4 Types Of Budgeting To Help You Reach Your Financial Goals

17/01/2019

Being “good with money” is a highly desired skill, especially to those whom it doesn’t come naturally. This skill generally means that you have a good handle on your spending habits, regularly save money, are debt free, or a combination of the three.

Regardless of your starting point or goals, sticking to a budget is a smart move. The word “budget” will mean frugal living to many, but that’s not always the case. A budget can be used to simply control unhealthy spending habits, or help you finally put aside an emergency fund.

Here are 4 types of budgets that can be used for different situations and goals.

The Envelope Budget

The envelope budget is a cash only method. This means locking up your credit and debit cards!

You pay your bills and rent or mortgage out of your account, and then work out your other monthly expenses. These would include things like:

Once you have worked out your other types of monthly spending, designate an envelope to each category and fill each envelope with an assigned amount of cash. For example, £400 for food shopping, £250 for transport, £200 for going out. Of course, customise the amounts to fit your lifestyle or goals.

When you go to make purchases from each category, like the weekly food shop, only take its designated envelope with you. When the envelope is empty, you have to wait until the next month to withdraw more money.

This method is designed to help curb overspending habits and bring your spending under control. You’ll also need to put in the effort to make sure you don’t leave yourself short at the end of the month. This doesn’t mean “borrowing” money from other envelopes, this means being smart with your spending.

These days it’s too easy to spend more than you planned but just put it on your card. Cash is more tangible, and makes you think more about the amount you’re spending as you physically have to count out the notes and hand the money over.

The Zero Budget

This budget style is very simple: Your money in minus your money out equals zero. The idea is that all of the money you have coming in is assigned to and spent on something. And in this budget, saving is classed as spending.

The zero budget is great for chronic over spenders, or people who want to put as much money as possible towards paying off debt or building savings for a certain goal. If you have a habit of putting left over money aside for “something”, this method ensures that all your money has a purpose, and negates the need for random savings.

This type of budget needs looking at monthly to make sure that you are truly zeroing out your finances, so is a better method for those who can dedicate this time.

Firstly you’ll want to split up all of your bills and expenses. A good idea would be to include “personal spending” in your budget to assign yourself a certain amount of money each month. This video gives a good visual representation. You’ll then want to add in your monthly income, and take all of your expenses away.

If you’re trying to curb overspending, your income minus outgoings should not equal any less than zero. No going into the minuses. But ideally you’ll be using this budget to achieve some kind of financial goal like paying off debt, over paying on your mortgage, or saving an emergency fund or for a holiday.

In this case, whatever money you have left over should go towards your goal.

For example, if your monthly income is £2,000 and your monthly outgoings are £1,600, you will have £400 left over. Every single penny of that £400 should then be put towards your goal. So if you want to overpay on your mortgage, you’ll pay your normal monthly payment (which is already included in your monthly outgoings), and then you’ll pay an extra £400 on top.

You need to revisit your budget every month as each months outgoings can vary, so one month you may have £400 to over pay on your mortgage, the next you may have £362, and the next you may have £457.

Whatever your goal is, the zero budget can help you achieve it much quicker.

The Debt-Free Budget

The debt-free budget is similar to the zero budget, but a little less involved. As the name suggests the main goal is to get out of debt, and if you’re lucky enough to be debt free, to build some savings.

This method doesn’t require you to map out all of your monthly spending. Instead, you just need to work out what the problem areas are. These could be frequent (and probably unnecessary) clothing or gadget purchases, eating out regularly, or a tendency to spend on expensive experiences or holidays.

Set a monthly maximum you want to spend on these problem areas, and over time reduce that maximum amount. The money left over should go towards paying off your debt first, and then to building savings once your debt is paid.

The 50/30/20 Budget

This method was created by Harvard bankruptcy expert, Elizabeth Warren. It’s a simple budget style that is ideal for people who don’t want to spend a lot of time on their budget and also have a steady income.

The first step is to work out your monthly income, then split it 50/30/20.

It is a simple yet effective approach to budgeting.

Which Budget Do You Use?

There are many different types of budgets to choose from. The important thing is to choose the budget that fits your lifestyle and your goals, while challenging you to meet those goals.

No matter what your financial situation is, sticking to some form of budget can help you gain a better understanding of your spending and help you form healthy spending habits while reaching financial goals.

Which form of budget do you use?

comments powered by Disqus

Amend Your Search

Connect with us