A budget is essential for your financial success. It is the foundation for reaching your goals and living the life you desire. There are so many different budgets out there and this post will review a few. As you read through these budgets it will help to determine which one is the best for your situation. There is no specific budget or process one must follow when creating a budget, but these budgets are proven to help reach goals. The core aspect of creating a budget is that your bills and necessary expenses are paid and put money towards savings and investing.
So here are the budgets this post will discuss:
- Zero Based
- Envelope System
- Goal Based
- Spending Cap
- Sub Savings Account
- Pay Yourself First
Zero Based Budget
Zero based budgeting is ensuring that each dollar of your income has a place to go. At the end of two weeks or the month (depending on how you manage your money) your account should equal zero. It gives a job to each dollar you earn whether it’s to pay bills, expenses, or savings. There should be a line item for each bill, expense, and savings allotment in your budget so that your budget should equal zero at the end of the week/month, having nothing left over. The downside of this budget is that if you miscalculate or forget a bill, especially one on autodraft, it can send the account into overdraft if you do not have overdraft protection. I would recommend when doing zero based budgeting to leave a buffer in your account for any forgotten expenses. Also, set up overdraft protection so that money can be pulled from your savings account in case the account overdrafts.
Envelope System Budget
The Envelope budget is best for those who prefer to use or manage cash. Each envelope is labeled with a category for bills, expenses, savings, car, household expenses, etc. You will withdraw cash from your account and place the appropriate amounts of cash in each envelope according to your budget. You will only use what is in the envelope for that category. Once the cash runs out, so does the fun.
This budget gives a visual representation of your income and spending. You can see where your money goes and how it’s being managed outside of a virtual space in your bank account. The downside to this budget is that in today’s world, everything is electronic and most bills and expenses are paid online and require a bank account. So to make this method work for you, leave the money required for your bills and other expenses in your account that is paid online. To ensure you are managing your money in accordance with the envelope system, I would suggest leaving the exact dollar amount required in your account to pay your respective bills and expenses. To continue with the envelope system, you can withdraw cash for your groceries, gas, and savings, if you are trying to reach a short term goal or to have spending money. Again, once the money runs out, so does the fun. Using the envelope system is a visual reminder of how you are managing your money.
Goal Based Budget
Goal based budgeting creates a budget around clear goals you have for your money. This usually includes two to three primary goals to focus on. As your priorities shift, so can the goals. This budget may be more fluid due to shifting priorities. Some example goals may include:
- Saving a percentage of your income each month
- Investing a definitive percentage in your retirement accounts
- Using excess funds to pay off debt
- Not spending more than $200 in Target each month
This budget is meant to focus on your needs and keep your budget in line with your goals.
Spending Cap Budget
A Spending Cap Budget puts a maximum cap on how much money is spent for the month. This includes everything— bills, expenses, savings, and investments. Once you have reached your cap for the month, then the remaining money is discretionary and yours to spend. A downside to this budget is that you may cheat yourself in terms of investments or savings to have more spending money. The focus should be on saving and investments first, rather than how much discretionary money you have to spend each month.
Sub Savings Account Budget
This budget focuses on creating savings accounts for something specific such as a vacation, a new car, or tuition. You can dedicate a percentage or dollar amount to this account to reach your savings goal. This budget prioritizes saving, by having a specific goal(s) to work towards. For example, if you were to set aside 20% of your income each month for savings, out of the 20%, you would break it down into different sub savings accounts that were established based on your goals, e.g., 15% tuition, 3%car, and 2% vacation.
Pay Yourself First Budget
The Pay Yourself First budget is exactly that. You prioritize your financial goals by dedicating a specified amount each month to your savings before paying any other bills or expenses. Normally, one would pay their bills and expenses first and the remainder is for saving. This budget is the opposite of a normal budget since it focuses on saving as a priority then paying bills and expenses. This method will ensure that you are always saving but it also can ensure that you closely examine your discretionary spending since your primary focus is your savings goals.
This budget creates percentage breakdowns for 3 categories. 50% for necessary expenses, 30% for discretionary expenses, and 20% for savings and debt. This budget is based on percentages of your net income. Since the budget is percentage based, it works within the confines of your income. The bills and expenses should be covered by the money allowed based on the percentages of your income. This type of budget may not be the most prudent for most, especially if you have a lot of debt such as student loans or consumer debt. Only allowing 20% for your savings and debt, may not provide enough to cover your debt payments. This budget is best for those who want their budget to be split in a specific way, to help make the budgeting process easier because there are clearly defined categories of how your money should be divided.
As you consider each of these budgets, it’s important to determine what works best for you. One specific budget may work better than others, but also you can take certain aspects from a few of these options and create a budget and budgeting process that works best for you. Remember, personal finance is personal.