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Best Budgeting Methods: How to Choose The Right System For You

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There is no one way for every person to budget their money.

Some finance experts may recommend one over the other, but the truth is there are several effective ways to budget, and we will explore the best ones in this article.

Note that not every method would work for everyone, and the key to financial success and security is finding what works for you. To do that, keep your financial situation and spending habits in mind as you learn the different ways you can budget.

The 4 Best Budgeting Methods

Here are four effective methods for budgeting your money.

1. The 50/30/20 Budget Rule

Created by Elizabeth Warren and her daughter, the 50/30/20 rule divides your after-tax income into three categories: needs, wants, and financial goals.

A total of 50% of your income should be used for things you need. This includes rent, groceries, dentist appointments, car payments, and other necessities. The 30% is allocated for wants. Wants are things you can live without, such as going to the movies, buying new sunglasses, going out to eat, and other activities. And finally, the 20% leftover is for your goals.

iCASH Canada, an online Canadian lender has put together an article within their personal finance education hub on the 50/30/20 budgeting rule, where you can figure out how your income divides into these three categories.

Pros: This method helps you see exactly where your money is being spent and makes it easy to make adjustments if you start to overspend in one category. The 50/30/20 method is simple than other budgeting systems that require you to break down spending into several categories. This system also helps you reach your financial goals and save for the future without feeling like you are sacrificing enjoyment.

Cons: If you are the kind of person who considers their weekly night out a need or you tend to overspend on groceries, this may not be for you. It can also be difficult if you have trouble distinguishing a need from a want.

2. The Envelope System

This system could be considered old-fashioned, but it’s an easy method if you struggle to control your spending. This method also requires that you take your money out of the bank in cash, which can be inconvenient.

Envelopes are labeled with the different categories in your budget, such as utilities, rent, groceries, toiletries. Once the cash goes into the envelope, it is gone and cannot be taken out for any reason other than that category. Seeing how much physical money is left in an envelope can deter you from buying something you would have otherwise just charged to a card without a second thought.

You can have as many envelopes as needed depending on how you want to budget. For example, utilities could be one envelope or divide into three: gas, water, and electricity.

Pros: The envelope system is a fantastic alternative for people that charge expenses to their cards and worry about the payment later. Taking out the cash forces you to confront your spending physically. This can be a fantastic temporary method to get your spending under control.

Cons: In today’s digital world, it can be a bit of a hassle to pull out cash and even a bit dangerous. The envelope system can also be disadvantageous if the envelopes go missing or get stolen.

3. Zero-Based Budget

This is a simple method for people who want to know where every single penny of their money is going. This can help get a handle on people who tend to overspend or make impulse purchases. This method requires that you track every transaction and match every paycheck against your spending.

Pros: A useful method if you have poor spending habits. This method keeps you accountable and forces you to be fully aware of where your money is going. The idea behind it is to ensure each dollar is being used appropriately rather than wasted on non-essentials.

Cons: For this method to be successful, you must be extremely organized and track your spending meticulously. If you let charges fall through the cracks because it was just a bottle of water at a convenience store or just one beer with a pal, this method will not work for you.

4. Traditional Budgeting

For some people, this budgeting method is the best and certainly the simplest way to keep a handle on your finances. You start by figuring out how much money you have going out (your expenses). Next, calculate your after-tax income. That number is all the money you have coming in. Finally, subtract the total of your expenses from your after-tax income.

If the number is negative, you should make some changes immediately. If the number is positive, this can be considered extra money to do with whatever you please.

Pros: If you are the kind of person that likes this big-picture overview, this is a great method for you. You can make decisions about what cards to pay off or whether to increase your savings. It lets you know just how much wiggle room you have.

Cons: The traditional budgeting method has no rules about saving or planning for financial goals and therefore, can be irresponsible in the long run. For this to work, you must be diligent about your spending and willing to do the math to determine if your finances are where you want them to be.

Choosing the Right Budgeting Method for You

As discussed above, there are pros and cons to every budgeting system, so you need to find the right plan for your budgeting needs. To choose the right method, you need some self-awareness and must be honest with yourself about your spending habits and your willingness to keep track of your finances.

If you tend to save your money rather than spend it, the best budgeting system for you will help you decide what financial goals you want to strive for with the money you save. An individual like this would most likely benefit from a traditional system or the 50/30/20 budgeting rule because these give a clear overview of money saved for financial goals.

Choosing the right budgeting system is vital in getting a handle on your finances and setting yourself up for a successful future.

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