Banking » Savings » 5 Budgeting Strategies You Should Know: Which Is Best For You?
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5 Budgeting Strategies You Should Know: Which Is Best For You?

The most popular budgeting strategies include the 50/30/20 method, pay yourself first and zero based budgeting. How they compare?
Author: Josiah Mwangi
Josiah Mwangi

Writer, Contributor

Experience

Josiah Mwangi is a Certified Public Accountant and has an MBA in Finance. He has been writing for the Huff Post, Corporate Finance Insitute, Smarter.loans, and other top publications. In his free time, he goes hiking alongside his two German Shepherds
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Author: Josiah Mwangi
Josiah Mwangi

Writer, Contributor

Experience

Josiah Mwangi is a Certified Public Accountant and has an MBA in Finance. He has been writing for the Huff Post, Corporate Finance Insitute, Smarter.loans, and other top publications. In his free time, he goes hiking alongside his two German Shepherds
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When You May Consider Creating A Budget?

Creating a budget can be helpful in many situations, including:

  • When you want to save money: A budget can help you identify areas where you may be overspending and find ways to cut back. This can free up money to put towards your savings goals.

  • When you have a variable income: If your income fluctuates from month to month, it can be difficult to plan your expenses. A budget can help you prioritize your spending and make sure you have enough money for your essential bills.

  • When you have debt: If you're trying to pay off debt, a budget can help you allocate your money towards debt repayment and track your progress.

  • When you're facing a major life change: Whether you're getting married, starting a family, or buying a house, a budget can help you plan for the financial implications of these changes.

  • When you want to achieve a financial goal: Whether it's saving for a down payment on a home, taking a dream vacation, or building an emergency fund, a budget can help you stay on track and make your goals achievable.

Budgeting strategies
The most popular budgeting strategies include the traditional budgeting, 50/30/20 method, pay yourself first and zero based budgeting. (Photo by iamtui7/Shutterstock)

What Are The Top 5 Budgeting Strategies?

There are many different budgeting strategies you can use to manage your money effectively. Here are five popular ones:

1. Traditional Budgeting

Traditional budgeting is a method of managing your money that involves creating a detailed plan for your income and expenses.

However, it does require some time and effort to set up and maintain, and it may not be the best fit for everyone's lifestyle or financial goals.

Here are the basic steps:

  1. Estimate your income: Start by estimating how much money you'll earn in a given period (usually a month). This can include your salary, any bonuses or commissions, and any other sources of income.

  2. List your expenses: Next, list all of your expenses for the same period. This can include fixed expenses like rent, car payments, and utilities, as well as variable expenses like groceries, entertainment, and clothing.

  3. Categorize your expenses: Group your expenses into categories, such as housing, transportation, food, and entertainment. This can help you see where you're spending the most money and identify areas where you can cut back.

  4. Allocate your income: Assign a portion of your income to each category of expenses. Start with your fixed expenses, since these are typically the same each month, and then allocate the remaining money to your variable expenses based on your priorities.

  5. Track your spending: Throughout the month, track your spending to make sure you're staying within your budget. You can use a spreadsheet or budgeting app to help you keep track.

  6. Adjust your budget as needed: At the end of the month, compare your actual spending to your budget and make any necessary adjustments. If you overspent in one category, for example, you may need to cut back in another category to stay within your overall budget.

Pros
Cons
Detailed Overview Of Expenses
Time-Consuming
Prioritize Spending
Requires Regular Updating
Achieve Long-Term Goals
Not For Variable Salary

Traditional budgeting provides a detailed overview of your expenses, allowing you to track your spending and identify areas where you can cut back.

Traditional budgeting can encourage mindful spending by making you more aware of your expenses and forcing you to prioritize your spending.

By tracking your expenses and sticking to a budget, traditional budgeting can help you achieve long-term financial goals, such as paying off debt or saving for retirement.

Traditional budgeting can be time-consuming, as it requires tracking expenses and creating detailed plans for future spending.

Traditional budgeting requires regular updating as expenses and financial goals change.

Traditional budgeting may not work for everyone, especially those with irregular income or those who prefer a more flexible approach to budgeting

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2. The 50/30/20 Method

The 50/30/20 budgeting method is a personal budgeting strategy that allocates your after-tax income into three categories:

  1. Necessities (50%): This category includes essential expenses that are necessary for your basic needs. The goal is to allocate no more than 50% of your after-tax income to these expenses.

  2. Discretionary spending (30%): This category includes non-essential expenses that you choose to spend your money on, such as entertainment, dining out, shopping, and vacations. The goal is to allocate no more than 30% of your after-tax income to these expenses.

