Budgeting Systems to Fit Your Life
Whether you’re on a fixed income or simply looking to make smarter financial decisions, a budget can help you guide your spending and supplement your savings. However, it’s important to find a budgeting system that suits your lifestyle. Here are some common budgeting methods to help you achieve your financial goals.
A simple approach
If you’re feeling lost, budgeting expert and Nerdwallet contributor Lauren Schwahn recommends trying a 50/30/20 split. With this budgeting format, you’ll dedicate half of your money to your must-pay expenses, like housing, utilities, and groceries. You’ll then have 20 percent to put towards your savings and debt, and 30 percent to spend on whatever your heart desires. This broad-strokes approach can help you get a feel for budgeting without being overwhelmed by a more detailed, restrictive budget.
Assessing your priorities
Whether you’re looking to build your savings or pay down debt, you can create a customized budget that suits your needs. If you have a savings goal, Schwahn suggests first setting aside a percentage of your paycheck for your savings account, then paying your expenses with the remaining money. You can make this easier by directly depositing a percentage of your paycheck into a savings account. This very same principle works for paying down debt.
Pump the brakes on spending
If you need a more rigid method to minimize your spending, Schwahn suggests the envelope system. With this form of budget, you keep your credit cards out of reach and deal purely in cash. Set allotted amounts of cash into envelopes categorized for different expenses, like groceries, gasoline, and dining out. Once that envelope has been depleted, you’re not allowed to spend any more on that expense for the pay period. This method can help you reduce spending by making your money more tangible and yourself more intuitive. However, if the envelope system sounds too extreme for you, you don’t have to channel all of your spending through it. You can just focus on your known problem areas, such the money you spend on a hobby.
The zero-base method
With zero-base budgeting, you’ll have to be mindful of every dollar that leaves your wallet. According to Investopedia, this intensive form of budgeting is a bit more time-consuming, but it’s an effective way to cut unnecessary costs. It’s called zero-base budgeting because it doesn’t take your income into account. You start with the goal of spending as little as possible, and as you review your necessary expenses, you have to justify every dollar you spend. It doesn’t matter whether it's for groceries, rent, or a cup of coffee. This helps prevent overspending, even if more lenient budgets allow it. For example, if you follow the 50/30/20 budget, you may not actually need to spend 30 percent of your money on discretionary expenses. However, you may be inclined to spend the entire allotment, since your budget has already set the money aside for you. Zero-base budgeting discourages that behavior.
Tips for success
No matter what kind of budget you choose to follow, consider these tips to make it easier to meet your financial goals. To take the hassle out of distributing your money and building your savings, set up an automatic transfer schedule. This frees you from remembering to shift money into the appropriate accounts. Creating spreadsheets as well as taking advantage of budgeting apps can also help keep you accountable.
Need help finding a budget that suits you? Consider consulting with a financial planner to create a budgeting system that fits the nuances of your life.