs out.
Who Is It Good For?
The Cash Envelope System is great for anyone who regularly overspends, especially in certain categories. Having physical money is a great visual reminder of how much your spending and can really help you be more mindful about your spending and cut back in the areas where you tend to go over budget.
Think about it – if you plan to go out to dinner one night towards the end of the month and notice that you only have $20 left in your “eating out” envelope, you might be more inclined to hit up a happy hour or choose a more budget-friendly restaurant, rather than going over your budget.
The Cash Envelope System is also a good option for those of you that don’t like to track all of your individual purchases. Instead, you can judge if you’re over or underspending on certain categories based on the amount of money left in your envelopes (or how quickly they run out).
The Downsides
Apart from cash being a bit gross (just think of how many hands that money passes through each year… ick), there are a few other downsides to the Cash Envelope System to consider.
Using cash can be inconvenient for some people. It does take some extra time each week/month to actually go and withdraw the cash from the ATM and divide it up into your envelopes. It can also be a bit of a pain having to carry around a bunch of different envelopes for your different spending categories (although this can be managed with a little planning).
Using a cash budgeting system also means that you don’t have the automated tracking that you get with using cards. While for some people, this is fine, it also makes it harder to pinpoint items that you might be overspending on. If your budget is already tight, not having a detailed record of your spending can make it difficult to determine areas that you can cut down further.
3. Percentage-Based Budget
If you have been doing some budget research, you’ve probably seen references to the 50/30/20 Budget or the 80/20 Budget. These are both examples of Percentage-Based Budgets.
The main objective of this type of budget is to provide a guideline on how much money you should be spending in each category. Percentage-Based Budgets are one of the simpler types of budgets and are useful if you want to keep an eye on your spending to make sure you’re on track, without needing to record everything.
How Does It Work?
If you want to use a percentage-based budget, it’s easy to get started. All you need to do is decide which main categories you want to budget for and how much to allocate to each category.
One popular breakdown is the 50/30/20 budget, which allocates 50% of your spending to needs (eg. rent, utilities, foods), 30% to wants (eg. entertainment, eating out, and other discretionary purchases), and 20% to debt and/or savings.
Who Is It Good For?
Percentage-Based Budgets are good for anyone that isn’t interested in devoting a lot of time to budgeting each month. With this method, you only have to worry about three main spending categories (needs, wants, and debt/savings), so it’s definitely quicker and easier to track and manage.
If you’re new to budgeting, this type of budget is a great place to start as it’s not too complex. However, it’s not only useful for newbies. Percentage-Based Budgeting can also be a good way for experienced budgeters to keep an eye on their finances without having to spend too much time on it.
The Downsides
This is not a great budgeting method for anyone that tends to impulse shop or overspend in particular categories. Since you only have three main categories in a Percentage-Based Budget, it’s hard to keep track of your problem areas. It’s also easy to blur the lines and spend more than you have budgeted for you “wants” and call them “needs”.
If you have a tight budget, tend to overspend, or want to save as much as you can as quickly as you can, I’d recommend steering away from the Percentage-Based Budget.
4. Pay Yourself First Budget
The Pay Yourself First Budget, also known as the Reverse Budget, is another simple type of budget that avoids the requirement to meticulously track every dollar you spend.
The key difference with the Pay Yourself First Budget is that it’s focussed on savings and debt repayment first, so you can avoid getting to the end of the month and having nothing left to put towards your savings or debts.
How Does It Work?
With the Pay Yourself First Budget, all you need to do is write down your income for each month, then write how much of your income you want to put towards each of your saving or debt repayment goals. Once you have that number, you set aside that money first, and then the remainder is used to pay your other monthly costs.
For example, let’s say that your takehome pay is $4,000 per month. Each month you might want to allocate $500 towards a house deposit, $200 for your retirement fund, $300 for your emergency fund, $150 for an annual vacation, and $300 to go towards paying off student loans. This is a total of $1,450 per month, which would go straight towards your savings or debt repayment, leaving the remaining $2,550 to be spent as you see fit.
Who Is It Good For?
The Pay Yourself First Budget is great for anyone that tends to find that they overspend in other areas and have nothing left at the end of the month to go towards savings and/or debt repayment.
By paying yourself first, you make sure that you’re hitting your savings goals each month so you don’t end up short-changing yourself by overspending on other stuff during the month.
This type of budget is another great method for anyone who doesn’t want to track every expense. As long as you pay yourself first, and still have enough money left each month to cover the rest of your wants and needs, you know that you’re on track with your budget.
The Downsides
While paying yourself first sounds great, the main downside is that you can end up being too ambitious with your savings and not having enough money left to cover all of your other expenses for the rest of the month.
To avoid this, you should plan your budget by reviewing your recent spending before you get started with this method. Have a look back at your expenses and other spending for the past few months and estimate how much money you will need to cover your regular wants and needs.
Once you have an idea of this number, keep it in mind when you’re determining how much you plan to pay yourself first. If you’re just getting started, it’s a good idea to begin with a more conservative allocation for your savings – you can always increase this as you get more comfortable.
5. Irregular Income Budget
Budgeting on an irregular income can be tricky, but that doesn’t mean that it’s impossible or that you shouldn’t do it. With an Irregular Income Budget, you can plan ahead to avoid the pitfalls of unpredictable income.
The key to budgeting on an unpredictable or irregular income is to understand your baseline, prioritize your expenses, and work on saving a cash buffer to tide you over during lower income periods.
How Does It Work?
To create a budget on an irregular income, you should have a good understanding of your expenses and their importance. The best way to get started is by listing out all of your regular expenses from most important to least important.
Once you have your list of expenses, you should determine your baseline. You can do this by looking back through your last year or so of income to find your lowest-paid month. This is the number that you should plan your budget against.
If all of your expenses are covered by your baseline, that’s great. If not, this is where your prioritized list comes into play. Each month, you should work down your prioritized list, paying for your highest priority expenses first.
If your income doesn’t cover everything during the current month, prioritize the remaining expenses to be paid first next month. However, if you find that you have money leftover, make sure you have a plan for what to do with it. This might include building up a savings buffer to ensure that you have some extra cash to cover any unexpected lower income months.
Final Thoughts
If you’re serious about saving money, paying off debt, or simply taking control of your spending, then budgeting is absolutely essential. After all, if you don’t know where your money is going, it can be almost impossible to make sure that you’re spending on the right things.
The most important thing to remember about budgeting is that it’s not meant to be a one size fits all solution. To be successful, you need to find a budgeting method that works for you and feel free to customize it to best fit your lifestyle and preferences.
Once you have a budget in place, you have one of the most important tools to help you manage your money and reach your financial goals. Whichever type of budget you choose, just remember that it gets easier the more that you do it.
Do you have a budget? What’s your preferred budgeting method?
Looking for more money-saving ideas?
6 Easy Ways You Can Start Saving Money Today
14 Things To Buy That Will Save You More Money Long Term
How I Paid Off $33,000 Of Student Debt In 5 Months
How To Save Money Without Feeling Deprived
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The post Types Of Budgets: Find The Best Budgeting Method For You appeared first on A Cure for Monday.
