If you’re resolving to get in good financial shape, all of your money goals should start with the same thing — a budget.
“A family budget is important because it helps to create a plan for how you’re going to use your money now and in the future,” said Ahren Tiller, founder and supervising attorney at The Bankruptcy Law Center. “Everyone has different needs, so developing a budget that works for you and your family will help you set priorities around how to spend your money in the most efficient way possible.”
Everyone has different needs, indeed — and they also have different personalities, different habits, different strengths and different weaknesses. The good news is, there’s a budget for everyone. Set yourself up for financial success by creating a budget that works for you and your lifestyle.
Before you learn about the different budgeting strategies and which types of people they tend to suit, start by adopting a mindset of financial awareness — without it, you’ll never stick to any budget no matter which one you choose.
“The most efficient budgeting strategy is simply being aware,” said Greg Wilson, a chartered financial analyst and owner of budgeting and frugal living site ChaChingQueen.com. “So many of us are not aware of where our money goes. We all know what we make before taxes, but we aren’t all aware of what we take home. Simply knowing what you spend and how much you take home is the best foundation for a budget. After that, you can decide whether or not to try to stick with tracking strategies.”
There are a million apps that can link your accounts, track your monthly subscriptions and break down your spending categories into nice little pie charts. But if you’ve never tracked your income and spending before, old-fashioned pen and paper can be the most up-close-and-personal way to get acquainted with your finances.
“If you’re a beginner to budgeting, an efficient budgeting strategy is to just start tracking your cash that’s coming in and going out,” said Jacqueline Gilchrist, founder of MomMoneyMap.com. “Get a piece of paper or open up a spreadsheet and tally up for the previous month what money came in, e.g. salary, bonuses, tips, etc., and what money went out, e.g. mortgage, utilities, cell phone bill, etc. You just need to get into the habit of knowing how money is flowing and what money you have leftover or if you’ve overspent. If you’re a beginner, I find doing the process manually like this is the easiest way to get started. You can always add complexity with apps or other budgeting techniques once you have an understanding of your financial situation.”
If your money disappears before you even know it’s there — leaking out of your life unaccounted for through credit cards, Venmo, PayPal and the rest — then consider the budget that’s based on the kind of money you can touch.
“This will take some setting up, but essentially every month cash is divided up into different envelopes that represent different categories,” said Julie Ramhold, a consumer analyst with DealNews.com. “And the cash within those envelopes is the only amount you can spend on the respective categories. So when the money in the envelope is gone, that’s it — you can’t spend any more on that category that month.”
There are, of course, drawbacks to dealing only with paper money.
“The downside to this is that you’ll be either carrying around envelopes with cash or at least having to stash them somewhere safe at home, and for many consumers, keeping a lot of cash on hand may make them uncomfortable,” Ramhold said. “Still, this can be a great method for those who are trying to rein in their spending and eliminate debt as it puts a hard limit on the budget and helps to cut out the risk of overdrafting bank accounts as well as carrying a credit card balance.”
50/30/20: For Those Who Want To Keep It Simple
If counting pennies and keeping receipts isn’t your thing, the 50/30/20 model follows a basic format that doesn’t require a lot of analysis or maintenance.
“This is a pretty classic budget model,” Ramhold said. “Users set aside 50% of their income to be used for essentials like housing, bills, and food, while 30% is set aside for personal expenses that are ‘fun,’ like dining out, traveling, hobbies, and similar categories. The last 20% is meant to be put into savings, although I have seen some models that swap the 30% and 20% so that 30% goes to savings and 20% is set aside for entertainment. This is a good budget for anyone who’s trying to look at their overall financial situation rather than drilling down into hyper-specific categories.”
On the other side of the 50/30/20 coin is zero-based budgeting, an intense format that works only for the most meticulous of budgeters.
“This is a form of budgeting that is incredibly hands-on,” Ramhold said. “Basically, you allocate every single dollar coming into some category, whether that’s bills, entertainment, retirement, whatever. Funds that aren’t totally used in one category can be rolled over to another if needed (or wanted). This is a very tedious setup because the entire purpose is to reach ‘zero,’ in that every dollar coming in is accounted for. It’s good for people who want to be very granular in their budgeting approach, as well as Type A personalities that do well with a lot of control.”
Also called “pay yourself first,” this strategy prioritizes socking money away above all else.
“You’ll choose how much to put into savings each month and that’s the only hard number to stick to,” Ramhold said. “The rest of your funds can be spent however you want or need to. This is a really hands-off approach, pretty much the exact opposite of the zero-based budget, so it’s good for those who already have a decent grasp on spending wisely and just need to ensure they save a specific amount on a regular basis. It may also be good for young people that don’t have many bills to worry about yet.”
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