Which Budgeting Style Is Right for You?

By Miranda Marquit

Creating a budget is an important step to take to reduce your likelihood of overspending each month. Still, not every type of budget works for every person. Just as personal finance is individual, your budgeting style should also reflect your preferences.

"There isn't a one-size-fits-all solution," says Dave Jacobson, a financial coach based in Maple Grove, Minnesota. "Without a strong enough reason or passion, even a perfect budget won't be followed."

Unless your budget suits your lifestyle, it's likely to fail. Here are some budgeting styles to consider:

Category Budget

The category budget is the basic budget. With this style, you decide upon a maximum amount you can spend in each category of items, which may include groceries, bills, utilities, gas, and other expenses.

You can keep track of these categories and your actual spending either on paper or on the computer. On the computer, you could try using personal finance software or find a budget template on the Internet. The FTC has a budget template that you can download and print out or download and complete on the computer.

Cash-Envelope System

Another approach is the cash-envelope system. With the cash-envelope system, you take cash out of your bank account monthly and keep the money in envelopes designated for each category of spending.

When you run out of cash, you are done spending in that category for the month.

The cash-envelope system is ideal if you have a hard time paying attention to your spending. This system forces you to think about the money you shell out each month.

"Technically, envelopes aren't budgeting," says Jacobson. "They are a tool used to help one stay diligent to their budget."

A modification to this system is to budget bills - such as car loan payments, housing, and insurance - using automatic payments, and then use cash in labeled envelopes for daily expenses.

Zero-Based Budgeting

Zero-based budgeting helps you plan ahead for expenses before they occur. This way, you prepare for what's coming instead of merely reacting to expenses as they arise.

When choosing this method, you need to look ahead to your future income, including when you expect to receive it. For example, if you're paid biweekly, you'll consider in advance how you might use the money from each paycheck over the two-week period before you receive the next one.

Give each dollar received in each pay period a job to do. For instance, one dollar might be earmarked for retirement, while other dollars are used to pay down debt, buy groceries, or pay bills.

This type of budget is ideal if you are serious about ensuring that each dollar has a purpose, and that the purpose matches your priorities in life. It's also possible to save for specific goals, since you can allocate dollars toward a "vacation fund" or a "wedding fund." You can even designate money for a "rainy day fund."

Whichever budgeting option you choose, remember that you always can tweak your budget later, or change your style as your financial needs change.

"The planning process is ongoing," says Jacobson. "Life happens, so realize your plan will need adjustments, and that alterations aren't failures."


Interview with Dave Jacobson

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