Like most things in life, budgets don’t come “one size fits all.” People have different incomes and spending habits like they have different hobbies and tastes in music. The key to running a successful budget is to find a style that supports your goals, but at the same time, won’t significantly affect your quality of life. It may take work to find that delicate balance but it can be achieved.
Whether fueled by necessity or personal choice, successful budgeting is possible by choosing the best technique for you. Here are four popular budgeting styles that are different in approach but share one common goal: cutting costs and saving money.
The envelope method is effective because of its simplicity. The idea is to place cash in envelopes for specific categories of spending each month and take money out as you need it. Following this exercise can be a great way to learn where your money goes and where you need to cut back. Here’s a quick summary of how it works:
- Outline all of your monthly expenses
- Organize your monthly expenses into categories i.e. dining out, groceries, clothing, etc.
- Designate a monthly budget for each category
- Label one envelope for each category and write the amount you’ve allocated for that month on the envelope
- Distribute cash into each envelope as budgeted and store in a safe place
- Take cash out as you need it and write down the new balance on the envelope after each withdrawal
If the “dining out” envelope is empty after the first weekend of the month, you’ve identified one problem. You can take funds from another envelope if you wish, but then you’re impacting another area of your spending. Over time you can figure out how much to take for each purchase so that you’re not running low or exhausting funds for any particular category before the month ends.
If you have trouble saving money, you’re not alone. Many people have intentions to save money left over from a pay period or other source of income, but often find themselves with nothing remaining to deposit. Reverse budgeting was created to face this problem head on. Instead of trying to save what you have left over, you portion out money for your savings first. Savings first, expenses second - hence the name reverse budgeting.
A reverse budget can be used to build savings in a number of areas:
- Savings/401k fund
- Emergency fund
- Vacation fund
- Down-payment fund
The idea is to satisfy your savings and retirement fund goals each month. If you plan to make a major purchase this year, it may be smart to start saving for these expenses 6-12 months or more beforehand. By making it a habit to save first, you can spend your remaining funds with confidence knowing the financial priorities you’ve determined are more important have been fulfilled.
Down to the dollar budget
If you enjoy detailed recordkeeping, this budget style may be the one for you. The concept is straightforward - record every single purchase you make and round to the nearest dollar. Include everything from your $2,000 mortgage to a $0.79 pack of gum to make the final assessment as accurate as possible.
If you can commit to this system of budgeting, you may have clear visibility into areas of overspending. This could allow you to pinpoint what costs need to be cut, and over time, see the positive impact on your bottom line.
Similar to the envelope budget, 50/20/30 is all about separating your money into different categories. The three numbers represent a percentage which adds up to 100% of your monthly expenses. Here is how each category breaks down:
- 50 : No more than 50% of your take-home pay is used for necessities such as mortgage/rent, utilities, food, transportation, etc.
- 20 : A minimum of 20% is allocated for a long-term savings goal (i.e. 401k or retirement fund) and paying off debt
- 30 : No more than 30% goes toward lifestyle choices such as entertainment, hobbies, vacations, etc.
50/20/30 could be an effective style to ensure all categories get their proper share. Once you get more in tune with this budgeting style, you may feel encouraged to start allocating more money toward your savings goals.
Stay the course
Nobody’s perfect, so don’t get discouraged if you find yourself having to re-evaluate your initial budget plans. What’s important is to try to choose a budgeting style that works for you and set the plan in motion. Once you start to see your hard work resulting in dollars saved, you might even be inspired to tighten your budget a little more.