Ready to finally create a budget in 2021? There are a variety of popular budgeting strategies today. In this blog post, I intend to cover four of the most popular options and answer the question, “How to Be on a Budget?”
Over the years, I have created a budget for:
- Paying Off Debt
- Saving for a House
- Improving Credit Score
- Building a College Savings Account
- Investing for Retirement
Related: The Pay Off Debt Guide for 2020
Whatever the end result is, budget planning is crucial to conquering your goals. And these are the top four methods for creating a budget.
The Envelope System
What is the Envelope System and How Does it Work?
The envelope system is a way to force yourself to accurately budget expenses every month. It demands honesty, discipline and commitment, but the reward is that you gain control of your finances.
Budget How To:
This method by Dave Ramsey starts off by labeling envelopes. Each label represents a spending category like:
- Food
- Restaurants
- Groceries
- Gas
From there, each envelope is stuffed with a set amount of cash. Then, when you go to make that purchase, you take the envelope along. This physically limits how much you spend at that place.
This method also makes it easier to know when you are running low on funds. And the empty envelope is a good reminder that you have spent too much. You are in complete control.
How Does This Work?
Let’s start with your salary.
Assume you get paid twice a month with a total take-home of $2,000 during that period.
Then you budget $500 a month for groceries or $250 per paycheck. When the month’s first paycheck is deposited, go to the bank and withdraw $250.
Put that cash in an envelope and label it “Groceries.’’
Every time you purchase “groceries”, it must be with money from that envelope. Do not take from the other envelopes. Also, if you get to the checkout and realize you don’t have your envelope, don’t whip out the credit card or debit card for payment.
You go home and get the “Groceries” envelope. This takes a lot of discipline and honesty, right?
Remember, you can ONLY buy groceries with the cash in that envelope. So, if your bill hits $251, guess what? You must put something back.
I used this method in college while working less than 15 hours per week. It works when you don't have much money to manage. How to Build an Envelope Budget
Also, this method is useful if you're looking to break bad spending habits.
The Pay-Yourself-First Budget
Payday is always a great day. So why not make a budget that keeps a personal payday at the forefront? One of the best budgeting methods is the pay yourself first plan.
Before we get into this plan, I want to share with you two services that we recommend. The first one is a compound interest savings account (the highest yield we can find). The second one is an app where you can invest money and borrow from one account.
You make savings your top spending priority. You send a set amount of your income towards savings each month.
In effect, this is a “reverse” budget. That’s because most other budgets place savings as the last priority. This switch-up allows you to grow their savings far quicker than on average.
This budget can be hard to maintain if you have a lot of debt or medical expenses. It is impractical in many ways.
However, if you have consistent income, this budget method will work for you. If you're looking towards retirement can also benefit from using this method.
Click here on how to get started with the pay yourself first budget.
The 50/30/20 or Rule-Of-Thumb Budget
This is one of the most popular budget methods today. This method requires you to categorize your monthly income into three main categories:
- Category One – Needs
- Category Two – Wants
- Category Three – Savings & Debt
Budgeting How to:
The first category is “needs.” This category includes food, fuel, insurance, loan payments, and the like. In this category, you will spend up to 50% of your monthly income.
The next category is “wants.” Here, you can spend up to 30% of your monthly income on entertainment, take-out food, and the like.
The final category is “savings and debt.” In this category, you’ll spend up to 20% of your budget on long-term financial obligations. These can include emergency and retirement accounts. These funds should also be used to pay down high-interest debt.
- Needs – 50%
- Wants – 30%
- Savings & Debt – 20%
This method is popular for several reasons. The first is it's simple, yet rigid and powerful structure. Many folks find this system easy to remember and apply to their daily life.
And, this method leaves room for flexibility. For example, you can adjust the 20% and 30% budget to focus on paying down debt before making optional purchases.
At the same time, this method can be used in tandem with another budgeting method. For example, you could effectively use the “envelope” method with the 50% “needs” budget. Click here to learn how to build a 50/30/20 budget.
The Zero-Balance or Traditional Budget is One of the Best Budgeting Methods
Last, I personally use the “zero-balance” budget method. This simply means you plan for every dollar. Zero dollars will be left unbudgeted.
The method works like this. You plan out every expense on a spreadsheet and organize them into fixed, variable and miscellaneous.
Then, as you make money & spend money – you add the “actual” amount on the charge in a new column. That allows you to compare “expected” versus “actual” on your budget.
Two things happen when you chart out your expenses like this:
- You're able to locate overspending.
- You're able to set goals on the extra income.
The leftover income will go to a savings account or an emergency fund. I used this method to build a down payment on my house. Click here to create a zero based balance budget.
Conclusion of The Best Budgeting Methods
As you can see, you have some great options for personal budgeting. Each of these methods has real benefits that could help you organize and plan your finances.
Do not save what is left after spending, but spend what is left after savings. Click To TweetRemember, though, that any budget method takes commitment. They require you to stick to your goals, even if you are tempted to overspend. Discipline is the key.
If you do follow these methods, you’ll likely find yourself on a more stable financial position soon. So, don’t wait to try one of these budgeting methods out yourself!
Related Articles You Don't Want to Miss:
- How to Build a Envelope Budgeting System
- How We Saved $50,000 in 12 Months
- How to Get Out Debt Guide
- Ways to Make a Quick $1,000
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