At any stage of life, learning to manage and monitor your own financial activity is very crucial. A person becomes financially successful only when she or he has mastered different types of personal budgets and has a good budget plan.
Let’s look at the kinds of budgets there are and share some budgeting tips and ideas for beginners to set up budgets effectively.
What is a budget?
Simply put, A budget is the planning of expenditure on the basis of income.
It requires a list of expenses and sources of earnings either yearly or monthly. A well planned budget will categorically balance out the income and expenses and show a true picture of your financial position for that month or the budgeting period.
Budgets are not supposed to deprive you. They give you a clear idea of where you should adjust your investments and how to plan expenses better. They bring clarity to your financial life.
Among different classifications of budget planning, here we are going to discuss Personal Budgeting.
Personal Budget & its benefits
Personal budgeting, or household budgeting, simply tracks the expenses on household or for your peronal activities. This is basically a planning and tracking tool that helps you to monitor and balance your day-to-day expenses.
Personal budgeting is all about spending money judiciously, prioritizing the spending, and focusing more on the important expense areas, and meet your month-end goals.
It also allows you to save for the things you need and the things you want.
Budgeting might sound a bit intimidating and hazardous task, but it is one of the important work which will simplify and boost your financial activities. You also need to know how to track expenses.
There are different budgeting technique, out of which we are going to discuss 6 most popular of them
1.) The Traditional Budgeting
Not to mention, the very obvious one to begin with, is the age old, traditional budgeting method. You need to record your income and expenses in order to keep an eye on your spending and cut back a few. To make an estimate calculation, add up all the monthly expenses from the last few months so that you can balance certain fluctuations.
You can maintain this kind of a monthly budget on paper or an app similar to Walnut App. The traditional way of budgeting does not have much ground rules. Utility bills, car payment, debt payments and all other spending or monthly expenses go into the expenditures column. Regular income, irregular income, passive income, profits, dividends etc go under Income column.
You simply track the income and expenses, add up and subtract, tallying up and ending up with a final number for the month. If this is positive, then you saved up for the month, if negative, then you have spent more than you earned.
Since this is a very detail-oriented budget style, it will help you keep track of where all the money is going. I myself have tried this and found it very useful, especially when you are starting to get your finances under control. This is quite helpful to meet your financial goals when your expenses are low, with a long list of outlay, this will be a very tedious job to do.
2.) 50/20/30 Budgeting
Also known as the Balance money formula, in this budgeting you are supposed stick to a rationed spending plan. You need to allocate major spends under three major categories:
- 50% of your income on needs,
- 30% on wants and
- 20% on savings
Needs are your everyday must-have expenses that are important for your survival such as groceries, bill payments, EMI, etc.
Then come the part where you can manage your extra expenses which are not your monthly compulsory needs.
Finally, the remaining 20% goes towards your future. Retirement goals, MF, etc fall under savings. 20% is a good start in the initial stage. subsequently, you can keep on increasing.
This method of budgeting comes in very handy to me as it reduces too much categorizing and hence, the struggle. Over, spending can be an issue here as there are fewer categories. In order to minimize this issue, keep it flexible where you can adjust the expenses.
3.) Cash-Only Budgeting
Cash-only budgeting, or very popularly known as Envelope Budgeting is completely based on cash. I.e. you use your cash for spending money. Here, you can allot your money to different categories such as groceries, bills, etc. and withdraw the total amount from your account and divide them into these sections, and put them in envelopes.
This old school method helps you to control your unnecessary expenses as you are not allowed to use credit cards or debit cards here. You just have to keep an eye on your bank accounts.
I personally have tried this earlier and would suggest to any college-goer to try this method of personal budgeting as it will help them to manage money in future.
This works when you are finding it difficult to control your spends and constantly find yourself running out of money for certain necessities.
4.) zero-based budgeting
It may sound a bit unreal, but trust me Zero-based Budgeting does exist and many of us use this budgeting technique. Here, you have to put all your income in a specific area so that you will be nothing at the month-end.
As per the fundamentals of zero-based budgeting, you will consider Savings as a part of the budget and squirrel away what you need to save for the month first. Then the remaining money is allocated to every other budget category and spent for the rest of the month.
If irregular expenses to come up, then you will borrow or dip into your savings to take care of them.
5.) Spending-first Budgeting
This is a pretty straight-forward budgeting method where you are simply prioritizing your expenditure over your savings. This will help you to manage all the important expenses. This works best when you have no variable expenses or your expenses are way less than your earning.
When cash flow is low, it is fine to focus only on your expenses. But you will be in trouble when unplanned expenses start coming up. Since you have been living paycheck to paycheck with this spending habit of yours, it is difficult to handle irregular expenses as you have no emergency fund or savings.
6.) Saving-first Budgeting
This budgeting method is opposite to the spending first budgeting concept and what we recommend to most. For anyone who is loves to splurge, this comes as a quick money-saving hack for me. Here, you are supposed to save your money first, even if you have to compromise on something.
It helps you to create financial security for the future. Saving is one of the important qualities for financial success.
This is very useful budgeting system if you don’t have an expensive lifestyle and high investments each month. Even if you do have a bad spending habit, it is good to set up a savings goal and start with this budgeting process. You can surely go for it as a good future investment is always worth the money.
As per the spending first budget method, you first put away your savings as per your savings goal. The remaining money is for you to spend. So if your salary is Rs.20,000 a month, if your saving goal is to save Rs.5000 a month. Then for the month, you will move Rs.5000 to a different saving account where it is safe or put it in a FD or Mutual fund. The remaining Rs.15,000 is yours to spend.
Categorizing budgeting methods according to everyone’s needs is next to impossible as everyone has different sources of earnings and different expenses. You can create your own budgeting style with a few experiments as all of these well-known expert budgeting concepts came from trial and error methods only.