Creating a budget is just the tip of an iceberg. Executing it successfully is the tough part. There are different budgeting systems to tackle different financial hurdles. You can efficiently manage your finances by following any of these budget systems. But before you choose or create your budget, conduct a financial self-assessment to gauge your current financial status to understand your financial obligations and figure out your priorities. Once you find out where you stand and what you wish to accomplish, pick the budget plan that is in line with your needs.
The 50-30-20 Budget System
If you are new to monthly budgets, this plan is ideal to get you started. The flexibility of this system makes it all the more appealing as it gives you enough space to cover current costs, pay off debts as well as save for the future. This budget plan recommends that you allocate around 50% of your total income towards your necessities, 30% for your wants and the remaining 20% for savings and debt settlement.
Simple yet extremely pragmatic, this budget system will keep your finances on track in the long run. You will have enough for your daily needs, be able to indulge in luxuries occasionally, manage your debt effectively and retire comfortably with enough savings.
The Envelope Budget System
Cash transactions have taken a back seat these days and we mostly use cards for all expenses. Unless you have an eidetic memory, you have no clue how much you are spending and what exactly is left in your account when you swipe your card to make a purchase. We often lose track of our funds and develop the terrible habit of overspending. If you think you have such prodigal habits, you could opt for the envelope system of budgeting to help you curb your spendings. It's a cash-based rigid approach that helps you reduce all frivolous expenses and also keeps you out of debt.
Before you start following this system, you should first sort your expenses into categories like groceries, entertainment, dine-out, etc. and set a monthly spending limit for each of these categories. Make separate envelopes for these categories. Next, you withdraw the entire amount in cash and put the allocated amount in each envelope. The idea is to spend from these envelopes. Once an envelope is empty, you cannot spend more on that particular category anymore for the remaining days of the month. It's a grueling process but can make you more responsible and frugal.
The Reverse Budget System
If you are struggling to save enough money by the end of the month and feel that you are spending a bit too much on your needs and wants, you could consider this effective method which focuses more on savings. The reverse budget is often referred to as 'pay yourself first' budget, but don't be misled by the phrase. It doesn't aim to satisfy your desires and fancies. It works on the principle of putting a premeditated portion of your income into your savings and then proceeds with the remaining amount for paying your bills and satisfying your wants.
If you wish to create a reverse budget for yourself, list all your short-term and long-term savings goals. Pick up a few, to begin with. Prioritize your retirement and emergency fund, then add a small amount for other long-term savings. Add it up and figure out the amount that you need to save each month. Use the remaining portion of your salary for your necessities and desires.
The Zero-based Budget System
Whether you are a meticulous planner or a spendthrift, this budgeting system can work well for you. It encourages you to allocate your monthly income to various expenses and savings and then deliberately spend whatever you earn without splurging on inessential things. The objective of this budget is to ensure that at the end of the month you have spent your entire income on things that you need for a living, paying off your debt, as well as contributing to your savings.
Before you start following a particular budgeting system, figure out a preferable way of tracking your expenses so that you stick to the budget. Budgeting plans like the zero-budget system and the 50-30-20 system need you to track your expenses in details quite frequently. On the other hand, the reverse and the envelope budget systems are more flexible regarding upkeep.
Maintaining a budgeting system can be a tedious task. You could try the trending budgeting tools, but those cannot force you to stop spending once you hit the limit. You need to be diligent in entering your expenses in the app every day and keep your tracking consistent.
You also need to revisit your budget from time to time to inspect whether it is working as planned. If you are confident that you are spending responsibly, you could relax and revise your budget once a year. Those with extravagant spending habits should keep a tighter grip on their expenses and monitor their budget closely every month. You should make adjustments to suit your expense needs. As your income, expenses and priorities change, revise the budget accordingly.
When you walk energetically into a budgeting system, you need to find yourself a budgeting tool to maintain it. There are manual as well as digital options. Figure out a suitable way to track your expenses. You could do it in the old-school way of using a notebook, or the tech-savvy way of using Excel.
Alternatively, many budgeting tools are readily available on the internet for free. Budgeting tools like You Need a Budget or Monefy need you to log in all your expenses consistently. A few of these apps have paid versions that can access your transaction details from your bank account; these apps allow you to track your expenses in a precise, more effective and organized way.
While following a budget is a good financial habit, it isn't mandatory. You just need to stay focused on your financial goals, keep a firm grip on your expenses and diligently repay your debts. Strict budgets might get too tedious at times. As long as you spend what you can afford, you are good to go. Just stay focused on your financial goals and work hard to achieve them.