5 Types of Budgeting Methods
Updated: Oct 28, 2021
I have a shoe size of 10 (yep, big feet here LOL!) and I wouldn’t want to buy anything near a size 8. Same goes for budgeting methods. There is no one-size-fits-all method for everyone.
If you’re having problems with how to budget or trying to figure out if there is another method more suitable to your needs, then this post is for you.
Here are 5 types of the most popular budgeting methods used.
I can’t tell you which one to choose. Be honest with yourself, and choose the one you think is most likely to work for you. This is how you save money on a tight budget.
1.The 50/30/20 Rule
Split your income into three spending categories namely:
50% goes to essential bills and monthly expenses
-allocate 50% of your monthly income to your necessities, like your rent, utility bills, transportation, grocery, and more. This percentage might sound too big, but once you list down all your monthly expenses, everything will certainly make sense.
Remember to smartly differentiate your NEEDS from your WANTS so you can properly allocate your money.
30% to Flexible personal spending
-The 30% of your monthly income should go to your wants. Go ahead, indulge and treat yourself! Spend it in whatever way you want – go to the movies, buy a new pair of sneakers or save it up for a vacation.
This percentage goes to everything you buy that you don’t need and you need not feel guilty about it. You worked hard for your money so basically, you deserve to enjoy it. In addition to this, if you tend to not spend hastily in this category then anything that remains in your flexible spending can go to your savings.
20% towards financial goals
-20% of your income should go toward your financial goals. This includes your savings, investments, and debt-reduction payments.
A simple method, easy to stick to and the ‘20%’ part will help you accumulate more money and build wealth faster.
Not suitable for people who have an unsteady monthly income.
Good for: People who hate budgeting and who worry they won’t have a life if they’re on a budget. This simple method is easy to incorporate in one’s life and will definitely help you get back on your budgeting game.
Here’s a diagram for you to understand it better.
2. Cash Envelope Budgeting
I have mentioned this several times in my other posts that this is the budgeting method I abide by.
The most important part of budgeting is SEPARATING your income into different funds for SPECIFIC purposes. In this way, when a NEED arises, you get money from one specific fund without affecting the purposes of your other funds.
Do take note that each fund has its own specific envelope.
Your income should be divided into 7 funds with the corresponding % of allocation:
Financial Freedom Fund
Long Term Savings for Spending Fund
*This is just a guide. Depending on your preferences, you may add more funds and change the % allotted per Fund
If there’s nothing left in one envelope toward the end of the month, there’s no more money to spend on that fund, period.
Using cash in shops will stop you from overspending on ‘extras’, as it’s less easy than just whipping that credit card.
Always carrying cash around is a bit risky. Also, you need to be disciplined and work out how much cash you need to avoid being caught short.
Good for: People,like me, who want to save for different categories of spending and saving; people who know they need help with self-control.
3. Zero-Based Budget
Your income minus your expenses (including savings) should equal to zero hence ,how the name is derived.
Income- (Savings + Debt + Exp)= P0.00
It’s like justifying every peso by giving each a job.
Basically, if you earn a net income of P20,000 per month, you want everything you SAVE, SPEND,GIVE AND INVEST to all add up to P20,000. This way, you know where every centavo is going. Simple, right?
That way you know exactly where every Peso is going. You could be setting yourself up for disaster if you don’t know where your money is going each month. It’s no fun to look up one day and find out you have no money—and no clue where it all went!
Here’s a step by step guide to creating a Zero-based Budget:
1. List down all your monthly income
Your income should include salary, small-business income, side hustles, passive income, and any other cash you bring in
2. List down all your monthly expenses
Things like rent, food, cable, phones, and everything in between should be added to the list
Your expenses may change every month that is why you need to make a new spending plan every month. Don’t get overwhelmed! Just focus on one month at a time.
3. Subtract your income from your expenses
Now,you want this number to be zero,
but it might take some practice to get there. Don’t be shocked or worried if they don’t balance each other out right away. That just means you need to do something to bring one of the numbers up, the others down, or both! It’ll take some work, but getting this written down is what will give you permission to spend without regret!
If you’re spending more than you make, trim up the budget so your income and outgo equal zero.
To cut back expenses, try reviewing your grocery list to cut out unnecessary things, cutting cable, making coffee instead of buying it, using a more budget-friendly transportation to work. If you need to bring in more money, try side-hustling or look for stuff around the house that you can sell to make quick cash.
Teaches you to stop spending more than you earn.
Needs to be done every month so it takes dedication! It also doesn’t allow for unforeseen spending so make sure your emergency fund is available.
Good for: People who need a simple, straightforward method that accounts for every peso.
4. The Half Payment Method
Work out the payments that happen ONCE a month.
When you get your weekly salary– take out HALF of the money you need for each payment and pay it into another account.
Example: You have a monthly rent of P8,000.
Week 1: You get paid P10,000. Put P4,000 in another account (HALF of the rent expense)
Week 2: You get paid P10,000. Put P4,000 in another account (the other HALFof the rent expense)
By the time your landlord comes around at the end of the month – you’ll have set the money aside to pay for it.
Gives you peace of mind that you have the money to pay bills without eating up all your weekly cash.
Works better for those on a low weekly income who share bills/rent with another person.
Good for: suitable for those who are paid weekly but still end up with no money to pay the once-a-month items.
5. The Goals-Driven Budget
Choose one goal. It could be an out-of-the-country trip you want to go on, or a new car. Work out how much it will cost. This goal needs to be influencing everything you spend on.
Then list your outgoings and incomings, always with the goal in mind.
Work out what you can contribute to your goal every month. This could mean ditching other non-essential items (gym, coffees, eating out) that you regularly spend on and redirecting them to your goal.
Open up a separate savings account and set up a goal for the amount you can contribute each month. Let’s call this the GOAL Account.
Having a goal can make you more determined to budget and save.
Not good for those who are on a very tight budget or are currently paying a huge debt.
Good for: People who need a Goal and rewards to keep the motivation
I hope you found this post helpful. Now you have 5 types of Budgeting Methods to choose from.