Four Common Budgeting Methods
When it comes to budgeting, there is no “one-size-fits-all” answer. You have to make your budgeting style work for what’s best for you and your lifestyle. That being said, there are four common budgeting methods people tend to turn to when starting a budget.
Incremental Budgeting Method
This method can also be called the “traditional” budgeting method. This is where you take your budget from last year and use that data to make your budget for the current year. Basically you are just assuming everything will be the same except for a few incremental changes from year to year. This method works because you already have a baseline idea of how much you spend in a year, so there isn’t any guesswork involved. However, if you are using this method, it’s best to really look at your year as a whole and find any new budget categories that might need to be implemented into your yearly budget, just so you aren’t caught off guard.
Zero-Based Budget Method
A Dave Ramsey favorite, this method takes into account your entire monthly income and assigns it to categories until there is no money left. In zero-based budgeting, every single dollar you make has an assigned category. Now, the categories can be called “extra” or “spending money” if you have money left over after all of your expenses, but it still has a home in your budget. The goal is to have no leftovers at the end of the month. Many people enjoy this method because they like knowing exactly where everything is supposed to go. If you are more of a spontaneous person, this method might not work for you.
Activity-based budgeting is the idea that you are setting up your budget according to the activities you participate in. For each activity (even if that activity is grocery shopping) you will assign a certain amount of money and stick to it. This helps you know exactly where your money is going and how much certain activities are going to cost. This method helps give you goals to work toward and realistic expectations of where your budget is headed.
The 50/30/20 Rule
Some people work better on percentages–that’s where the 50/30/20 rule comes in. This budgeting method is simple. First, you add up all of your after tax monthly or yearly income. Then you make sure 50% is going towards your needs such as housing, utilities, food, insurance, etc. Then you budget 30% for your wants–hobbies, eating out, clothes and entertainment. The remaining 20% goes toward debt repayment (if you have it) or savings. This method is simple and straightforward, and it works for many people who don’t like to get into the nitty gritty details of a budget.
Whatever method you choose, budgeting still comes down to tracking your expenses and knowing how much you have coming in and going out each month. If one budgeting style isn’t working for you, don’t be afraid to try other methods. When you find one that is easy to stick to, you won’t have to struggle to budget ever again.
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