  3. Savings and debt repayment (20%): This category includes saving for your future and paying off any debts you have. The goal is to allocate at least 20% of your after-tax income to these expenses.

The 50/30/20 budgeting method is based on the principle that you should be spending less than you earn and saving for your future. By allocating a significant portion of your income to savings and debt repayment, you can build an emergency fund, pay off debts, and work towards your financial goals.

Pros
Cons
Simple And Easy To Follow
Not Suitable For Low Income
Provides Flexibility
Lacks Detail
Encourages Saving And Debt Repayment
Not For For People With High Debt

The 50/30/20 budgeting method is a simple and easy-to-follow budgeting approach that can help you stay on track with your finances.

The 50/30/20 method is flexible, allowing you to adjust the percentages to fit your individual needs and financial goals.

By allocating a significant portion of your income to savings and debt repayment, the 50/30/20 method encourages you to prioritize your financial goals and work towards long-term financial stabilit

The 50/30/20 method may not be suitable for people with high expenses or low incomes, as they may need to allocate more than 50% of their income towards necessities.

The 50/30/20 method does not provide a lot of detail on how to allocate your money within each category, which can be a disadvantage for people who prefer a more specific budgeting approach.

People with high levels of debt may need to allocate more than 20% of their income towards debt repayment, which can be difficult to do while also saving for the future and paying for necessities.

3. Pay Yourself First

The Pay Yourself First budgeting method is a personal finance strategy that emphasizes saving a portion of your income before paying for any other expenses. The idea is to prioritize saving for your future goals by making it the first expense you pay each month.

Here's how the Pay Yourself First budgeting method works:

  1. Determine how much you want to save: Decide on a percentage of your income or a fixed dollar amount that you want to save each month. This should be a realistic amount that you can commit to saving on a regular basis.

  2. Set up an automatic transfer: Set up an automatic transfer from your checking account to a savings account or investment account for the amount you want to save each month. This transfer should happen as soon as you receive your paycheck or other income, before you start paying for any other expenses.

  3. Budget for other expenses: After you've transferred money into your savings account, create a budget for your other expenses. Make sure your expenses are within your remaining income, and keep track of your spending throughout the month.

  4. Adjust as needed: At the end of each month, evaluate your budget and adjust it as needed. If you're consistently overspending, you may need to adjust your budget or find ways to reduce your expenses.

Pros
Cons
Helps Prioritize Savings
Not Suitable For Low Income
Encourages Good Saving Habits
Not For Variable Income
Can Be Adapted To Fit Different Goals
Not Address Immediate Financial Needs

The Pay Yourself First budgeting method makes saving a priority, which can help you reach your financial goals more quickly and consistently, especially in times when you can get up to 5% with your savings account.

By setting up an automatic transfer and making saving a regular habit, the Pay Yourself First method can encourage good saving habits and help you develop a strong financial foundation.

The Pay Yourself First method can be adapted to fit different financial goals, such as saving for a down payment on a house or building an emergency fund.

The Pay Yourself First method may not work for everyone, especially if you have a low income or high expenses that make it difficult to save a significant portion of your income.

The Pay Yourself First method may not address immediate financial needs, such as paying off debt or covering unexpected expenses.

If your income changes significantly, you may need to adjust the amount you save each month to ensure that it still aligns with your financial goals.

4. The Envelope Budgeting

Envelope budgeting is a personal budgeting method that involves using physical envelopes to allocate your money into different spending categories. Here's how it works:

  1. Identify your spending categories: Start by identifying the different categories of expenses you have, such as groceries, transportation, entertainment, etc.

  2. Determine your budget for each category: Based on your income and financial goals, determine how much money you want to allocate to each category.

  3. Label envelopes for each category: Label envelopes for each of your spending categories.

  4. Place the budgeted amount of cash into each envelope: At the beginning of each budget period (such as a month), take the budgeted amount of cash for each category and place it into its corresponding envelope.

  5. Spend only the cash in the envelope for that category: Whenever you make a purchase in a particular category, use only the cash from that category's envelope. When the money in an envelope is gone, stop spending in that category for the budget period.

Pros
Cons
Encourages Mindful Spending
Requires Use Of Cash
Simple And Easy To Use
Limited Flexibility
Can Help Avoid Overspending
Can Be Time Consuming

By using physical envelopes for each spending category, you can become more aware of your spending habits and prioritize your spending accordingly.

Envelope budgeting is a simple and straightforward budgeting method that can be easily understood and implemented.

