A budget is just a plan for your money. It is a financial plan for a specified period that allocates money for a particular purpose. Essentially, a budget tells you if you can afford your monthly expenses, savings goals, etc. Budgeting is only as complicated as you make it, and while some hate the idea of building and following a budget. A budget is often the first step to financial peace. There are various versions of budget methods, and your financial style and personality help to determine which version you will use. Personally, I have done them all, and now I use a mixture of them all.
Zero-Based Budget Method
The zero-based budget method was made famous by Dave Ramsey involves making a budget before the new month starts. It is called zero-based because you take your total monthly income and subtract all of your bills until you have zero dollars. I recommended listing your bills and their amounts in the order of importance on a sheet of paper. Don’t forget to include groceries and your transportation cost (gas, bus fare, etc.) in the top five. Dave calls these items the Four Walls (food, shelter, utilities, essential clothing, and transportation).
Envelope Budgeting Method
You may remember your grandparents carrying around envelopes full of cash. Well, this is something similar. The envelope method allows for the use of cash for different categories of your budget. Mostly the envelope method is used for the categories of the budget that often cause a budget to fail such as groceries, gas, personal expenses, etc. For example, if you budget $400 a month for groceries, you would either take that out half of that each paycheck or all of it at the beginning of the month and put it in an envelope labeled groceries. Now you have the money for groceries for that destinated time period, and the money in that envelope should be used for nothing other than groceries. Also, if you are uncomfortable with carrying large amounts of cash, there are several envelope type apps for your mobile phone that can do this for you. (Don’t worry a complete list of financials apps are coming soon). If you have money left over from that money, it is okay to roll it over to the next month or move that money to your savings account.
Balanced Money Method (50/30/20)
The balance money formula also called the 50/30/20 rule is a simplified budget method that attempts to balance fixed expenses, variable expenses, and savings. As with the other two methods, this utilizes your after-tax (net or take home) income. The method works as follows:
- 50% – Fixed expenses and necessities (food, housing, utilities, transportation). 50% is the maximum, and it is recommended that it stays at 35%
- 30% – Wants. Cable, Internet, personal, dining, trips, grooming, etc
- 20% – Savings and Debt Payments
Of course, to use this method, you have to be able to differentiate between needs and wants. While most needs are apparent, others vary from person to person. Use your judgment to determine what determines needs and wants.
The First 3 Months
Using a budget for the first time is often full of setbacks and failures. You have to consistently use the budget (making adjustments to amounts, correcting errors, etc.) for at least three months before it can be representative of your finances. During the first month, you are primarily focused on making the budget, and making it work for you and your money. Month two is an adjustment and reassessment of last months budget. Analyze the places you have overspent or underspent and make changes are needed. By the time you have reached month three, your budget should be an accurate representation of your lifestyle. If you wish to make cuts, or rearrangement of some items according to your goals, this is the time to do so.
This post is apart of the Guide to Money Management. You can find more articles like this by click here.