The purpose of a budgeting system is to help you understand and evaluate your current relationship with your money. While every person shares a common goal with money for the most part, everyone out there has their own kind of system and tactics they use to manage their money and grow it.
With so many budget systems available to you, this article is designed to give you some considerations regarding which one is best suited for you. Depending on your overall view of these considerations, we will help narrow your choice down.
What Do You Value And What Is Your Current Financial Position?
As simple of a consideration as this sounds, not that many people have ever done a financial self-assessment. Looking at the general picture, most live paycheck to paycheck with no actual strategy or financial goals. Naturally, doing a financial assessment and knowing what you want to work towards can give you an idea of what you want to do financially.
Part of that financial self-assessment should be based around your current financial situation.
Are you in debt? Are you looking to balance expenses so you can save for a down payment for a home? Having a large overview of your financial position can give you clear targets to set goals.
Based on those goals, here are some budget systems that you can choose:
- The 50/30/20 budget is the ideal budget for getting started. The appeal of this system is that it offers room to pay down debt, cover current costs and help you save for the future. The idea with this budget is that it splits your income into three sections: 50% for necessary expenses, 30% for your wants and 20% for saving and debt repayment. There are other iterations of this system, but you can use this as a baseline even for other budgeting methods.
- The envelope system is another budget option for those looking to curb spending. For those who want a more rigid system and reduce needless expenditures, adopting this system is a good way to help with that. The purpose of this system is that you put a strict limit on how much you can spend on certain expenses and allocate that limit to cash, which you put into an envelope. Once all of the money in the envelope is gone, you’re cut off for the rest of the month. This is a harsh system because it actually is. Our brain is wired in a way that seeing something go feels harder for us. It’s a stark comparison to paying with a plastic card where we don’t see the transaction at all.
- Paying yourself first is the third budget option if you want to build up your savings. This method has been mentioned in several personal finance books and for a good reason. It takes the traditional budget system and flips it. Instead of covering all of your expenses first, pay yourself first. The idea with this is that by prioritizing paying yourself first you avoid the potential of not paying yourself and building your savings. This also saves you a lot of math too, since you know how much you want to be saving up and you then have the leftover money to cover everything else.
- The final budget system is the zero-based budget, which allows you to stretch every dollar. While you’d think this is for those who really love numbers, this can also help the over-spenders too. The purpose of this system is to make monitoring your spending quite clear. You’ll take your monthly income and use every single dollar in a deliberate method until you’re left with zero dollars. This is a touch different from the envelope system in that you do have to log every expense – whether it’s an actual expense or you’re putting that money into savings.
The Amount Of Effort You’ll Devote To It
As you can tell from each system, there is a certain level of dedication placed into each of them. Not only in setting it up, but maintaining it too. Beyond that, you’ve also got the nuances of each system. Some are more demanding and have tight requirements, while others are quite flexible.
In the end, depending on the system, you could be spending several hours a month to prepare your budget if the requirements are strict. For flexible ones you could spend an hour every month at most.
But that’s just us guessing numbers. There’s no set rule for how often you want to be budgeting. Naturally, the more months you’re budgeting for, the longer it’s going to take. At the very least, we’d suggest doing this monthly or quarterly. If you’re still figuring out your way of handling your money properly, making it a weekly activity will help – even after every purchase you make.
Making this determination can help you narrow down what sort of system is ideal for you, since you can compare the amount of time you’ll need to make the system work with how much you actually want to spend time doing.
Moving It Online Or Keeping It On Pen And Paper
The final consideration you have to make is whether or not you want to use pen and paper for this system or use technology. There are several apps available that are based on the budget systems mentioned above. You have YNAB (You Need A Budget) and EveryDollar to help you with a zero-based budget or there is Goodbudget, which makes the envelope system easier to manage.
You can also consider Excel spreadsheets or opening several no-fee bank accounts and have them cover various expenses. Overall, these are strong approaches, as they require a little bit of set up and then you can automate the process moving forward.
The other approach is a more hands-on one – through the use of pen and paper.
Writing things down will help you in retaining information and can help you feel more invested in your budget. That said, it’s going to take you longer to have everything set up and will require consistent dedication to this habit.
The Bottom Line For Budgeting
The bottom line for budgeting is that there is no golden standard to a budgeting system. All that it requires is the system that tells you all the important facts: your income, your debts, the goals you have, and your general spending habits. As long as your budget fits that, you can set it up in any way that you like.
But above all that, the budget system should encourage one thing from you beyond all this: allowing you to live within your means.
You don’t need to know the specifics of every expense at all times. So long as you have a general idea of how much money is coming out and how much is coming in is what really matters.