Budgeting Strategies

Introduction

There are a lot of ways to budget, and they all have different advantages and disadvantages. It’s important to pick the one that works best for you! In this article, we will look at some common budgeting strategies and explore their procedures, advantages, and disadvantages.

The 50/30/20 Budget

Procedure: Allocate 50% of your income to needs (necessary expenses, like utility bills and rent), 30% to wants (stuff you would like to buy, like a new phone), and 20% to savings.

Pros: The budget is simple to understand and easy to conduct, with only 3 expense categories and set percentages. It also encourages saving by allocating a generous portion of your income to the category, helping you reach your savings goals faster.

Cons: The most obvious issue is that the percentages of income allocated for each category may need to be adjusted. Oftentimes, 50% is too little or too much for necessities, depending on how much you make. This forces you to redo the percentages, which reduces the simplicity of the strategy.

Envelope Budgeting

Procedure: Put money into envelopes for different categories, and you stop spending on that category when you run out of money in the envelope. Excess money at the end of the period can be reallocated or rolled over to the next period.

Pros: The strategy lets you visualize your categories, helping people grasp the basis of budgeting better. You can make as many categories as you want, which can be helpful for those who want to be a bit less vague with the allocation of their income.

Cons: You might be misplacing money if you are using physical envelopes. However, there are digital envelope budgeting software that can mitigate this.

Pay Yourself First

Procedure: Upon receiving income, you first allocate a portion to your savings, “paying” yourself. Afterward, you pay off all your necessities, and the rest can be used for whatever, like wants or more savings.

Pros: The strategy encourages saving by making it the first thing you do with your money. Additionally, the lack of set portions of income offers good flexibility.

Cons: You may allocate too much money upfront for savings, leaving insufficient amounts for needs and wants.

Zero-Based Budgeting

Procedure: Every single dollar of your income is assigned for a specific expense, leaving you no excess money. This is a strategy you can use with other ones, leaving you no unallocated funds.

Pros: It ensures you use all your resources, so you can consume more. Knowing there is no excess money may also help reduce impulse purchasing.

Cons: The strategy leaves little room for error. It requires you to anticipate all of your upcoming expenses, which requires more experience.

TL;DR

The 50/30/20 rule involves allocating 50% of income to needs, 30% to wants, and 20% to savings.
Envelope budgeting involves creating physical/digital envelopes for different spending categories and allocating a set amount for each.
Pay Yourself First calls for the first transaction you make with your income to be towards savings, then needs, then anything you choose.
Zero-based budgeting involves assigning every single dollar towards a specific expense, leaving no excess money.