Sometimes we need to go back to basics with budgeting and revisit how to make a budget. I will be discussing the different components of a budget and the different budgeting options to choose.
We hear the term ‘budget’ constantly in the world of finance and money management, but do we know what budgeting is? You will be surprised to learn that there is more to a budget than a calculation of income minus expenses. Good budgeting requires a symbiotic relationship
Before we talk about the different budgeting methods, it is important to distinguish a budgeting method from a budgeting system. The budgeting method is the plan, or WHAT you do with your money. If you were to pick a budgeting method, you would choose from the four main budgeting methods: Cash Envelope, Zero-Based, Pay Yourself First, and the 50/30/20 method.
The budgeting system is HOW you deal with your money. In other words, it is how you carry out your finances from day to day. Do you use cash or a debit card? Do you track your expenses electronically or with a written system? This is the difference between a method and a system. Now we are going to discuss the budgeting methods you can choose from.
There are four main budgeting methods to choose from when managing your money: the Cash Envelope Method, Zero-Based Budget Method, and Pay Yourself First Method.
It can be easy to swipe a credit or debit card without acknowledging the amount you are paying. Unlike a credit card that gives you access to more money when desired, you can’t spend cash you don’t physically have. Once the cash is gone, it’s gone. Physically handling cash and giving it to the cashier forces you to count the money you are spending, and quite literally ‘get a handle on your money.’
The idea behind the Zero-Based Budget Method is that the total of your income minus your expenses will equal zero by the end of the month. The design of this method is that every dollar has a purpose. The zero-based budget considers your income and has every dollar accounted for before it is spent. This is great if you are like me and the money gets lost in your checking account once bills are paid.
The Pay Yourself First Method is best described as a traditional budget in reverse. Instead of paying bills first and putting whatever money remains into savings, you put a portion of your income toward your savings (i.e., retirement, emergency fund, etc.) before you pay for anything else. This budgeting method ensures that money intended for saving does not get spent on short-term objectives and that you pay yourself first for long-term objectives.
Most people turn away from the 50/30/20 budgeting method because at first glance the numbers seem to indicate complexity. This is not the case. The 50/30/20 budgeting method represents the categories that make up spending: 50% of your income will go toward necessities, 30% toward wants, and 20% toward savings and/or debt. This is an especially great system if you have fluctuating income. You don’t have to perform recalculations on dollar amounts you are putting towards various accounts; instead, simply apply the percentage amount to the adjusted income/expense to get the new dollar amount for your budget.
Most financial experts stop the financial plan at budgeting methods. However, budgeting systems are what carry out the financial plan. Budgeting methods determine where money needs to go; budgeting systems get the money where it needs to go. There are three primary systems you can use to guide where money goes: Pen and Paper, Budgeting Apps, and Bank Management.
The Pen and Paper budgeting system requires no bells or whistles—just a pen and paper. With a pen and paper system you record the date of the transaction, where you purchased the items, and what items were purchased. To take it one step further you can keep a running total of the money you have left to spend in a particular category. If you are one that doesn’t carry a pen and paper on you, then use a notes app on your phone.
Nowadays there are a lot of money management computer programs and apps that make managing money easy. Common apps include EveryDollar, YNAB (You Need A Budget), and Mint. These third-party apps allow you to categorize and label transactions so you can know how much money you have spent in each category and how much you have left to spend. This is similar to a bank management system; however, it is through a third-party that is linked to your bank account.
If you are looking for an alternative option to using pen and paper or an app, check your bank or local credit union. Most offer money management features for customers to easily track and monitor their spending through the institution itself and not third-parties. This is the method I prefer because I don’t like the idea of using a third-party to input my bank and credit card information into. Nowadays there are lots of security measures in place, but it is just personal preference.
So far we have discussed the different methods and systems for budgeting, but how do you make a budget?
We’ve discussed budgeting elements and how to make a budget, but there is such a thing as choosing the right budget for you. Choosing and making budget are crucial foundations in a budget—lets talk about how to stick to your budget.