Budgeting Methods
Budgeting is essential for managing your finances effectively. This seems apparent, but only 24% of millennials possess even basic budgeting knowledge. Even if it is as simple as an Excel sheet, you should know how each one of your hard-earned dollars is being spent.
We understand that budgeting can be scary at times. For most, the constraints of an ill-fitted budgeting technique can cause anxiety or guilt because of the boundaries that are set. This can be avoided easily if the budgeting technique used is tailored specifically to your spending habits and situation. Here are a few strategies that you can implement that will make it easier to protect your financial wellness.
Zero-Sum Budgeting
It involves dividing up your money into distinct categories and designating them for usage toward certain costs. For example, a portion of your earnings may be set aside for your entertainment fund, while another portion may go towards gas, groceries, and utility bills.
Spender Type: You prefer to know how every cent is going to be used and are fine with not having extra if you need to overspend on something. It is also great if you are always worried about the future; since you will be able to allot a certain amount of money towards savings, which allows you to know how much money you will have in the months/years coming. This is best for those who are very detail oriented. It could also work well if you are living in an area with a higher cost of living.
If you find that you want a stricter version of Zero-Sum Budgeting, Envelope Budgeting would be recommended. It is the same concept, except you physically withdraw cash and assign each category to an envelope.
50/30/20 Budgeting
After taxes, your income will be split so that 50% goes towards needs, 30% should go towards everything that you might want, and 20% should go towards debt repayment and savings.
Spender Type: If you are easily able to decipher between your “wants” and “needs” and are competent with letting go of your “wants” to develop more savings, this is the budgeting technique for you. Since there is such a strong emphasis on savings for this method, it would be great if you are worried about needing an emergency fund. However, if you are living in a place with a higher cost of living, this method may not be best for you as you may have a higher percentage of your income to go towards “needs”. This is best for those who aren’t extremely detail-oriented when it comes to spending money, but still care about the purchases made in general.
Reverse Budgeting
This budgeting technique prioritizes savings and investments before anything else. Automatic transfers are set up to savings accounts, and the remaining money can be spent freely.
Spender Type: If you don’t want to spend a lot of time worrying about budgeting, and are only worried about savings, this is a low-maintenance method. It can also be paired with the other budgeting ideas mentioned if preferred.
Debt Avalanche Budgeting
Allocate a certain amount of money towards monthly necessities, and the remaining funds goes towards debt repayment. Lump-sum payments (all at once payments) should be made to the debts with the highest interest rate first, continuing until all your debt is gone.
Spender Type: If you are in an excessive amount of debt, maybe from student loans or a recent large purchase, this method would be for you. Since this method requires consistent large payments, it is best suited for those with a stable and predictable income.
No Budget Budgeting
All you have to ensure is that you have enough money to pay off your necessities. Other than that, the rest of your income is up to you for how you want to spend it.
Spender Type: If you find that your spending habits are spontaneous, or that you don’t care much about budgeting, this is for you. You get as much freedom as you possibly can with this plan, and it is the most low-maintenance budgeting plan you could have. It is also recommended for you if you are well off, and are not worried about overspending, as overspending is the biggest downfall of this plan.