Budgeting may seem like a chore, but it’ll benefit your financial life in so many ways. In fact, if you’ve tried it once and it hasn’t worked for you, it’s not your fault. The reality is that budgeting can be easy and fun.
Depending on your habits, style of work and your financial situation, there are different budgeting solutions out there. Take a look at the following budgeting styles to see which one works best with your personality.
The Zero Sum Budget
Who it’s best for: Those who are meticulous and want to make sure each dollar is accounted for.
How it works: A zero sum budget ensures that you know where every dollar goes, even if it’s just allocated towards short-term savings. You leave nothing to chance. What you’re doing is essentially making sure every dollar is doing it’s proper “job”. It’s also a useful template to help you set aside money for expenses that happen every few months, such as your car insurance bill.
How to create one: First add all your income for the month. This should include not only your salary, but any side jobs and investment income. Then you’ll add up all your fixed expenses such as your mortgage, insurance, debt and utilities. Tally all these up and subtract them from your income.
The amount left over is then allotted to your variable expenses. You can choose how much you want to put into each category. This can include entertainment, groceries, transportation, retirement and short term savings. Every time you assign a dollar amount to a category, you’ll need to subtract it from the amount left over. Keep going until that amount reaches zero.
The Survival Budget
Who it’s best for: Those who don’t make a lot of money or are deep in debt.
How it works: This type of budgeting is great for people who have very low income and may be living paycheck to paycheck. All personality types can benefit from a survival budget. This is especially true for those who are really stressed about not having enough money at the end of the month.
With a survival budget, you don’t worry about savings or retirement because all that matters is being able to pay your bills until you get back on your feet. If you find it difficult to pay even your debts back, your survival budget should include a plan to speak with someone who can help you manage those loans. It could mean either consolidating your loans or other alternatives.
How to create one: Look at how much you have right now, not how much you’ll be paid in the future. This is what you have to work with. Then gather up your bills and plan out how much you can pay towards each one. After that look at your necessities (no wants here) and create a spending plan for the rest of the month. Using pen and paper or even a spreadsheet will work perfectly fine.
The Cash Envelope Budget
Who it’s best for: Those who may be impulsive with their purchases and/or prefer to pay in cash.
How it works: A cash envelope budget is one where you only spend a certain amount in cash for the month. You’ll be able to physically see how much cash you have left until the end of the month. Typically people divide up the cash into different categories (envelopes). Afterwards, they spend from each one accordingly. You can’t overspend using this method because there literally will be no money left over even if you wanted to go over budget.
How to create one: Decide on the maximum amount you want to spend for the month and take it out in cash. Divide up the money into as many categories as you want. The most popular ones include food, transportation, housing and entertainment. Put the money into an envelope (or any container you wish). Each time you spend money you’ll need to take it out of the appropriate envelope.
The Percentage Budget
Who it’s best for: People who hate hard rules and prefer guidelines.
How it works: This type of budget operates on rules of thumb, where you assign dollar amounts based on a percentage of your income. You can search online for average percentages to help you figure out how much you should spend, or try the popular 50/30/20 budget. This equals to 50% of your income going towards needs, 30% towards wants and 20% towards savings.
How to create one: Figure out what your take-home pay is and either use the 50/30/20 budget or any percentage you choose. Write down the specific dollar amounts for each category to determine how much you’ll spend in each one per month.
The Variable Budget
Who it’s best for: People who are self-employed or seasonal workers.
How it works: Think of it much like a zero sum budget, but with a few variations. First, since you can only predict how much money you’ll make in any given month, you’ll need to make sure that your necessary expenses are taken care of. Use the money for that first. Many people put the extra towards an emergency fund or add more onto other categories such as groceries and entertainment.
How to create one: Look at your last month’s income to predict how much you’ll make this current. If you do have recurring income, use that first. Then, add up all your expenses and subtract it from your income. Any amount left over you can use for anything you want. To help with cash flow, you can try to pay your bills right when you know you’ll get paid.
The Bottom Line
Finding the right budget will help you improve your financial life. It gives you a chance to not only improve your credit score, but to be able to save more and reach your goals. Even if you end up finding a budgeting style that works for you, remember that it’s an ongoing process. Your budget should be as fluid as the ebb and flow in your life. You may need to tweak or change your budgeting style over time. That’s ok, as a budget is meant to work with your life, not the other way around.
Experiment with different budgeting styles that work for you. It will make managing your money not only painless, but fun as well.