You have your own unique personality, preferences and lifestyle. Likewise, how you manage and organize your finances can have its own personality, including how you budget. Here are five different methods of budgeting, each with a distinct way of helping you organize your spending and finances.
- Traditional budget. Use last year’s budget as a base, make any necessary adjustments due to changes in your income or expenses, and create your budget by taking your income minus your expenses to equal the amount you have to spend.
- Envelope budget. Keep a set amount of cash for the month in envelopes labeled with an expense category like groceries, clothing, eating out, entertainment, etc. Use one envelope per expense category. If you run out of money in one envelope, you can dip into other envelopes, but this will obviously impact spending in those areas.
- Reverse budget. Instead of stashing away the money left over after you’re done spending for the month, first take out your portion for savings and then spend the amount of money that remains. Reverse budgeting is an effective way to prioritize saving for your future retirement, an emergency or rainy-day fund, or other big expenses like a vacation, a new car, or a down payment on a house.
- Zero-based budget. Know where each dollar is going and record every single dollar spent. Also called the zero-sum or down-to-the-dollar budget, this method helps you get specific about spending and keeping track of all your dollars. Instead of one amount allotted for food, you know exactly how much you will spend on groceries, lunch while at work, and dining out. Instead of one amount allotted for savings, you know exactly how much you are putting into retirement, loan repayment, and emergency savings.
- 50/20/30 budget. Stick to three spending categories. Each month, 50% of your take-home income goes toward needs, 20% toward savings, and 30% toward wants. Examples of needs are housing or car payments and groceries. Savings could be retirement money, paying off loans, and emergency funds. Wants include things like shopping, vacation, or entertainment. Less detailed than the zero-based or envelope methods but more detailed than traditional or reverse budgeting, the 50/20/30 method helps you monitor money habits by helping you stick to three categories every month.
The best budget approach? One that works for you and one that you will continue to use. So pick an approach and try it. It can really change how you spend your money.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
— By Nancy J. Ekrem, CPA
DME CPA Group PC
Certified Public Accountants & Business Consultants