Having a strategy is key to successful budgeting
Once you’ve decided that now is the time create a budget, you might be scratching your head thinking about where to begin, the best way to create a budget or the best type of budget that suits you.
As with most things in life, there are a host of different strategies that can be employed in budgeting. Here are several to consider. Before going into the process, one of the biggest pieces of advice that experts give on budgeting is to avoid using credits cards until you can get the budget working.
Budget strategy: subtraction budgeting
Financial gurus of all stripes say is the easiest and simplest budget to create and maintain. With this budget, you add up your monthly income, add up your essential monthly expenses, and then subtract the expenses from your income. Hopefully, that result is a positive number.
There are a number of different ways of saving from this scenario. You pick a number and count that as an expense among the bills you subtract from income. The rest is free to spend. Or, as The Simple Dollar notes, you put in savings half the number you come up with after the subtraction. In The Simple Dollar’s example, if you have $400 leftover, you put $200 in savings.
Budget strategy: cash budgeting
Also called envelope budgeting, this budget strategy has you use only cash. You cash your check when you get paid and divvy up the money into envelopes for bills and spending as much as possible given today’s reliance on technology and online bill payment.
The idea here is to give you the ability to physically see where every penny goes. You can’t see that when swiping a debit card.
If going analog for budgeting just doesn’t fit your digital style, there are a couple of digital platforms that could help – GoodBudget and Mvelopes. GoodBudget has a free version that allows you to do envelope budgets that can be managed on your desktop and mobile phone. Mvelopes charges a monthly fee of $4 for its basic plan.
Budget strategy: zero-sum budgeting
Financial guru Dave Ramsey touts this strategy. The idea here is that you spend every dollar you make. But this doesn’t give you a license to blow through money. On the contrary. With this budgeting strategy, you allocate everything you make. Anything not allocated stands a chance of being spent frivolously.
According to Policygenius, the idea is to live off last month’s income. “Instead of budgeting your money as the month progresses, zero-sum budgeting requires you to build up a month’s expenses in savings then pay yourself that amount as a salary on the first of the month,” the writer notes.
With this type of budgeting, you pay your savings like paying a bill. This ensures that you have savings for emergencies. If you have investments, those are treated as bills as well.
Once you’re in the position of living off last month’s income, then you can put your entire paycheck into savings for future use, according to Policygenius.
Budget strategy: proportional budgeting
This type of budgeting is also called the 50/30/20 budget. U.S. Sen. Elizabeth Warren and her daughter Amelia Warren Tyagi made this a popular budgeting strategy in their book “All Your Worth.”
Here, you break everything down into needs, wants and savings. You spend 50 percent of your income on needs and 30 percent on wants while 20 percent goes into savings. Of course, needs and savings take precedence over wants.
There may be a challenge in defining needs and wants. In other versions of the 50/30/20, the “wants” category is considered “personal” and the “needs” category is considered “essential”. Mortgage, car, utilities and insurance are generally essentials or needs. But a mobile phone may be a need considering that for many, it has replaced their landline. But a smartphone may be a “want” since it’s above and beyond a basic mobile phone.
Still, this budgeting strategy has flexibility. The 50/30/20 is a guideline, not a hard and fast rule.
Budget strategy: two-bank budgeting
This budgeting strategy involves using two checking accounts. And there are different strategies for this. The Simple Dollar suggests using a newly created checking account in which you put your entire paycheck.
Then, you direct the new bank to pay you by sending most of the money to your usual checking account, leaving some money behind in the other checking account. You live on the money that is transferred. You build up the other account for emergencies, big ticket items or a down-payment on a new car.
According to LessDebtMoreWine, another way to use the accounts is one handles variable expenses – such as groceries and gas – and the other is used for fixed expenses – rent or mortgage, car payment, phone bill. The website’s writer had tried to use the second account to save for big expenses, but she found herself still overspending.
Budget strategy: automatic budgeting
Here, you set up every bill for automatic payment near the due date. You also automate putting money in savings and investments. This method has been described as a non-budgeting budget.
It may help to have a banking account that allows subaccounts that allows you to shift money for specific purposes, such as a vacation. A key part of this type of budgeting is ensuring you have a handle on spending so you don’t suddenly get hit with overdraft fees.
Ray Li, publisher of technology magazine Hacker Bits, outlines what he calls “3×3 automated budget system” that he and his wife used for themselves. Li notes that the system has three steps, three accounts and three habits. Income goes into a checking account handles predictable expenses. Another account handles savings, and another handles allowance, which covers day-to-day expenses.
Whichever budgeting strategy you choose, the key is sticking to the budget. There will be temptations. So when considering a budgeting strategy, be sure to work with one you feel confident will help you succeed. And, of course, there are strategies for keeping you motivated on your budget strategy.