In this blog, we share a few of our favorite budgeting strategies, explaining the strengths of each and which ones may be most suitable for certain individuals.
Quick Tips for a Better Budget
Before deciding on a budget strategy, first look at your current expenses. Consider your net income and review your bank and credit card statements over the last few months. Are there areas where you could cut back or entirely cut from your budget, like subscriptions you don’t use or membership costs? Do you feel confident that you have enough in your account that you’re covered if an emergency were to happen? While reviewing your balances and assessing monthly expenses, don’t forget about annual charges and seasonal purchases.
Once you have a firm grasp of your financial situation, you’ll be better prepared to choose a budget strategy that’s right for you.
Choose A Budgeting Strategy That You Like
Not all budgets are created equal. Different methods work for different people, and you may find that a certain strategy is more effective in getting you to stick to it. Here are a few popular budgeting strategies that you may want to try!
In this budget, you split your after-tax income into three categories with 50% for necessities, 30% for “wants,” and 20% towards savings and debt repayment. It’s a common budgeting method, and for a good reason — it’s not complicated, and it can be highly effective. By following this strategy and staying consistent, you may be able to save a considerable amount over time.
Once you’ve figured how much is 20% of your take-home pay and you’ve established where to allocate these funds, you may be able to automate your savings contributions. Scheduling or automating your savings can make this strategy even more seamless if you’re using direct deposit or an automatic transfer of funds.
Pay Yourself First/Reverse Budgeting
Another method is to “pay yourself first,” sometimes referred to as reverse budgeting. Ordinary budgets are built around expenses meaning that you subtract expenses from your income and set or allocate remaining funds to go towards savings. But paying yourself first reverses this order by setting aside money for your savings and dividing your remaining income for expenses. You may even see that you need to create more income streams to reach your saving goals.
According to SmartAsset, this budgeting strategy makes your financial planning forward-looking by focusing on what you want to do with your money rather than how you’ve already spent or committed your money. This method can help you get more excited about your savings goals by making them top of mind when you first receive your paycheck!
The Envelope System
The envelope system is another method in which you set a spending limit for each expense category ahead of time and fill envelopes with the allotted cash for each category. According to Nerd Wallet, having physical cash devoted to each category may make it easier to stick to your budgeting goals. Once the cash runs out, the system doesn’t allow you to spend any more on that category!
If you’re someone who would be motivated by seeing something tangible as a result of your savings efforts, this could be a great option for you.
This budget doesn’t mean you should quit your job so that you can hit the sweet spot of zero dollars in your bank account. Instead, zero-based budgeting is a budgeting method in which you plan for your income minus expenses to equal zero. Essentially, your expenses match your income so that every dollar is accounted for and intended for a particular expense.
Businesses often use this strategy because it is precise down to the dollar to ensure that there are no inefficiencies. But, it can be highly effective for individuals meticulous with their spending and savings!