BUDGETING METHODS

recent survey found that 69% of Americans have less than $1,000 in savings. That makes it hard to handle emergencies but having a written Budget can help.

What Are the Benefits of Budgeting?

Budgeting money does not mean deprivation and never having fun again. Budgeting means:

  • Knowing your cash flow coming in and going out. It helps you to manage your expenses, fixed and variable, and it determines if you need to create additional income. Based on your priorities, you decide how much you want to spend, save, and give.
  • Having a road map to your short- and long-term financial goals. After budgeting living expenses, you find money for other goals, like retirement.
  • Understanding what your income and expenses are. You will be prepared for unexpected expenses and avoid having more month than money.

Types of Budgeting Methods

There are a variety of methods when it comes to budgeting. Here are some popular methods:

  • 50/30/20: Developed by Elizabeth Warren, this budgeting method allocates 50% of your income to your needs, 30% to wants and 20% to building up savings and paying down debt.
  • Zero-based budgeting: With zero-based budgeting, you allocate all of your income so that your income minus your expenses equals zero. Every dollar that comes in has a function.
  • Envelope method: Popularized by Dave Ramsey, this method uses cash in envelopes to control spending. Each spending category has an envelope, and once the money is gone, you stop spending.
  • Flexible budgeting: With a flexible budget, you reallocate your income and expenses as they change. This allows more flexibility, but it takes more time to manage.
  • Static budgeting: As the name indicates, a static budget stays the same even if your income increases.
  • 80/20: You focus on setting aside 20% of your income for savings. Everything else comes from the remaining 80%.

Simple Budget Steps

  1. List all your living expenses.
    • Start with budgeting living expenses like housing, food, and transportation, and other essentials.
  2. List variable and recurring expenses and debt payments.
  3. Add up your after-tax income.
    • Include income from your spouse or partner, full-time jobs, side hustles, and other sources such as alimony or child support.
  4. Create financial goals to set aside money. Your goals might include:
    • Overall financial stability
    • Establishing a savings or emergency fund
    • Saving for retirement
    • Paying down debt
    • Saving for a home, car, education or starting a business
  5. Record and track your spending.
    • You can use a notebook, a spreadsheet, or a budgeting app. The important thing is to track your spending every month.
  6. Revise as needed and do not give up.
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