Budgeting 101: How to Budget Your Money
How to divide your income into needs, wants, savings, and debt repayment
Have you ever felt confused or uncertain about how to do something?
Have you ever felt alone or lost?
I think we can all answer yes to these questions at some point in our lives. In fact, a lot of people feel this exact way about budgeting. At times, budgeting your money can seem daunting, like a never-ending jog that just goes on and on with no end.
So, how should you go about budgeting your money?
There are a couple of different types of budgeting methods to choose from. In this article, we’re going to talk about these different types to help you decide which method will work best for you and your family.
Here’s a short list of the main types of budgeting methods:
- Zero-Based Budget
- Pay-yourself-first
- Envelope System
- 50/30/20 Budget
- The “no” Budget
We’ll go through the list one-at-a-time to provide a basic explanation of each one.
- Zero Based Budget
This may be one of the most forward, easy to start with budgeting systems to use. There’s no secret sauce or absolute genius brain needed to best understand this budgeting system.
The concept is simple: Income minus expenses equals zero.
Do you see what I mean by? It’s basic to the point.
This budget method is best for those who have a set income each month or a somewhat steady monthly income.
Here are the steps for it:
- Calculate your total income for the month
- Add up your monthly spending and savings to equal the same amount
- Double check that your total income number and your spending and savings numbers equal zero when applying this formula: Income — Expenses = Zero
Provided is a basic example of a Zero Based Budget
As you can see, each expense is important. It’s vital to keep track of the expenses you’ll have each month. One forgotten expense could throw off the system. Remember, the first month or two of using this system may not be perfect due to the fact that you’re starting something new or you may end up forgetting a couple of your expenses. So, don’t be too hard on yourself if it doesn’t go well the first time you use it.
When setting up this budget, I would recommend making the Misc. category a bit bigger than in this example. After my wife and I make our budget each month, I constantly find myself forgetting about extra expenses that have to be paid that month.
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Since this budget has so many details to it, it may be best to use this budget if you’re already a well-seasoned budgeter. If you are, I would recommend using this type of budget due to it allowing you to get down to the details of your money.
2. Pay-yourself-first
The Pay-yourself-first system is another basic type of budgeting method that any person can use. To briefly explain, the pay-yourself-first budget focuses on two main points: savings and debt payments. This type of budget is best for those who are currently working on building an emergency savings fund and paying down consumer debt.
This budget type is simple and goes as follows. The first step is to set aside a specific amount of money into savings and another amount towards debt payments. The next step, you can spend the rest of your money as you see fit. If you wanted, you could spend the rest of your money on street tacos.
As previously mentioned, this type of budget method is extremely focused on savings and paying off debt. Once savings and debt have been paid, you can be more free with how you spend your money, as long as you don’t OVERSPEND. With this type of budget, you don’t have to focus as much on the little subcategories of your budget.
This type of budget method works best for those who need to focus on saving and paying debt. If you already find budgeting to be difficult, this method would be perfect for you.
3. Envelope System
This budgeting method is a little bit of the zero-based and a little bit of putting your money in a safe place. It’s actually the current system that my wife and I use. There’s a couple of different ways of going about this method. You can either do all of your budget in cash or parts of your budget in cash.
Basically, you plan out your budget each month, similar to the example used in the Zero-Based method, and then you use an envelope for each category of the budget. If you get close to the end of the month and one envelope has more than enough in it to get you through to the end of the month, you can take that money and use it for other categories in your budget. The idea behind this method is to connect the money you are spending to a real loss. It’s supposed to help those who overspend to make the connection between what they are buying and how much they are giving up just to buy a product.
Overall, it’s a really great system. However, it’s hard to implement sometimes due to all of the automatic payment methods used in our world today. So, it may take some time to adapt and apply this system. Once you have it down, it becomes a lot easier to use.
Dave Ramsey (link here) is known for having made this system famous. Oftentimes, you’ll hear him mention this system during his radio shows. So, if you enjoy his thought process for handling money, I would recommend turning to this strategy when choosing a budgeting method.
However, this budgeting method may not be best for those who don’t like having a lot of cash stored in one place or have a habit of using credit cards. If you’re a big fan of using cash or find yourself constantly overspending, this is the budgeting method for you!
4. 50/30/20 Budget
This budget is a little different from the other ones. In a sense, it’s a little bit more flexible.
As you can tell by the name, it has three parts to it. The first part, 50, is where you budget to spend 50% of your after-tax income on needs and obligations. These would be items such as mortgage, food, and transportation. The other two parts take the remaining 50% and split it; 20% towards savings and debt and 30% towards anything you may want.
This budget can get a little fuzzy due to how it’s put together. Essentially, any minimum payments you have for debt should be a part of the first part, since this is a need that has to be met. In the savings and debt section, extra debt payments fall under this section. Make sure to keep these two separate when setting up your budget.
5. The “no” Budget
As you can probably guess by the title of this section, this is the “no” budget budget. It’s a budget that doesn’t involve having to sit down and reconcile on a regular basis.
You don’t track your spending.
You don’t have budget categories.
This “budgeting” method is based on only your income and your expected expenses, with the intention of moving your money around each month.
This budget has three simple steps to it.
- At the beginning of the month/pay period, pay all of your bills first
- Save money or pay off debt in the amount you determined you can afford each month
- Whatever is leftover is yours to spend on your variable expenses
As well, there are some recommended rules to follow to help keep you from overspending. Those rules include things such as not having a credit card and checking your bank accounts regularly.
Conclusion
So, now that you know all of the main types of budgets used. It’s up to you to decide which budget to go with. Choose your destiny and make it happen!
