In today’s economic instability and uncertainty, budgeting plays a huge role in our personal finances. It helps us perform financial planning and control, debt management, emergency preparedness, and goal setting.
However, despite its benefits and several accessible resources online, many people still don’t budget or do it properly for various personal reasons. Above all is the inability to grasp their real financial situation.
In this article, we’ll help you solve this issue. We’ll walk you through different budgeting methods that are highly recommended for different financial situations.
A zero-based budgeting (ZBB) method is a must-try if you have a fixed monthly income. It’s called “zero” because you have to develop a spending plan or budget from scratch every payday. Its method simply subtracts expenses from income and ensures the result is zero. In other words, it’s salary minus all spending equals zero. Note that only income should be zeroed, excluding your other accounts.
The benefit of ZBB is that you can monitor your finances with fresh eyes, free from past limitations, assumptions, budget history, and targets. It also helps you identify unnecessary or redundant costs and prevent overspending by scrutinizing each spending category from scratch. Besides cost-cutting, it also enables you to set savings goals, improving your overall financial efficiency.
However, since digging into the details behind each line item is necessary, ZBB is often considered resource-intensive and among the most time-consuming budgeting strategies. It isn’t flexible as well. If you take cash from the allotted budget of one spending category, your overall budget can be easily thrown off. Hence, it’s only recommended for those who can reasonably estimate their monthly salary.
If your goal is to save up, the budgeting method called pay-yourself-first is your best bet. In this system, instead of directly allocating your income to your regular monthly bills or immediate needs, you pay yourself first by saving for future finances and long-term financial well-being. However, saving for retirement and emergency funds should be the priority over vacation plans and other goals.
Since you aim to secure savings, designate a specified savings contribution and deduct it from all paychecks. Usually, 5-10% of your take-home is a good target for your saving goals. If this is not achievable, saving even $25 or $50 each month is a good stepping stone to paying yourself first.
Consider automating these monthly contributions to your savings to prevent you from spending them elsewhere. After the savings are secured, allocate the remaining income however you see fit.
However, note that paying yourself first isn’t recommended if you have significant debt. In this case, consider a debt avalanche strategy, where you pay off high-interest debt first. This stops the interest from growing, allowing you to save up.
If your current financial situation allows you to save $25 but not pay for your high-interest debt, still choose to pay down debt to prevent its interest from growing. Tap into alternative financing, such as online loans like CreditNinja or credit unions in your local area if you have no work, low income, or bad credit score. Doing so lowers your monthly credit dues, giving you spare money to save even a little. Once the debt is settled, increase your monthly savings contributions.
Cash Envelope System
If you’re a habitual overspender, go traditional and try the envelope system. As its name implies, you must divide your available spending money or income into separate envelopes representing your important spending categories. This gives you granular insight into your monthly budget and expenses, preventing you from spending beyond your means.
Start with knowing your expenses each month. Prepare one envelope for each spending category. Then, designate an amount for each envelope based on how much you usually spend on them. If you have already used the funds in a certain envelope, don’t spend any more in that spending category until your new budget period begins.
Like ZBB, the envelope system requires you to closely review and justify every budget element. However, it’s more inconvenient since you must do it “manually.” That means the spending money should be in cash rather than e-money. It also requires you to collect receipts, write down expenses, and deduct costs from envelope totals.
While having no online transfer funds offline and automatic data import can be time-consuming, it’s effective money management for those who often engage in impulse buying and overspending behaviors. There are digital envelopes nowadays, but they may not be effective for overcoming compulsive spending. Additionally, since the paper envelopes are non-tech, it’s a good alternative for those who aren’t technology savvy.
Besides what’s on this list, there are other budgeting methods you can try. Keep in mind there’s always a budgeting method for a specific financial situation. People only need to do their due diligence to run their research, fully understand their finances, opt for the right budgeting strategy, and strictly follow their spending plan.