As a financial advisor, I often get asked about the best way to budget and the myriad of different apps and systems out there to help people budget. I’m happy to talk about it as budgeting is the first line of defense in one’s financial plan and is a crucial step to financial stability and long term success. I have talked with many individuals with successful businesses and six figure incomes with no savings or investments to show for it and the thing they all have in common is no budget
The truth is, there is no one-size-fits-all answer to this question, as everyone has different financial circumstances, goals, and lifestyles. However, there are several popular budgeting styles that people can use as a starting point to manage their money. In my first ever blog, I will explore the pros and cons of five different budgeting styles to help you choose the right one for your needs.
1. The 50/20/20/10 Budget (percentage based)
This budgeting method involves allocating 50% of your income to necessities, such as rent and bills, 30% to discretionary spending, such as entertainment and dining out, and 20% to savings and debt reduction. This approach allows for flexibility in your spending while still prioritizing your financial goals.
Pros:
Provides a simple and flexible approach to budgeting.
Allows you to prioritize your spending while still saving money.
Can be easily adjusted to meet changing financial needs or circumstances.
Cons:
May not work for those with high fixed expenses, such as rent or medical bills.
Doesn’t provide a detailed breakdown of your spending.
Can be difficult to stick to if you have a lot of discretionary expenses.
2. The Priorities Budget
With this budgeting style, you prioritize your spending based on what is most important to you. You identify your financial goals and allocate your funds, accordingly, putting the most money towards your top priorities. This approach ensures that you are putting your money towards things that matter most to you.
Pros: This method aligns your spending with your values and goals, which can help you stay motivated and disciplined. It also allows for more flexibility in your spending.
3. The Cash Envelope (Dave’s way)
This style of budgeting involves withdrawing cash for each budget category and placing it in a designated envelope. For example, if you budget $200 for groceries you withdraw that amount in cash and place it in an envelope labeled “groceries.” Once the money in an envelope is gone, you can’t spend any more in that category until the next budgeting period.
Pros:
Helps you stay within your spending limits by physically separating your cash into different categories.
Encourages you to be more mindful of your spending habits.
Can be a great option for those who struggle with overspending or impulse buying.
Cons:
Can be inconvenient if you prefer to use digital payments or credit cards.
May not work for those who need to track business expenses or other non-cash expenses.
Can be challenging to manage if you have a lot of different budget categories.
4. Zero-Based Budgeting
This budgeting style involves starting from scratch each month and allocating every dollar you earn to specific categories such as food, rent, utilities, and entertainment. With this method, you don’t carry over any funds from the previous month, and each dollar has a job to do.
Pros:
Forces individuals and businesses to prioritize spending and eliminate unnecessary expenses.
Helps identify areas where spending can be reduced and reallocated towards more important goals.
Encourages a proactive and disciplined approach to financial management.
Cons:
Can be time-consuming to create and maintain.
May not work well for individuals or businesses with irregular or unpredictable incomes or expenses.
Can be difficult to stick to if unexpected expenses arise.