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In order to set yourself on the best financial path possible, it is important to have a budget. Budgeting helps you track exactly where your money goes each month, then put that hard-earned income to work, ensuring you are saving for your goals and your future.
Overall, having a budget is essential for maintaining control over finances, achieving financial goals, preparing for emergencies, and reducing stress. It provides a structured approach to managing money, ultimately leading to a more secure financial future. In addition to setting up a budget, tracking your expenditures is an important piece of this puzzle – it helps keep you on target and curbs potential overspending.
We often hear that budgeting seems overwhelming: where do you begin? How should you budget? How much do you need to save and spend?
Below, we have outlined five popular approaches you can use to budget your finances that keep tracking simple and streamlined.
Using this approach, you will allocate your expenses as follows:
This budget is a great starting point, because it is simple and easy to understand. You get to decide what falls into each category. Need that afternoon latte for your mental health? Put it into your “need” budget, as long as it does not lead to overspending, then that is where it belongs! This technique also promotes balanced spending and saving but is flexible and can be adjusted as necessary.
This budget design, however, may not work for those with a low income or high cost of living, and it can encourage overspending in the “wants” category, so if you choose this method, watch that category carefully. This process also does not account for irregular income or very specific financial goals, so it may not be the best choice if either of those apply to you.
This budget set-up is even simpler than the 50/30/20 method, as you only categorize your income into two places:
This budget is definitely simple and easy to follow, and makes tracking a breeze. It provides flexibility in what you spend your money on, while it encourages consistent saving.
This approach, however, may not allocate enough funds for savings or debt repayment depending on your personal situation, and can also lead to overspending if the 80% is not carefully managed. It also does not provide any detailed guidance on spending categories, making it difficult to track if there are more specific areas where you overspend month over month.
Like the 80/20 budget, this technique prioritizes savings and investments. Similarly, you will allocate 20% to savings and 80% to expenses, however the 20% goes directly into your savings, retirement, or debt repayment goals immediately. Essentially, after saving, you choose how to spend the rest of your income. This budget strategy prioritizes your savings and long-term financial goals and encourages a higher level of discipline in your spending. It is also very simple to implement and maintain.
However, like the 80/20 budget, it may not provide enough structure for day-to-day expenses and does not address repaying debt or retirement savings directly. It may also be challenging for those with a tight budget.
This budgeting approach allocates every dollar you earn to a specific purpose. It provides detailed control over everything you spend. This system helps identify and eliminate wasteful spending, provides a high level of discipline, and aligns your spending to your priorities and financial goals. You can use the 50/30/20 or 80/20 methods to divide up various budget categories as you begin.
While this style of budgeting is very tactful, it is time-consuming and requires frequent monitoring. Most who use a zero-based budget track their expenses at the time of transaction, daily or weekly, at minimum, which can be too restrictive for some. This structure might also encourage short-term thinking over long-term investment, something to keep in mind if you tend to make emotional purchases – ensure every dollar of your savings is working for you as well.
The envelope system is a traditional, cash-based budgeting method. Each month, you categorize your expenses into corresponding envelopes, and once that cash is gone, it is not replenished until the next month. This option is great to control tangible spending and helps to curb overspending or impulsive purchases. It is also simple to implement.
This approach, however, does require carrying cash, which can be inconvenient or risky, especially when many businesses are moving to a cashless model and require payment via credit or debit card. It can also be inflexible for any unexpected expenses. This practice does not work for online or automatic payments that many vendors require today. Alternatively, you could combine the envelope system with the 50/30/20 method, and take out the 20-25% in cash, categorized in envelopes, leaving the remainder in your account for savings, needs and any cashless payments.
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Each of these budgeting methods has its own benefits and limitations. The best approach often depends on your individual financial situation, goals, and personal preferences. Some may find success by combining elements from different systems or adjusting percentages to better suit their needs. When unsure, just get started! Try one budgeting method for three to six months, then assess your success and consider another if the first manifested too many challenges.
At Bank of the Bluegrass & Trust Co., we offer convenient, simple-to-understand banking options, like secure online and mobile banking, no- or low-fee checking and savings accounts, and more. Even better, as a local, community bank, we are able to provide superior customer service, and support the community where we live and work.
Visit one of our locations to get started, or simply visit open an account with “The Best Bank in Town” HERE today.
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