The Art Of Budgeting
Budgeting is a tool created to improve how you manage your finances, and to be a guide leading you closer to reaching your financial goals. Budgeting consists of having a system to measure your income and expenses, setting goals, considering what are your needs and wants, and knowing the difference between fixed and variable expenses. The process of budgeting is not black and white, but completely individualized. Depending on your unique circumstance, each budgeting strategy could be tweaked and customized to what serves you best. Many philosophies and strategies have been developed over time that all strive to bring peace and knowledge to the state of your finances.
To start out, the 50/20/30 budget is a very common budgeting strategy that consists of allocating a specific amount of your income to your needs, savings, and wants. The strategy goes with specific numbers, but according to your situation, these numbers can always be adjusted. It is recommended to spend 50% of your income toward your needs, including items such as housing, food, and insurance. Then, 20% of your income should go towards a savings account, whether that is for a future home, emergency fund, retirement, or a college savings account. 30% of your income is recommended to go towards your wants, such as dining out, art or cooking classes, and traveling. This budget is quite simple, but still requires that you know on average how much money you are bringing in every month, and how much is going out, to adjust in terms of the budget.
The next method is called the “Pay Yourself First” strategy. This budgeting strategy might be helpful if you feel very overwhelmed by your financial situation and do not want to get too wrapped up in nitty gritty details. This method follows the principle that the first “bill” you pay every month should go towards your savings account. After you have paid yourself, then you should pay your bills, and whatever is left over is free to be spent as you please. It can be so easy to feel guilty for every purchase you make that is not going towards a need or savings, especially in the early stages of building your portfolio. It is important to save and pay your bills, but it is also important to live your life and do things or have things that you love. Budgeting can be a tool to help you enjoy those things even more when you know you are taking care of your future self.
The Zero-Based Budget is the most involved and detail oriented of all the budgeting strategies. This strategy consists of meticulously tracking every dollar coming in and assigning it to a specific expense, leaving you with a balance of $0. This plan can be helpful in developing a sense of intention in how you spend your money. Every dollar means something and has a specific purpose in your life. This method also requires that you plan out every expense for that upcoming month, creating strong boundaries around impulse purchases.
The envelope budget is where you place specific amounts of cash into envelopes that each represent a category. Once the envelope is empty, you can no longer spend any more in that category for the month. This method is originally done with cash but can also be done electronically in different budgeting apps or a spreadsheet that you created. It is important to know how much money that you spend in each category to ensure that the envelope is sufficient for the month. There is research that reveals spending with physical cash is often more challenging than swiping a card or paying online. This budgeting strategy creates that effect, leading to thoughtful purchases.
Modern budgeting strategies are typically automated through budgeting apps, auto-pay, and financial planning software that are linked to bank accounts. These services simplify budgeting and could be super helpful if you are looking to reduce the amount of work you must do to keep an accurate report of your finances.
You might be a finance nerd and create a complicated spreadsheet meticulously tracking all your accounts. Maybe you are a new parent just trying to make it through the day, and you use an automated budgeting app to keep track of your finances. Maybe you’re a college student just learning how to create spreadsheets in Excel. The art of budgeting is crafting it to your specific needs, serving anyone in their season of life, and helping all reach their financial goals.