I’ll be sharing my personal budgeting tips and other tips that are useful to help anyone start their budgeting journey!
Budgeting is a great way to help you reach financial freedom. There are many different techniques anyone can use to create a budget without having to invest in a Financial Advisor. It is important to assess your financial obligations before deciding what method to use. This will ensure you choose the method that will help you reach your financial goal. Check out my budgeting post to learn how to start creating a budget. In this post, I’ll explain what the budgeting techniques are and how they are used to successfully create a budget to reach that financial freedom.
Envelope System
When you begin to create your budget using the envelope system, you will determine a budget for each spending category, using a physical envelope for different spending purposes. Here are some general steps for how it works:
- Each envelope would list a specific category, such as groceries, transportation/ gas, entertainment, etc. Basically, anything that you know you are going to spend money on, you would create an envelope for that.
- Next, you will need to determine how much money you want to put in each envelope for a certain period. This could be based on how often you get paid (weekly, biweekly, monthly).
- Each envelope should be labeled with the specific category and filled with the allocated cash.
- Once you have filled each envelope with the amount of cash you budgeted, you can use that money until it is completely exhausted.
Essentially, this method is great for those who “don’t know when to stop spending”. It forces the person to only use what they have allowed themselves for that period. That means if you are trying to save as well, you can work that into the envelope system and label it “Savings”.
Zero Based Budget
A Zero Based Budget is a method used to assign all your income and subtract any expenses to leave you with a zero balance; similar to the envelope system. You’ll assign your income to a specific expense rather than an “envelope”. The purpose is to assess your savings, investments, monthly bills, etc. You might be thinking, “why would I want to leave myself with $0.00 each month?” Although you’re determining where all you’re income will be disbursed, this can also include, “fun money” or maybe “vacation funds”. You’ll be the person to determine what the money is spent on.
- The first thing you’ll want to do is determine all your sources of income.
- Then you’ll identify and list all expenses including fixed (rent, mortgage, car payment, etc.) and create categories for everything.
- Determine the specific amounts you want to set aside for each category until you reach $0.00.
- Once you have matched income and expense, make sure everything balances.
This method is helpful to ensure you are not over spending or spending what you do not have. It almost forces you to not touch anything you have already categorized to ensure you stay within your allocated limits.
Pay Yourself First Budget
The pay yourself budget prioritizes you savings and investments over everything else. This non-negotiable expense ensures you save for your financial future rather than focusing on the other discretionary expenses. Obviously, if you have fixed bills, those will need to be considered when using this method. If you plan to use the pay yourself first budget, you’ll want to consider the following:
- Determine what your financial goals are.
- Then, you’ll want to decide on a percentage to put away or a fixed amount per pay period (weekly, biweekly, monthly, etc.)
- It can help to automate the transaction. Each time you receive an income, the money can be automatically deducted to ensure you’re paying yourself first to meet your financial goals.
- Once you have set up your financial plan for this budget, then you should use the amount leftover to assess your expenses.
Prioritizing this method, will ensure you hit your financial goals. Essentially, you’ll always save because that is the priority over paying bills. The con for this method is that, if you have high debt, it could take longer or make it more difficult to pay off your bills. The longer you hold on to debt, the more interest that will be incurred.
50/30/20 Rule
The 50/30/20 rule, is essentially a percentage bucket to divide up your expenses between needs, wants, savings and debt repayment. This method is designed to provide a simple approach to budgeting finances.
- The first bucket will determine what your needs are. This includes expense like, housing, utilities, groceries, insurance, transportation, etc. Anything you know you need to pay for including fixed and non fixed expenses.
Fixed income/ expense is the amount that does not change, such as your monthly mortgage or rent.
Non fixed income/ expense is an amount that can change, such as groceries or gas.
- 30% will determine the Wants can be something people think they need. Remind yourself these are discretionary expenses. An example of something someone thinks they need, but really don’t need could be a television. I currently have a TV in my living room, and it is absolutely horrible. The TV is super slow and there is a tiny hole from when I hired movers, on the actual screen. I’d love to invest in a new TV, but that is not in the budget today. The 30% bucket of wants will essentially allow you to either save for the television or put money towards that, or out right buy the television, if that’s what you choose to do.
- The last rule is the 20% bucket. This one is for all your savings and debt repayment. Although this is the smallest bucket, I believe it is one of the most important. This bucket that will allow you to reach your financial goals, by saving and paying off debt. According to FiscalData,
“the national debt (32.70 T) is the total amount of outstanding borrowing by the U.S. Federal Government accumulated over the nation’s history”
What people don’t realize is businesses like the credit card companies, aren’t here to get you out of debt; their primary function is to continue to raise your credit limit, so that you’ll continue to borrow more of their money and incur a lot of interest over time. 
The longer you have a balance on your credit card, the more interest you’re paying to your lender. This does not only apply to credit cards, but also applies to any loan you take out (money you borrow) from a financial institution.
Although the 50/30/20 rule is straight forward, you do have to tailor it to your financial situation.