Your Guide to Budgeting: How to Set Up and Find the Best Method for You
Budgeting is a vital part of managing your finances. It helps you keep track of your spending, save for future goals, and avoid financial stress. In this blog post, we'll explore several common types of budgeting, describe who each type might suit best, and explain how to set them up. By the end, you should be ready to start budgeting with a method that fits your style.
Why Budgeting Matters
Budgeting is more than just numbers on a page; it's a tool that empowers you to take control of your money. With a budget, you can:
Avoid Overspending: Know where your money is going and keep it under control.
Save for the Future: Set aside funds for emergencies or future goals like a vacation, a new car, or retirement.
Reduce Stress: With a clear view of your finances, you're less likely to feel overwhelmed by unexpected expenses.
Different Types of Budgeting:
There are many ways to budget, each with its strengths and ideal users. Let's dive into a few of the most popular ones.
1. Zero-Based Budgeting
Zero-based budgeting means that every dollar has a job. You start with your income and allocate every penny to expenses, savings, or debt payments until you reach zero. It's like having a game plan for your money.
Who It's For:
This method is excellent for people who like structure and need to ensure every dollar is accounted for. It's great for those who want strict control over their spending and are willing to spend time planning their budget.
How to Start:
Write down your monthly income.
List your fixed expenses (e.g., rent, utilities).
Allocate money for variable expenses (e.g., groceries, entertainment).
Deduct your savings and debt payments.
If there's anything left over, assign it to a specific category until you reach zero.
For a more comprehensive guide on zero-based budgeting, check out this blog post.
2. Cash Envelope System
The envelope system involves using physical envelopes to allocate cash for specific expenses. You place money into envelopes at the beginning of the month, and once the cash is gone, you can't spend any more in that category.
Who It's For:
This approach works well for people who find it easier to manage cash than digital transactions. It suits those who want to limit impulse spending.
How to Start:
List your budget categories (e.g., groceries, transportation, entertainment).
Assign cash to each envelope based on your budget.
Use cash from the envelopes for each category. Once it's empty, you can't spend more in that category for the month.
3. 50/30/20 Budget
The 50/30/20 budget divides your income into three categories: 50% for needs, 30% for wants, and 20% for savings or debt repayment. This method provides flexibility while maintaining a structure for your finances.
Who It's For:
This method is ideal for people who prefer a balanced approach to budgeting. It suits those who want some flexibility in spending while ensuring they save and address debt.
How to Start:
Calculate your monthly income.
Allocate 50% to needs (e.g., housing, groceries, transportation).
Assign 30% to wants (e.g., dining out, entertainment, vacations).
Dedicate 20% to savings or debt repayment.
Adjust these percentages if needed based on your circumstances.
For a more comprehensive guide on zero-based budgeting, check out this blog post.
4. The Pay-Yourself-First Budget
In this approach, you prioritize savings by setting aside money for savings and investments before you pay for anything else. After savings, the rest is used for expenses.
Who It's For:
This method is great for people focused on long-term financial goals, such as retirement or building a safety net. It's ideal for those who need help prioritizing savings.
How to Start:
Set a target for savings (e.g., 20% of income).
Deduct your savings first from your income.
Use the remaining amount to cover expenses and other costs.
Adjust as needed based on your spending patterns.
By the way, we have a free Simple Budget Tracker that can help you do this! And if you need a bit more guidance, check out our free course that will walk you through step-by-step how to create your first budget.
Siobhan and I (Amanda) both use a combination of the 50/30/20 method and the Pay-Yourself-First method to help manage our money and keep us on track to reach our longer-term financial goals.
We typically transfer a set amount (usually 20%) of money to savings & investments as soon as we receive it, then use the remaining money on 50% needs and 30% wants. We both aim to keep our needs and wants lower than 50/30 method so we can transfer any extra at the end of the month to boost our savings & investments, but we like having the flexibility to spend as we sit fit for the month knowing we set aside at least 20% for the future.
We both started budgeting in our late 20’s with the 50/30/20 method (and wish we started earlier).
However, neither of us are fans of restrictive budgeting, so over time as we’ve built better money habits and have become more attuned to our typical spending, we use budgeting more as a guide to help keep us in line, without worrying too much if we’re matching our spending goals precisely from one month to the next.
KEY TAKEAWAYS:
The best budgeting method is one that suits your lifestyle and financial goals. Try different approaches and adapt as needed.
Whichever method you choose, the key is to stick with it and track your spending regularly.
Don't be afraid to personalize your budget. Add categories that matter to you and adjust over time as your priorities change.
About The Authors
Amanda and Siobhan found a shared passion for personal finance shortly after completing their MBAs in 2018. Amanda excelled as a Director of Product in the tech industry, while Siobhan established herself as a leader in e-commerce before transitioning to academia as a Professor.
In 2020, they joined forces to found Hiver Academy, a platform born from their own experiences and triumphs in conquering student loans and building wealth. Realizing that financial success is within reach once the complexities are simplified, their mission now revolves around empowering individuals to achieve financial freedom.
With a wealth of knowledge and a commitment to demystifying money and investing, Amanda and Siobhan are dedicated to helping others navigate the path to success.
