Personal Finances: Choosing the Best Budgeting Method

There are two popular budgeting methods that you need to learn about before you choose the one you want.

The Zero Based Budget Plan

Some people like using so-called zero based budgeting, which means that each month, you set up your spending to zero out each of the budgeted actions you take. People who use zero budgeting like to put every pound to work every month and don’t carry over any money each month.

The 50/20/30 Budget Plan

Other people like using the 50/20/30 budgeting plan, which states that half your money is for all needs, 20 percent is for saving and investing, and 30 percent of your income is used for all your wants. Wants are defined as anything outside of a basic need. For example, if you cannot cover an expensive car under the needs portion of your income, you might take some from the wants to make up the difference.

Implementing a Zero Based Budget Plan

To Implement a zero-based budget plan, follow these five steps:

Write Down Your Monthly Income – Only include income you can count on in this figure, such as your paycheck, gig income, residual income, and so forth. If you’re bringing it in, you want to count it.

Write Down Your Monthly Expenses – Include everything, including investments, phone, mortgage, food, shelter, etc. It’s best to list all the needs first, and then list the items you want in order of importance going down the list.

Write Down Seasonal Expenses – One issue with zero-based budgeting is that sometimes one might forget seasonal expenses and forget to take a monthly amount out to pay that expense. For example, if you pay your property taxes every October, you’ll want to set up your budget to have the full amount to remit when it’s due in October, which will require that you move money to short-term savings for it.

Subtract Your Expenses from Your Income – When you are done and subtract your expenses from your income, it should equal zero. If your expenses are more than your income, you’ll have to start cutting some of the expenses or make more money.

Track Your Spending Every Month – Don’t leave everything up to chance. Track your spending every single month and even every single day if necessary, to make sure you don’t overspend or add debt.

The drawbacks of this plan are that it requires a lot of monitoring and thought each and every month because you need to start over every month with a new plan based on the amount of income you have, putting every single dollar you bring in to work for you. The zero-based budget plan can be overwhelming for some people, but it works better if you have a lower income.

Implementing a 50/20/30 Budget Plan

To implement a 50/20/30 budget plan, follow these three steps:

Add Up Your Living Expenses – Include only the essential items you need each month to live – for example, shelter, food, utilities, and healthcare. You should not use more than half or 50% of your income to pay for these needed items.

Add Up Your Savings and Investments – 20 percent of your budget should go to your financial goals like your emergency fund, retirement accounts, college savings, and also paying down consumer credit.

Set Up Your Wants – Finally, the remaining 30 percent of your budget is for your wants. For example, if you want a nice extra-fancy car over the basic one that your budget above allows, some of your discretionary money can go to that. Plus, of course, anything else is a non-necessity, such as travel, entertainment, and expensive beauty treatments or lifestyle upgrades.

When you set up a 50/20/30 budget plan, one thing that becomes clear is that you don’t have to think about the budget all the time. You know that you have a set dollar amount every month for your wants or discretionary spending and the rest is automated, so you don’t have to review it constantly.

The plan you choose will be one that works for you in a way that you understand. You need to know what’s going out, where it’s going, why it’s going there, and that you have the income to fund it – whatever it is. And, most notably, you need to know that an expense is not causing you to throw away your future.