Budgeting may feel like a far-fetched dream that may never fully work for you. This just means that you haven’t found the right budgeting style for yourself! During my hunt for the perfect budgeting strategy, I had learned and tried every type of budget with varying levels of success.
Want to know the secret to creating a successful budget? The key is to uncomplicate your budgeting strategy and take it slow! Quit complicating the system and pushing yourself to achieve unrealistic targets. Remember that you need at least 2-3 months of time to see real success, no matter what strategy you choose.
I’m going to share all the note-worthy personal budgeting techniques, including my favorite type of budget which helped me save $48,000 in our first year!
What is the purpose of a budget?
Budgeting will allow you to spend on things that truly matter to you instead of blowing your hard-earned money on random tiny expenses throughout the month. I bet you have heard of the quote – small leaks sink big ships! Creating a budget helps you prioritize your needs and live below your means. Without a check in place, it’s very easy to max out your credit card every month and feel like your salary is barely enough to pay your bills.
Budgeting makes sure that you are saving your money. Not having a budgeting strategy hinders you from improving your savings rate and thus delays you from achieving all your financial goals. This is the first hurdle to growing your wealth. Savings will allow you to:
- build an emergency fund
- invest your money and safeguard your retirement
- pay off debts and start growing your net worth
- achieve financial independence
5 TYPES OF BUDGETS
1. 50 30 20 Rule
The popular 50 30 20 budgeting rule believes in dividing your monthly expenses into 3 buckets – Needs, Wants and Savings. The goal is to spend 50% on necessities such as rent/mortgage, bills, food, fuel etc. Another 30% should be dedicated to “wants” such as shopping, entertainment and hobbies. Lastly, 20% of your paycheck should go to your savings.
The 50 30 20 rule is suitable for those who want simplicity in their budgets. You can focus on dividing your paycheck into the 3 neat buckets and not worrying about the individual expense categories.
The drawback of this type of budget is that it’s easy to overspend. If your lifestyle allows you to save more than 20%, you should go for it! Also, for people living in HCOL (high cost of living) cities, the rent itself could be 40% of the paycheck. In such cases, try combining the Needs and Wants categories into one bucket and make it an 80-20 budget.
2. Zero Based Budget
The motivation behind the zero based budgeting rule is that every dollar should be given a job. Write down all your expense categories and assign a specific dollar amount to each line item. Take the money that is left (your savings) and assign it to a specific savings account like a retirement account or an emergency fund until you have zero dollars remaining.
Zero based budgets are great for those who want to have a clear picture of where their money is going. It helps you be in total control.
The disadvantage of this type of budget is that it’s too rigid to be practically followed “down to the dollar”.
3. Cash Envelope Budget
The cash envelope method gained some popularity on Pinterest. The idea is to withdraw your paycheck in cash. Allocate a specific dollar amount for each expense category. Write out envelopes for each category and put the assigned money in it. For example, if you have an envelope for grocery with $300 in it, that’s all you get to spend on groceries for the month.
The main advantage of this envelope method is that you will be paying yourself first, by depositing your savings. Also, it is easy to know how much money you have leftover at any given time.
The downside of the cash envelope method is that it’s tedious to handle cash and coins since we are so accustomed to tap and go payments. And there is always the danger of losing money or misplacing it!
4. No Budget Method
The no budget method is probably the laziest and yet decently effective approach to budgeting! You first need to calculate how much your monthly expenses would be. Let’s say that from a paycheck of $3000, your monthly expenses tend to be around $2400.
Now all you need to do is check in on your account from time to time to make sure that your expenses are under $2400. If you’re nearing your limit, slow down on your spending until next month. That’s all there is to it!
This type of budget is great for those who are not big spenders and don’t have the time to track expenses. All it requires is signing into your banking app once in a while.
The disadvantage is that this budgeting method only works if you have great self-control to not exceed your quota for the month. Otherwise it is easy for your expenses to eat into your savings.
5. Progressive Budget
When I found that all the existing budgeting methods were too rigid or tedious, I created the progressive budgeting method. It recognizes that people live in different cities with varying costs of living and that each person has their own, unique spending vices. It’s important to prioritize spending and saving based on your lifestyle!
This budgeting method involves tracking your expenses in different categories once a month. It requires 15 minutes and the visual exercise helps bring awareness to your spending habits. Identify 1 or 2 categories where you can cut back and set a target to lower this expense by 20% for the next month. Grab the free budgeting bundle and get started!
This budgeting method is successful because its gradual approach allows for sufficient time to build new habits like cooking at home instead of ordering out. It helped me become debt free and save $48,000!
The drawback of this type of budget is that it needs time to work. Give yourself 3-4 months time to permanently increase your savings rate. Quick results may sound fun but they aren’t sustainable!
Still can’t decide on one type of budget?
That’s okay. Start small and focus on living below your means. Avoid these big money mistakes! Try out these simple steps to get your finances in order.
- Figure out your monthly income.
- Track your expenses for one month to get a general idea.
- Figure out how much you are saving. Get your savings rate.
- Identify your main financial goals. Are you saving for an emergency fund, to pay off your loans, for a down payment or for your retirement? Figure out how long it will take to reach your goal at your current savings rate.
- Tweak your savings rate until you feel like you are on track to reach your goals! That’s it!
Personal finance is all about your personal lifestyle. As you grow in your journey, your financial priorities change and that should be reflected in your budget and your money goals. Experiment with different types of budgets and see what works for you! Don’t forget to grab your free budgeting bundle above, it may just be the push you need to get started!
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