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5 Effective Budgeting Methods You Should Know
Life and Style Daily
August 18, 2021
6 min

They say the best way to achieve any goal is to have a plan. When it comes to your financial goals, budgeting is one of the best ways to plan out your course of action. But how can you know what budget would actually work for you?

The answer is pretty simple: assess your current spending habits and financial responsibilities. Then, check out which of these time-tested and proven budgeting methods will suit your style.

Whether you are just starting out to create a budget or feeling like your current process doesn’t work anymore, we have the budgeting method for you.

Method #1: The Traditional Budgeting Method

How it works:

The traditional method is what many people think of when they talk about a budget. It works by following 3 vital steps. First, listing and getting the total of your projected expenses by category. Then, take note of your after-tax income.

You have to subtract your expenses from your income afterward, and what remains will be your extra money for the month. This is the money that will go towards your financial goals.

Pros and cons:

This method is really good if you want to see where each dollar goes. From your expense list, you can see where exactly you overspend, and what category you can adjust in order to meet different goals.

However, it may be tedious to track and balance each of your expenses every day.

Best for:

This budgeting method works best for people who like to look at their finances in detail. If you are someone who has a tendency to overspend, this could be your way to know exactly what category you are spending more in and start reducing your expenses.

Method #2: The Proportional Budgeting Method

How it works:

Proportional budgeting is a set of techniques where you break down your expenses into three categories: needs, wants, and savings.

An example is the 50-30-20 budget rule, in which 50% of your net income goes to your needs, 30% goes to your wants, and 20% should go to your savings. Another example is the 80-20 rule wherein 20% of your income would go to your financial goals and 80% to the rest of your expenses.

Needs involve the expenses that are important for you to stay alive. Rent, utilities, and food are some of its examples. Your wants, on the other hand, are the things that you don’t need to survive but would help keep yourself comfortable and happy.

In distinguishing your wants from your needs, you have to dissect broad categories that might be hiding luxurious spending. For example, you might think that all of your monthly subscriptions are a need but there are probably some that are not.

Pros and cons:

This method is also good to know where all your money is going. It’s simple and not too tedious as well because you don’t have to track your expenses down to the smallest detail.

However, you might be tempted to mislabel your wants into needs. You can also get confused with the vague categorization of your expenses.

Best for:

If you are a person who doesn’t like tracking every penny of your income or simply doesn’t have time to do so, but would still want to discipline yourself and prioritize your financial goals, this method is for you.

Method #3: The Envelope Budgeting Method

How it works:

The envelope method simply means putting your budget as cash in envelopes. Your budgeting envelopes serve as your cash limit for a certain category - say, groceries, shopping, or rent.

This works by figuring out your money allocations, withdrawing the corresponding budget for the month, and dividing it into different categories. If you’re not fond of having your money in cash, there are also apps now available that will help you follow the envelope method virtually.

Pros and cons:

This method gives you the advantage of creating a clear spending limit and preventing you from using a credit card for purchases, which is often the culprit to overspending.

However, preparing your envelopes sometimes takes time as it requires you to withdraw cash from your bank and prepare physical envelopes. Plus, you would need to know where to hide it and discipline yourself to not take money from other envelopes.

Best for:

If you see yourself overspending when making credit or debit card purchases, this budgeting method is for you. With cash at hand, you can leave your cards at home and help you pay off your credit card debt easier.

Method #4: Reverse Budgeting

How it works:

Reverse budgeting revolves mainly around your financial goals. This works by setting aside your income for your goals first, using the rest of your money to break even your bills and other expenses, and spending whatever’s left however you want. This can also be called the “Pay Yourself First” method.

For example, the financial goal you want to achieve is to save up for your retirement. To accomplish reverse budgeting, you set aside a certain percentage of your after-tax income in these savings, and try to live off the rest of your money.

Pros and cons:

Reverse budgeting works well with people who want to focus on their financial goals. It doesn’t require much effort to start and is easy to follow through.

But since this is one of the budgeting methods where you can’t check your spending in detail, it won’t help you keep track of what category you are overspending in. You would also find yourself leaning towards other budgeting methods if you still have debts to pay or have a big tendency to overspend.

Best for:

This budgeting method is for people who don’t want to get into the nitty-gritty part of your budget and plan it down to the smallest detail but still want to commit a significant amount of your income to fulfill your financial goals. It also works well with people who want to improve their saving habits.

Method #5: Value-based budgeting

How it works:

This is a personalized budgeting method that needs reflection and time. As the name implies, you base your budget on what you value first. However, you still have to be careful to prioritize your financial goals such as paying off your debts, saving, or investing.

This budgeting method usually involves these steps:

  • Find out and list down the things that you value the most and the least right now
  • List down your current expenses
  • Allocate your money into necessary expenses to survive and the things you value the most right now.

Check this: For example, if you value advancement in your current career, you can check for your current excessive expenses such as everyday coffee or luxurious date nights.

Then, you can decide to spend your money on things that would resonate with your core values instead. In this case, instead of buying a couple of bucks of coffee every day, you can spend this money to buy an online course, attend seminars, or study short courses to learn more about your field.

Pros and cons:

This is a great method that focuses on personalization. When you continuously fulfill both your wants and your needs, you can prevent impulse buys. It also allows you to feel freer as you set out for greater financial goals.

You can live a life comfortable enough even without restricting yourself so much until all your debts are paid off. However, this method focuses more on people who have a significant amount of extra allowance in their monthly income.

Best for:

If you’re at the point of your financial journey where you don’t have to have a strict budget anymore and are disciplined enough to maintain your good habits, then this method is for you.

Knowing what budget is best for you

You need a budget system that focuses on your priorities: whether it is to save, pay bills, invest, or others. There are a lot of different budgeting methods out there. Choose what feels right to you.

Some budgeting methods may work for other people but might not work for you, and that’s totally normal. After all, there is no one-size-fits-all when it comes to your budget.

Contrary to what some people believe, you don’t have to force a budgeting method to work for you. You can always try different budgets until you find one that’s right for your lifestyle, income, and goals.

You can also try combining them. It’s all about trial and error. Just remember that whatever budgeting method you choose, it will all come down to your self-discipline, dedication, and consistency to achieve your financial objectives.

Looking to save money while reducing food waste? Read ”6 Tips to Reduce Food Waste and Save Money” to learn more.

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