6 types of budgets and how to choose

Looking back, it makes sense that at the height of the COVID-19 pandemic and after, Americans hoarded more money than ever. BE A notes that personal income increased by $107.2 billion (0.5%) in March 2022.

While understandable, this should still cause concern. After all, The bank rate found that only 41% of Americans would be able to cover a $1,000 car repair or emergency room visit. Moreover, in the event of an unexpected bill, 37% of people would have to borrow this money in one way or another.

Additionally, 59% of adults in the United States live paycheck to paycheck. And, via a CreditDonkey investigation29.2% of respondents say they do not save part of their income.

How do you solve these scary statistics? The most obvious answer might be through a budget.

To be honest, a budget won’t magically relieve all of your financial stress. However, a budgeting system can guide you in understanding and evaluating your relationship with money. Mainly, it is by determining your available money and it can be put to good use.

But did you know that there is more than one type of budget available?

Although all budget systems have a similar concept, they have their own unique tactics that can help you achieve specific financial goals.

1. Budget by item

Line item budgets are most commonly associated with a typical budget or budgeting process.

“You know the kind, in Excel or another spreadsheet that lists every expense by category,” said Brian Walsh, certified financial planner for personal finance firm SoFi. really simple.

To start, you will list each of your expenses. Or, better yet, expense categories. It will be for a specific period, such as a month. “Line item budgets work by aggregating related costs,” adds Mia Taylor.

From there, you’ll want to identify a target spend amount for each line item or category in your budget. “Ideally, you’ll do this based on looking at your past spending in these categories,” Taylor says. If you’re developing a new line item budget, a good place to start would be to review your last three months’ spending and assign a category to each transaction.

While you can use this type of budget for your personal finances, it’s typically used by businesses to do a year-over-year analysis or comparison of spending across expense categories. This method also makes it easy to track income and expenses.

“Because a line item budget is itemized, it could be a great option if you need more control over spending or are a detail-oriented person,” Walsh says. The level of detail involved, however, may be a drawback for some due to the need to set it up and maintain it.

Budgeting can give a greater sense of freedom. (Casper1774 Studio/Shutterstock)

2. The 50/30/20 Budget

Popularized by Senator Elizabeth Warren, the 50/30/20 budget rule is so simple that it’s perfect for beginners to budgeting. But it’s also appealing to anyone who wants to not only cover current expenses, but also reduce debt and save for their future.

Here’s how it works, just divide your income into the following categories:

  • 50% goes to necessities
  • 30 percent to wishes
  • 20% for savings and debt repayment

What I also like about this type of budget? It is flexible enough that you can use other variations to better suit your needs and goals.

  • For a simplified version, try the 80/20 rule. Here, 80% of your income goes to essentials and luxury, while the remaining 20% ​​is reserved for savings.
  • Are you an ambitious saver? The 60/30/10 rule might be a better option. With this type, 60% of your net salary is spent on savings, investment or debt repayment. You will spend 30% on your needs and the remaining 10% on discretionary expenses.
  • If you’re trying to save for retirement and your child’s education, try the 50/15/5 rule. With this model, you allocate 50% of your income to essential expenses, 15% to retirement savings and 5% to an emergency fund. What about the remaining 30%? You can use it to supplement your pension, your child’s school fees or go on vacation.
  • There is also the 30-30-30-10 budget. Here, 30% of your monthly income will be split equally between housing, necessities, and financial goals. The remaining 10% will budget for vices such as entertainment, restaurants and vacations.

3. The Envelope System

Prefer to physically handle your money. Or do you need to limit unnecessary expenses? If you said yes to either, then the envelope system could be your ally.

But, how does it work exactly?

“Once the month (or pay period, if you’re filling your envelopes every two weeks) begins, look at your categories in your budget,” says William Lipovsky. “Food, clothes, gasoline for the car…I’m sure you have some more. For each category, the envelope system requires you to pull out an envelope of your choice (decorated envelopes look nice, but longer security envelopes work great) and write a category name on each envelope.

Then you take the actual money you need to cover those expenses. And then you “distribute it among your envelopes according to your budget”.

“The theory is that if you only have $200 in your food budget for the month, you’ll only use $200. Not a penny more,” Will said. “The truth is that it takes major dedication. Even if you only buy the essentials you need to last the whole month, you can still run the risk of going over budget if you’re not careful,” which requires careful calculation.

You can, however, move money from one envelope to another. Let’s say you spent $175 at the store. You could take that extra $25 and put it in the “gas” envelope if the bill was higher than expected.

Use envelopes to separate different spending plans on different things, then try to control only the use of the money in the envelope to pay for daily life for the month. (Peshkova/Shutterstock)

4. Pay yourself first

Also known as reverse budgeting, this is a savings strategy where you save some of your income towards goals, like retirement, before spending money on food, services public or discretionary items. The amount you set aside is usually predetermined and is automatically redirected to the appropriate savings account(s).

People like this method if they want to increase their savings without having to calculate all the numbers every month.

5. The zero-based budget

Want to get the most out of every dollar you earn? You may want to create a zero-based budget.

“Zero-based budgeting is a way of budgeting where your income minus your expenses equals zero,” says Ramsey Solutions. In a zero-based budget, you need to make sure your income matches your expenses each month. This way you give every dollar that comes in a job to do.

This does not mean that your bank account is empty. It simply means that your income minus your expenses equals zero, they explain.

Let’s say you earn $3,000 a month. All of your expenses, savings, donations and investments should total $3,000. “That way you know exactly where every hard-earned dollar is going,” they add. After all, if you don’t know exactly where your money is going, you could face financial disaster.

6. Hybrid budget

Do you like parts of every budget listed above, but not the whole kit and caboodle? That’s perfectly acceptable, says Evan Gorenflo, a financial advice expert with banking, savings and investment app Albert. Why? Because you can take the elements you like and combine them with others to create your own personalized hybrid budget,

“For example, you can start with a 50/20/30 plan, where the goal is to save 20% of your income,” says Gorenflo. But, you can also establish a detailed category of expenses and use cash envelopes for these different types of expenses.

“At the end of the day, the most important thing to remember is that creating a budget is a very personal thing,” Taylor says. “There is no right way for everyone to budget. Identify an approach that works for you, your goals, and your personality type.

Dollar In An Envelope In Children's Hands. Materials, Help, Donation,
You can design your budget plan according to your status. (Shchus/Shutterstock)

How to choose the right budget

When it comes to budgeting, how do you decide which type is right for you? Well, just like when buying a car, you can try out the system first. If that’s not to your liking, you can take another system for a test drive.

Generally speaking, though, here are three ways to help you narrow down your decision:

  • Do a financial self-assessment to find out where you are and what your goals are. For example, if you want to pay off your debt, you’ll need a system that helps you identify where you can cut spending so you can direct those savings to your debt.
  • Before embarking on a budgeting system, think about how long it will take you to manage it. Some budgeting systems are more rigid than others. For example, Excel spreadsheets and zero-based budgets require frequent and detailed expense tracking, while the pay-it-yourself approach is more convenient.
  • Compare your manual and digital options. Do you want to be more self-sufficient or let technology do most of the work? If the app or program lets you automate savings or access your information on the go, personal finance software can be handy. But that may not help if there’s a steep learning curve or if it doesn’t automatically capture and categorize your purchases.

As a final piece of advice, some experts say that you don’t have to follow a specific budgeting system. The problem? You know what your income, debts, goals and general expenses are. If so, tracking every penny could be overkill if you live within your means and know you’re on track to achieve your financial goals.

By John Rampton

The Epoch Times Copyright © 2022 The views and opinions expressed are solely those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.

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