Since you can only spend the cash in each envelope, envelope budgeting can help you avoid overspending and stick to your budget.

Envelope budgeting requires the use of physical envelopes and cash, which can be inconvenient or impractical for some people.

 If you overspend in one category, you may not be able to borrow from another category without going over budget.

Keeping track of cash and moving it between envelopes can be time-consuming and tedious.

5. Zero Based Budgeting

The key difference between Zero-Based Budgeting and other budgeting methods is that you start with a blank slate each month and allocate all of your income towards your expenses and financial goals

so that your income minus your expenses equals zero. Here's how it works:

  1. Estimate your income: Start by estimating your income for the month. This can include your salary, any bonuses or commissions, and any other sources of income.

  2. List your expenses: Next, list all of your expenses for the same period. 

  3. Categorize your expenses: Group your expenses into categories, such as housing, transportation, food, and entertainment.

  4. Allocate your income: Assign a portion of your income to each category of expenses. Start with your fixed expenses, since these are typically the same each month, and then allocate the remaining money to your variable expenses based on your priorities. The goal is to allocate all of your income so that your income minus your expenses equals zero.

  5. Track and adjust:  You can use a spreadsheet or budgeting app to help you keep track. At the end of the month, compare your actual spending to your budget and make any necessary adjustments. If you overspent in one category, for example, you may need to cut back in another category to stay within your overall budget.

Pros
Cons
Encourages Better Spending Habits
Requires More Effort And Time
Greater Visibility Into Your Finances
Not For Unexpected Expenses
Efficient Use Of Resources
Can Be Difficult To Stick To

Zero-Based Budgeting forces you to think about every dollar you earn and spend, which can help you prioritize your spending and make better decisions about where to allocate your money.

Zero-Based Budgeting requires you to track your spending carefully, which can give you a better understanding of your financial situation and help you identify areas where you can improve.

By ensuring that every dollar you earn is allocated towards something, Zero-Based Budgeting can help you avoid wasteful spending and make the most of your resources.

Zero-Based Budgeting can be more time-consuming than other budgeting methods, as you need to create a new budget each month and track your spending carefully.

Zero-Based Budgeting may not be the best fit for people with fluctuating income or expenses, as it requires you to allocate all of your income towards your expenses and financial goals.

Zero-Based Budgeting can be challenging to stick to over the long term, especially if you have a lot of expenses or unexpected costs arise.

How To Choose A Budgeting Method?

When choosing a budgeting method, there are several things you should consider to ensure that the method you choose aligns with your financial goals and lifestyle. Here are some factors to consider:

Your income and expenses will play a significant role in determining which budgeting method is best for you.

  • If you have a low income, you may need a budgeting method that focuses more on cutting expenses and prioritizing savings. You'll be less flexible for changes and make an exact calculation of each dollar you spend.
  • If you have a high income, you may be able to allocate more towards discretionary spending or invest in more long-term financial goals.

Your financial goals will also play a significant role in determining which budgeting method is best for you.

  • If you're saving for a specific financial goal, such as a down payment on a house or paying off debt, you may need a budgeting method that prioritizes savings and debt repayment.
  • If you're focused on building long-term wealth, you may want to prioritize investing and saving for retirement.

Your lifestyle and spending habits will also play a role in determining which budgeting method is best for you.

  • If you prefer a simple and straightforward approach, you may want to choose a budgeting method that is easy to follow and doesn't require a lot of tracking.
  • If you're more detail-oriented and enjoy tracking your spending, you may prefer a more complex budgeting method.

FAQs

Budgeting can help you save money, reduce debt, and achieve your financial goals. It can also help you identify areas where you can cut back on expenses and make better financial decisions.

Common budgeting mistakes include underestimating expenses, not tracking spending, and not prioritizing savings. Avoiding these mistakes can help you achieve your financial goals more quickly.

Budgeting with irregular income requires careful planning and flexibility. It's important to create a budget based on your lowest expected income and prioritize expenses and savings accordingly.

To save money on groceries while budgeting, make a list before going to the store, buy in bulk, and look for sales and discounts. You can also try meal planning to reduce food waste and save money.

Budgeting tools and apps include Mint, YNAB, and Personal Capital. These tools can help you track expenses, create a budget, and monitor your financial goals.

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Josiah Mwangi

Josiah Mwangi

Josiah Mwangi is a Certified Public Accountant and has an MBA in Finance. He has been writing for the Huff Post, Corporate Finance Insitute, Smarter.loans, and other top publications. In his free time, he goes hiking alongside his two German Shepherds
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