A budget is a financial tool that can help you organize your finances. Budgeting involves tracking your income and expenses to then develop a long-term plan for where your money is spent or saved.
Most people choose a monthly budget, while others may want to pursue an annual budgeting plan or pay period plan. There are several ways you can build a budget and different strategies you can follow. Keep reading for more details on taking on a budget.
Basic Budgeting Categories
When creating a budget, it will be helpful to divide your expenses into three broad categories and then allocate your expenses into each. Here are the basic categories that most people will use:
- Essentials — Your essentials should include costs like rent/mortgage payments, utilities, groceries, family care (childcare costs, pet care), credit card bills, student loans, debt, insurance costs, transportation, necessary clothing, etc. These are the things that are necessities and will likely be the category with the least amount of malleability.
- Recreational Spending — Dining, traveling, shopping, and sightseeing are a few examples of things that can fall under recreational expenses. Anything else you do for fun can be added to this spending category.
- Savings and Investments— All your saving goals and investment spending should be under this category.
Different Budgeting Strategies
Budgeting techniques can help you start without having to do a ton of work, and they can help you identify and avoid common budgeting mistakes. Below are some of the most used budgeting strategies available:
You will have to split up spending with proportional budgets based on percentages. When researching these kinds of budgets, you will find the following percentage breakdown:
The 50/30/20 Breakdown
With this method, 50% of your income will go to essentials, 30% recreational spending, and 20% savings.
The 80/20 Method
The 80/20 breakdown is simple, you save 80% of your income and freely spend the rest! This budget can be an excellent option for those focusing on saving and want something simple.
The Zero-Sum Budget
To follow the zero-sum budget, you will have to allocate all your income into savings or expenses. The idea is to have a plan for every dollar; you have to know exactly where your money goes every month.
The Envelope Budget
The envelope method involves creating envelopes for different spending categories (digital or actual envelopes). You can keep the categories simple or add multiple for a more detailed look at your spending. Once you have each category, you can allocate your budgeted money in each. Once that money is spent for the month, you will know that there is no more to spend.
The Pay Yourself First Plan
The pay yourself budget is similar to the 80/20 budget in that you focus on your savings goals. Once you put aside money for savings, you can spend your money however you would like.
Budget Tools, Apps, or Software
Many people choose to automate their budget with software and apps. There are all kinds of budgeting apps that are free or paid with a free trial. Explore your options and consider automation to make things easier.
The Benefits of Budgeting
If you have budgeted before, you may have seen some of the benefits that can come with the process. However, if you haven’t used a budget before, it will be helpful to learn more about them; here are some:
Setting and Reaching Financial Goals
A budget can help you set and reach significant life goals instead of aimlessly spending your money on anything and everything that you want. With a budget in place, you are forced to prioritize your spending based on goals you have set up for yourself. Common financial goals include taking a trip, saving enough to start a family, or buying a home.
Can Help You Repay Debt
Have a ton of high-interest debt you pay from various loan options and credit cards? Having a budget can help you find the most efficient and cost-effective solution to repay your debt. In some cases, this could be using different debt payoff strategies or taking out a loan to refinance your debt. And once that debt is paid back, you may be less likely to take out more credit or loans with a budgeting plan in place. A bonus that can come with debt payoff can help you improve your credit score!
A Cushier Retirement
Most Americans don’t think about getting a plan started for retirement, especially at a young age. However, the sooner you plan for this stage of your life, the chances are that you will have a better time in the future, and a budget will help with that.
Help With Emergencies
A budget can help you put money aside to build an emergency fund. Emergencies like car repairs, medical bills, and home repairs can happen at any time without notice. And having an emergency savings fund can help you pay for those costs without having to go into debt with emergency quick cash loan options. Instead you can use your savings to fund the unexpected expense!
Can Help Curb Bad Financial Habits
Before starting a budgeting plan, you may not know any bad spending habits. However, with a budget in place, chances are that you will have to be mindful of your spending, which can help you spot and change bad spending habits.
A budget can be a great tool to use when organizing your finances. There are several strategies to help you get started and execute your financial goals. While budgeting, you may find a few unexpected advantages like better spending habits and debt payoff.