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The 3 Best Ways to Budget Your Money
- 50/30/20 Budget
- Envelope Budget
- Zero-Based Budget
- 50/30/20 Rule:
The 50/30/20 budget is one of the most popular budgets out there, and for good reason. This method is a simple, straightforward way to manage money. Each number in the 50/30/20 rule represents a percentage of your income that should be designated for a specific purpose.
According to this budgeting method, 50 percent of your income should go towards your needs. This category includes housing, transportation, utilities, groceries, and insurance. The next 30 percent should go towards wants, which includes entertainment, hobbies, dining out, clothes, gifts, and travel. The remaining 20 percent should go toward saving, which can go toward an emergency fund, paying off debt, and retirement or other investment accounts.
Keep in mind that these percentages do not need to be completely fixed. If it takes less than 50 percent of your income to pay for your needs, then you will be able to contribute more to your savings and wants based on your financial goals. If your needs require more than 50 percent of your income, you can reduce your spending on wants, at least temporarily while trying to find ways to reduce the cost of your needs.
The 50/30/20 method is a great guide for how to manage your money since this method offers a simple and effective budgeting approach. This budgeting method provides clear targets for the percentage of income to allocate for needs, wants, and savings. Our recommendation is to view these percentages as flexible guidelines instead of strict rules. The main idea is to be able to comfortably cover all essential costs while having enough money leftover to both meet all of your savings goals and enjoy all of the things that you don’t absolutely need but are still important to you.
- Envelope Budget:
Another budgeting method that has become very popular on social media within the past year is the envelope budget. This method involves stuffing envelopes with a specific amount of cash for each category of spending, which can be a refreshingly low-tech and effective way to control spending. If you prefer a more high tech approach, you can also use an app or a spreadsheet to create virtual envelopes.
The key benefit of this method is that it helps with both being disciplined about how much to spend on each item in your budget and understanding your actual spending habits, which could lead to some surprising findings and opportunities to save more money. The main challenge with using this approach is determining the appropriate amount of money to allocate for each item in your budget in order to reach your financial goals. Since this method doesn’t provide any guidance for setting savings and investment targets, we recommend combining it with a method that does, like the 50/30/20 rule, or another personalized set of targets.
Any budgeting method that can help control spending has our stamp of approval, and a lot of people have had success with using envelopes. This method requires discipline, realistic spending limits for each category, and financial targets to establish an overall budget amount, all of which are necessary for any budgeting method to be successful.
- Zero-Based Budget:
The zero-based budgeting (ZBB) method is commonly used by businesses to lower the cost of their operations, and this method can be very effective for household budgeting too. First, you need to start with a base of zero spending, then add in all of your needs and associated costs, which involves assessing all of your spending to understand what is a need and what isn’t. There’s potential to cut costs for any items that are not essential in the budget.
One of the main strengths of this approach is that ZBB can be very effective for identifying and eliminating unnecessary costs. Another strength is that this budgeting method provides flexibility for setting your overall budget since the budget is set on an individual budgeting period basis. Overall spending could increase from one budgeting period to the next, which may be normal for many households, and ZBB accounts for that by trying to optimize spending for each period.
There is extra work involved with setting a unique budget for every budgeting period, and if your spending doesn’t vary much from month-to-month, then this might not be the most effective method to use. However, if your typical spending can vary significantly for each period, which may be the case if you are self-employed, then this method will help set you up for success by optimizing costs in each spending period.