Reviewing Budgeting Methods

I have talked about the importance of budgeting quite a bit. I am sure that at this point you guys are pretty well aware advantages and disadvantages.

Still, most people think of budgeting as restricting, time-consuming, and overwhelming. And nobody likes feeling that way. Hence, credit cards; Giving you access to money that you don’t have to spend on whatever you heart desires. Out of sight, out of mind, am I right?

Not exactly…

To answer your question, no credit cards are not going anywhere soon, nor is consumer debt. And these debts can be a detriment to your financial situation. So, the best defense for your personal finances is a good offense. And, to me, a good offense needs a playmaker. Something dictating your tempo, and your spending for your everyday life.

In the world of personal finance, this comes in the form of a budget. Now, at the same time, budgets come in all shapes and sizes. Some more detailed, some more automatic, but all in all, functioning without a budget can lead to some serious issues.

So, today, I am going to review a few different budgeting methods to show you how you can think of your money and avoid costly mistakes. Let’s dive in:

As a side note, I recommend completing a budget every month, even if that is using the same template each month to make sure you are staying on track.

The Envelope System:

With an Envelope System of budgeting, you set your goals for the month by assigning a dollar amounts to different spending categories based on your habits.

• Find your fixed costs like Rent, Debt, Internet, etc…
• Average what you spend monthly on things like Groceries, Restaurants, Entertainment, and make sure to have a misc category (You never know)!

Once you have those figures, write them down, put them on your fancy meal prep white board you hang on the wall, or use an app like GoodBudgets to help track how you are spending throughout the month.

What you do from there depends on how detailed you want to be. You can track every week or every 2 weeks in each of those categories to determine how much you have left to spend for the rest of the month.

Then reset at the end of the month. Some people like to use physical cash for this by putting cash in actual envelopes, but you do what’s best for you.

Overall, I give this method a B rating because it is easy to use, simple to maintain and gets the job done.

Zero-Based Budgeting:

Where it has its drawbacks leads me to the next budgeting method which is Zero-Based Budgeting.

Zero-Based Budgeting uses the same concept of the envelope system but it enables you to prioritize specific saving goals.

Maybe that is: Paying off debt, Saving for that new fishing boat, or Planning a big vacation. Could even be long-term goals like retirement, education, etc…

I use a version of Zero-Based budget for my own budget because I like the awareness it gives me on my spending each month, the allocation of my income to meet certain goals, and the flexibility to prioritize my income to what matters most to me.

If you would like my Excel template, put your information into our Contact Us page and let me know!

You set this up very similarly to the Envelope Method where you assign categories to your spending, but you will also have different Aspirational Buckets -or- Savings Buckets that you put money away in so that at the end of the month you are left with Zero Dollars to “spend.”

This also works great with variable income because it gives you flexibility at the end of the month. Once you know exactly where to place extra cash.

Here is what that looks like:

The drawbacks or disadvantages of a Zero-Based Budget:

• Time: This method does require consistent review and adaptability – this can take time.
• Discipline: You don’t want to run out of money, so you have to be in control of your spending throughout the month to make sure you don’t overspend.

I’m giving Zero-Based Budgeting an A because of its flexibility and easy application.

The 50/30/20 Method:

That brings us to our final budgeting method and that is the 50/30/20 Method. Now, in fairness, this is much more of a “guideline” than an actual method, but nevertheless, it can be used in practice very easily. In the 50/30/20 Method, you break your income into the following categories:

• 50% Needs:
  • Rent/ Mortgage Payment
  • Groceries
  • Debt Payments
  • Utilities
• 30% Wants:
  • Travel/ Vacation
  • New Clothes
  • New Clothes
• 20% Goals:
  • Building your Emergency Fund
  • Additional Debt Payment
  • Retirement
  • Education Expenses

You can go about this however you would like, but at its core, you want to stay within the boundaries set by your percentages. This is customizable to your situation. So, for instance, if you are trying to pay down your debt quicker, you don’t have to use 20% as the benchmark, you can use 30% and reduce your “Wants” category to balance it out.

Or maybe you don’t “Need” that much, so you can spend more on things you Want, like that new fishing boat…

You know, the great thing about the 50/30/20 Method is its simplicity. It is easy to understand, and it allows you to still enjoy life.

The drawbacks:

• When you want to spend outside of those percentages – Those guides may not align perfectly with your goals, and you have to adjust those manually every time you want them to change.
• Doesn’t account for specific goals since it just lumps everything into the “Goals” category.
• Very difficult on a variable income – this method assumes you will make the same amount every month to assign to your spending, but that may not be the case.

But at the end of the day, budgeting is what you put into it, so you have the ability to make it work for you depending on where you live, the size of your family, your lifestyle, etc…

I give the 50/30/20 Method a B as well.

I think the important thing to remember about budgeting is that no matter what budgeting method you use, there is no right or wrong as long as it works for you. You’ve got to consider your situation and ask yourself:

• Is my income stable? Does it fluctuate?
• What savings do I want to prioritize?
• What are my financial goals?
• How easy do I want to make this on myself?
• How detailed do I want to be?

You should also evaluate your method periodically to ensure that it is working for you. If it is not, then seek advice. You work too hard to feel like you have no control over your finances.

I am always happy to help with budgeting. So, feel free to reach out if you would like some additional insights – It doesn’t cost you anything!

And if you would like my template for how I do my budget, fill out your information here and let me know how I can help!

Until next time,

Gil Brandon IV, AAMS™

Any opinions expressed are those of Gil Brandon IV and not necessarily those of Raymond James.