4 Budgeting Methods to Bring Your Finances on Track

Introduction to budgeting

A budget is an estimate of your income and expenditure for a set period of time. In simple words, a budget is a spending and savings plan. Or as I like to put it, it’s a visual and mental picture of the flow of money. An ideal budgeting method should avoid any burnout, meet your needs and save you money(if you have saving goals)

Why do you need a budget?

Budgeting is similar to the steering wheel of a car. It keeps your finances in check. A budget allows one to feel in control of their money. Moreover, budgeting is a pathway toward achieving your financial goals, whether it is short-term savings, long-term savings or to spare money for your side hustle.

How to make a budget?

No matter which method you go for, you need to jot down your income and expenses first. Both of them have different categories which are summarized below:

Income categories– Income categories include earned income from your job/business, extra income from your side hustle and part-time job. It should be bring-home money, minus the taxes and any other deductions that are made before you are paid.

Expense categories

You can make as many categories as you like. Some of the ways to divide categories are:

1. Fixed expenses, variable expenses and savings:

2. Categories may also look like Needs(Rent/mortgage, groceries, transportation costs), wants(Subscriptions, dining out, personal expenses like grooming, shopping for clothes etc.) and savings.

3. The third option is to divide expenses according to various main categories and assign sub-categories to them. For example, you can add home as a category and mortgage/rent, home maintenance, utilities etc. as sub-categories. Similarly, food can be added as another category and groceries, eating out and drinks as sub-categories.

4 helpful budgeting methods

1. Envelope method

Do you remember the conventional budgeting methods your parents used to manage money? They allotted cash for various purposes and spent it accordingly. The method is as simple as that:

1. Assign one envelope for each expense category. For examples, Home, Food, subscriptions, car and pet etc.

2. Add cash in each envelope. The amount should be calculated beforehand.

3. Pay expenses from the assigned envelope. You can run a tab on the envelope each time you use money from that envelope.

Once an envelope is empty, you cannot use any other envelope to pay off that category. So basically, you have to do a spending audit before you commence this process. I actually found a TikTok page explaining all about envelope budgeting.

The envelope method is useful for those who want to control their splurging habit. This system requires discipline and keeps overspending in check.

Pro tip: You can use budgeting apps like YNAB and Mint if you do not want to handle cash.

2. 50/30/20 rule

This budgeting method has room for savings, paying current expenses and paying debts. It involves splitting your income into 3 main categories; 50% towards your needs, 30% towards your wants and 20% towards your savings or debt payments. For example, if you bring home $3000/month, $1500 should go towards your needs, $900 towards your wants and $600 towards your savings.

It is crucial to understand the categories here:

• Housing, food, healthcare and loan payments are all necessities in the budget.
• Eating out, subscriptions, going to the movies, shopping are all wants.
• Saving for an emergency fund, investments, saving for a major event are some examples of savings.

3. Zero Sum budget

The zero-sum budget method emphasizes tracking every single dollar that you earn. Here is how it works:

• Calculate your monthly income
• Write down each expense category
• Allocate money for each category
• If there is money left, add a category.
• Keep adding categories until there is no money left to allocate.

4. Reverse Budgeting

This method starts with “paying yourself first”. In other words, you set the money aside from your income towards your savings first and use the leftover amount for expenses. It is a useful method if you have a savings goal. I have used this method and realized that I save more this way. It works this way:

• Do an expense audit and write the amount required for expenses each month. For instance, you spend $2500 every month on your fixed and variable expenses. Go through the previous spendings to check if you can cut back in some areas.
• Write down your savings goal amount. For eg., you need $5000 for a vacation next year.
• Break down the savings goal into smaller goals depending on how much is left from the expenses. Say, you can save $500 each month.
• That’s it, each month, you pay $500 to yourself for savings, and divide the rest for expenses.

Apart from these 4, there are more methods to make a budget too. The no-budget method, traditional budget method, highlighter budget method and budget binder are some of the ways to plan your budget.

Pro tips:

1. It may take a few months to start following your budget plan and seeing the results. Do not give up.

2. Set a splurging category to avoid the burnout.

3. Check your budget and finances and budget regularly. If needed, make adjustments.

4. Bring your family members onboard.

5. To keep the kids encouraged, set small milestones and rewards. You can apply the same method to yourself and other adults too!