Financial health is important. Being able to afford to pay your bills regularly and place money into short-term or long-term savings unlocks the ability to have some leftover to enjoy yourself responsibly. If you don’t know how to do this, though, you’re not alone. In fact, plenty of us don’t have a good grasp of how to budget our money well so that we can afford everything we need — some of us just never learned, and we can end up in some hot water because of it!
Understanding how to budget your money doesn’t have to be in the wake of a financial disaster or emergency, though. In fact, if you learn the ins and outs of budgeting your money and apply these techniques right at the very beginning, you’ll be able to avoid money emergencies much more easily. It’s in that interest that we’ve put together this comprehensive guide to budgeting your money the smart and responsible way.
First Things First: Audit Your Incomes and Outgoings
It’s important to understand that before you begin the important work of budgeting your money, you need to first take stock of your financial health. You can’t just come up with a budget out of thin air; assigning arbitrary figures to what you’ll spend on what every month is no good if you don’t first have a good grasp of how much money you have currently flowing into your bank account and where it’s heading when it leaves.
In other words, it’s time for an audit of your finances. A personal audit isn’t necessarily difficult, but it does involve being as careful and complete as possible. You need to gather all the information you can, starting with your monthly income after taxes and deductions. From there, you need to gather up all your monthly bills and itemize them to see how much you spend regularly. Once you have both these figures — your incomes and your outgoings — you have the data you need to begin budgeting in earnest.
The Envelope Method
Simple and systematic, the Envelope Method is an excellent tool for both paying bills and saving money. Its simplicity and effectiveness have led it to be quite popular, it’s easily adaptable to personal finance software applications, and it’s great for building positive spending habits in the longer-term.
In its most simple form, the Envelope Method literally involves taking several envelopes and labeling them with different spending categories such as Rent or Mortgage, Electricity, Water, Trash Removal, and so on. These envelopes are literally filled with the cash needed to pay each of these bills and are then emptied in order to pay those bills when they’re due.
This budgeting method is both simple and adaptable, as it can be used with financial budgeting software instead of cold, hard cash. It can also help you keep ahead of your discretionary spending; if your Dining Out envelope is empty, for example, you know you don’t have the funds to do so currently, which prevents you from overspending and jeopardizing your ability to pay your bills.
The Balanced Money Formula
As simple and straightforward as the Envelope Method is, the Balanced Money Formula may be even more so. Often called the 50/30/20 Rule, the Balanced Money Formula separates your budgeting into three simple categories: Needs, Wants, and Savings, with each one correlating to a different proportion of your income.
This budgetary method calls for spending no more than 50 percent of your net income on your needs, up to 30 percent on your wants, and no less than 20 percent in savings. These are, of course, some very broad categories, though some are obviously self-explanatory: your “needs” cover costs associated with housing, groceries, clothing, utilities, childcare, even as the other two categories are sometimes open for interpretation. So-called “negative wealth” debt repayments, for example, are usually classified under Savings, for example.
The strengths of the 50/30/20 rule are that they allow you to adapt your spending and saving without having to fuss with up to a dozen categories or even more. It relies on a bit more diligence on your part to ensure you stick to your budget, but it also provides you wiggle room to reduce one to increase the others, or vice versa, to remain in equilibrium.
Other Budgeting Plans
Just because the Envelope Method and the Balanced Money Formula are the most popular budgeting plans out there today doesn’t mean that they’ll necessarily be the right ones for you. Here’s a quick, short list of some of the other most commonly used budgets out there today:
The Zero-Based Budget
Often used by small business owners, the zero-based budget involves making a budget from scratch. Instead of being based on previous budgets, this budget starts at zero and then requires you to justify every expense before adding it to your official budget. This forces you to reduce spending by looking for places where you can cut costs.
The 60% Solution
Similar to the 50/30/20 rule, the 60% Solution budget requires you to commit 60% of your income towards committed expenses such as housing, food, and so on. The remaining 40 percent is then split evenly between retirement savings, long-term savings, short-term emergency savings, and personal use.
Cash-Only Budgeting
Typically paired with the Envelope Method, Cash-Only Budgeting literally does what it says on the tin. It involves avoiding using any sort of credit to make purchase or payments and using cash for everything. The most strict versions of this budget even preclude you from using checks or debit cards!
The “No Budget” Budget
This curiously-named budget is ideal for anyone whose incomes are already well above their outgoings, as it involves setting all your bills to Auto-Pay and then simply using whatever’s leftover at the end of the month to do with as you please. Spend it, save it, it’s up to you.
The Values-Based Budget
The Values-Based Budget is similar to the Balanced Money Formula, but instead of relying on a 50/30/20 split, you get to decide what aspect of your life takes priority. In essence, this budget is concerned with maximizing the amount of money you have leftover after paying for essentials so that you can afford what makes you happy.
The 80/20 Budget
Another variation of the Balanced Money Formula, the 80/20 Budget is even further simplified. The breakdown used is 20 percent of your earnings go into savings every month, while you use the remaining 80 percent for literally everything else.
The Sub-Savings Accounts Method
The Sub-Savings Accounts Method is a budgetary strategy that’s best used to save up for specific big-ticket purchases like vacations or new household appliances. You simply set monetary goals for these accounts and then regularly pay into these savings accounts until you’ve accumulated enough to pay for the item or event you’re saving for.
Reverse Budgeting
While most people formulate their budgets by first figuring out their monthly expenses and then subtracting that from how much money they bring in before putting whatever’s left into savings, Reverse Budgeting does the opposite. First comes saving for the future, then paying expenses; leftovers then go to whatever you would like.
The Priority-Based Budget
Priority-Based budgeting is all about ensuring that your money goes to the places it does the most good. This typically results in essentials like housing and groceries getting paid first, with other spending then prioritized accordingly. This method is often used, in larger scales, in municipal settings to ensure that cities spend their budgets on the most useful services.
The Anti-Budget
The Anti-Budget is all about calculating your “Nut”, or the total amount of your fixed monthly expenses and savings, and then setting up automatic payments accordingly. Whatever’s still there above and beyond your Nut is yours to do with as you please.
The Spending Ceiling
Deceptively simple, the idea of having a Spending Ceiling is literally just that: you set an upwards limit on the amount of money you can spend every month. As long as you can stay beneath that ceiling while also paying your bills and putting aside some money for long-term savings, this simple approach can work well.
The Last Word on How to Budget Your Money
No matter what type of budget you adopt, or which budgets you pull from to create your own, a few things are universal. The most important ones are to spend less money than you earn and to also put aside some money for the future. Other than that, find a budget that works for you, stick with it, and before long you’ll see the difference that even a little bit of financial planning can make in your life.
