Different Types of Budgeting Methods

May 23, 2023 By Susan Kelly

Budgets may take many forms, from the traditional approach of writing down every purchase to the more modern approach of using simplified applications. There is probably at least one resource available somewhere that may assist you in gaining insight into your financial situation and regaining control of your money. When properly implemented, a budget may not only assist you in effectively managing your expenditures but also in achieving your desired levels of savings.

Researching the many approaches to financial planning is a good place to start when looking for the best method for your needs. It is also feasible to combine many methods into a single strategy or to "mix and match" various concepts to locate the approach that best accommodates your preferences in terms of financial planning.

Each person's financial situation is unique, and the items on this list are not comprehensive. Having said that, though, the following is an in-depth examination of well-known budgeting methods that you may want to look into.

Line-Item Budget

When you think of a "typical" budgeting style, you probably immediately think of a line-item budget as the first thing that comes to mind. You are probably familiar with this kind, consisting of a spreadsheet that categorizes each spending. When creating a line-item budget, the objective is to keep track of monthly expenses to ensure that they do not go beyond the spending objectives that have been set.

When discussing accounting for a company, the phrase "line-item budgeting" is one that you'll hear rather often. This method is used by businesses to keep tabs on their cash inputs and outflows. It can be beneficial for you to use the same strategy for your own personal budget.

You may create a line-item budget using a spreadsheet, whether you choose to use pencil and paper or any of the available online programs, such as preparing a budget in Excel. You have the option of using either pencil and paper or any of the available online programs. You make a list of each spending and each type of expense for a certain amount of time, such as a month or a year. As the year progresses, you may check if you are on course to meet your financial goals by comparing your current costs to those of the past.

Remember to include a line item for savings in your list of expenses, even though the primary purpose of a budget broken down into line items is to monitor spending and not to determine which savings goals should be prioritized.

Proportional Budgets

The method known as proportional budgeting requires you to allocate a certain amount of each month's earnings to three distinct buckets. First, there is a fund for "needs," then there is a fund for "wants," and last, and probably most crucially, there is a fund for saves and other financial objectives.

When doing this computation, it is recommended that you use the numbers for your "take-home pay," often known as your earnings after taxes. The 50/30/20 budget is an example of a typical proportionate budget; however, you can choose the amounts that should be allocated to each category according to your preferences.

Paying Yourself First

This no-frills budget is predicated on a single idea: you should pay yourself first, and whatever else occurs with the rest of your money is not as significant. "Paying yourself first" refers to putting money aside for savings or other financial objectives.

Imagine that you have made the decision that you want to save 25% of the money that comes into your bank account. You decide to automatically contribute 15% of your salary to your retirement account, 5% to a fund for making down payments, and 5% to a fund for going on vacation. You have complete discretion over how you spend 75% of the money.

Envelope Budget

Another method of budgeting to consider is the following: The envelope budget is a hands-on method for allocating funds and keeping expenditures under control. If you use the envelope budgeting method, you have a predetermined amount of money to spend in each area of the budget each month. The distinct sums of money are stored in discrete envelopes, giving rise to the concept's namesake.

Zero-Sum Budgeting

The goal of this exercise is to make use of every single dollar that you possess. No, this does not imply that you should blow all your money on whatever frivolous things come into your head. Instead, you would put each dollar you make towards a certain goal, such as savings or spending money you may use towards anything you like.

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