Budget methods are important to consider. Pick a budget method that works for you and you are more likely to stick with it. Ultimately, this leads to your financial success.
Why do I need a budget method?
A budget is a plan for how you will spend your earnings. In other words, where you want your money to go. Many people have a negative mindset when it comes to budgets. They believe that a budget means you can not do anything. On the contrary, a budget is just a plan to help you get what you want. At the same time, it ensures you do not spend more than you earn.
Without a budget, you have no idea where your money is going. Even worse, you may not know if you have enough coming in to pay for what needs to go out. In fact, you may not even know what is coming in or going out!
Everyone needs a budget. It does not matter how much income you earn or what your expenses are. A budget allows you to be in control of your money.
Before you start
It is a good idea to have a clear picture of your income and expenses before you start creating your budget. Regardless of what method you choose, I recommend setting up a budget each month since the numbers will change from month to month. This gives you an opportunity to be more strategic with your income depending on your goals.
Be sure to list every single expense that you anticipate. Of course, it is not going to be one hundred percent, but it will be close. Don’t forget to note if the expense is a need or a want. Needs are not negotiable for your budget. The wants can be adjusted when necessary.
Now that you have your financial picture, it is time to create the budget. But, what method do you use?
What are the different budget methods?
Finding a budget method that works for you makes the budgeting process easier. Furthermore, you are more likely to stick with your budget if the method resonates with you.
There are quite a few budgeting methods to choose from. If you have never budgeted before it can feel like information overload when you start researching.
Once you pick a method, try it for a few months. If it feels cumbersome, try a new method. In fact, you may even create your own budgeting method. That is what I did.
Listed below are three budgeting methods that I personally like.
1. Pay yourself first budget method
This method works very well if you aim to pay down debt or increase your savings account. The basic idea is that you pay yourself a predetermined amount of money from your income that would go toward debt payment or your savings account. The balance of your income is then used for the remaining expenditures. I suggest making sure that all of your standard living expenses are taken care of before you determine the amount you will be paying yourself. Any money left over after paying your standard expenses and yourself can be used to pay for you “wants”. I’ve used this method and it definitely helped keep me focused. In fact, the method I currently use is very similar.
2. Zero-based budget method
Income less expenses equals zero. This is the concept of the zero-based budget. You calculate your expected income, subtract all of your estimated expenses and if there is anything left over you allocate that money to your debt payback or savings. Every penny should be spent.
Accuracy is key if you use this budget method since you are bringing your balance down to zero. Personally, I feel this method works if you have a steady income and not too many expense transactions. Underestimating your expenses could throw your whole budget off resulting in the need to pull money from other categories. On the other hand, if you have a pretty good handle on your numbers, this method may work for you.
3. Create your own budget method (mine below)
As I mentioned earlier, you may find your own method that works. Below is the method that I use.
Add up all of your “need” expenses and then subtract that number from your income. Hopefully, you have money left over. Let’s assume you do.
Next, add up all the “want” expenses and cut that in half. Subtract that number from your new balance. Leftover funds can go into savings or debt payments.
Because I am no longer in debt, this method works great for me. Since I am able to spend more on my wants and still have money to contribute to my savings it gives me the flexibility to enjoy many different aspects of my life.
Changing your budget method
Your budget method will change over time. For example, we started off with the pay-yourself method. That worked very well for us while we were on our debt-free journey as well as when we were bulking up our savings account.
I now use the balanced budget method. This one gives me more freedom with my spending, yet still keeps me in check.
All in all, whatever budget method works for you is the best method to choose. Ideally, you will find something that is easy to maintain and does not feel like work. Consistency is your friend when it comes to budgets so be sure to choose a budget method you can stick with each month.
Another method that might be of interest is Values Based Spending.
You can read more about that one here:
Do you have any budget methods you would like to share? Please add to the comments. I would love to read about what works for you.
Thanks for reading!
Stay Balanced,
Jill