If you have started looking into saving money, you know there is one suggestion that keeps coming up over and over: You need a budget.
Creating a budget plays a vital role in developing good spending habits, setting money aside for savings, and ensuring that your money goes where it needs to.
The task of choosing a Budgeting system can seem overwhelming. I’ve narrowed the options down to 4 systems. I would recommend using this as a guide and if none of these are right for you, keep looking or make your own.
The 50/30/20 BudgetThis system splits your income into three major categories: 50% goes to your needs, 30% goes to wants and 20% goes to savings and debt.
50% of your income (needs):
30% of your income (wants):
- Television Subscriptions
20% of your income (savings/debt pay down):
- Build an emergency fund
- Pay off debt (Dave Ramsey is a really good resource here)
- Save for retirement
This system can be used by its self or as a reference for other systems that require you to decide where your money should go.
The Envelope SystemThis system allows you to physically section your money into different spending categories.
You start by listing the types of expenses you have and them write them on envelopes. Your envelopes would be labeled, “movies”, “dining”, “groceries”. You then fill each envelope with the amount of money you have chosen for that category. This is where the 50/30/20 system comes in handy, you can use it to decide how much money each category should get. When you pay for things, use the money from the envelope for that category.
This system is great because you know exactly when a category is low on money or out. The physical nature of it makes it one of the best systems to use if you have trouble sticking to a budget.
The bad part about this system is that you have to have cash. This can mean multiple ATM trips and you have a higher chance of theft.
- Pay yourself first BudgetThis is a very simple “reverse” budget. You set aside the amount you want to save before you start spending your paycheck. Once bills roll in, you make ends meet using the remaining money.
With this method, you don’t have to worry about accidentally going over budget and spending your savings.
- The Zero-Based BudgetThis budget is great for people who spend too much or want to see exactly where every dollar goes.
You look at your monthly income and find a way to use every dollar. You decide how much to use for saving, utilities, groceries, vacations until there are zero dollars remaining. You can use the 50/30/20 system to decide where your dollars go and the envelope system to ensure the dollars go to the right place.
If you don’t use the envelope system though, you will have to use an online tool to log your expenses and make sure you are staying on budget. There are many apps out there such as EveryDollar and YNAB.
The great thing about this budget is that you track every dollar and know exactly where your money is going. The downside is that it is very time consuming and it’s tough to keep updated if your expenses or income change every month.