Budgeting is the foundational tool to manage your money and there are different types of budget to help you from spreadsheets, to mobile apps, the challenge is to find the best one for you in your current season.
A budget is a plan for your money. Simple right? That means a budget is forward looking simply because plans are forward looking, it also means that a budget makes you proactive and intentional.
This is why picking the right budget is crucial or else you could fail at budgeting. Check out other reasons people fail with budgeting
Before we go into the types of budgets, you need to understand that these are just guides, personal finance is very personal, we are all unique, in different seasons and with different goals so don’t limit yourself to the specifics look at the underlying principle of each type and tweak or combine till you find what works for you.
Depending on your personal preference and financial circumstances here are the most popular types of budget to help you create yours.
This type of budget is for those that tend to overspend with cards, this budgeting method is cash-only where you physically divide your money into different envelopes.
The goal is to control spending in areas that break budget like food, restaurant, movies, shoes, clothes etc
How to do it?
Another way to do this without carrying physical cash is to have multiple bank accounts for different categories and have debit cards for them or use banking app that enables you to divide money into different categiories like Monzo
Pros:
Using cash in shops will stop you from overspending on extras, so if overspending is a problem you can try this method
Cons:
Carrying cash around is less secure.
You also need to be disciplined and work out how much cash you need to avoid being shortage. You need to be an expert list-maker!
There are different forms of this method.
This method is ideal for the busy bees because it’s a no-fuss method.
The most popular types are
This method was developed by Harvard bankruptcy expert, Elizabeth Warren
How to do it?
Divide your net income into 3 broad categories, 50% for needs (living expenses) such as rent, food, bills, transport. 30% on wants such as going out, new shoes and 20% on savings, investment or reducing your debt.
This method was created by T. Harv. Ekeh writer of The Secrets of The Millionaire Mind.
How to do it?
Divide your money into 6 categories 55% Necessity, 10% Long term savings, 10% play, fun, entertainment, 10% education, 10% financial freedom, 5% giving
I love the intentionality with education and giving, you are your greatest asset so anything that makes you better is a plus for me.
By constantly educating you build new skills and increase your income either through side hustles or a higher paying job or a promotion.
There are other variations of the percentage method like 70/10/10/10 or 60% solution or better still you determine your percentage.
Pros:
A simple method which only needs a calculator (to work out the percentages).
Easy to stick to, this is perfect for those that are easily turned off by budgeting every line.
Con:
Not ideal for people whose income isn’t steady.
If not applied correctly it defeats the purpose entirely
This type of budget has one simple rule: your income minus expenses must equals ZERO at the end of the month.
If you earn £2,000 (after tax) each month, then ALL your spending, including the money you pay into savings and investments, should not be a penny more than £2,000 each month, giving you a zero balance.
You give every dollar (pound) a job
How to do it?
Determine your net income.
Then list every, single monthly expense in that coming month. This includes essentials and non-essentials that you are going to spend on in that particular month (this should be done at the start of EVERY month, as some months will be more expensive than others – car tax etc. so you will need to tweak it every time you get paid.)
Subtract your income from your expenses (including paying off debts and credit cards). The amount should be ZERO.
This takes some practice, some months your expenses might be more than your income, you just have to cut something to ensure it equals zero
For you to be successful with this budget you need to create sinking funds for those annual and quarterly expenses, you contribute accordingly on a monthly basis
Pros:
This method teaches you to stop spending more than you earn.
It is the ultimate budget for those who want to control and plan every penny.
It also gives you a lot of insight to your spending patterns, i believe everyone should try this style for some time no matter how short.
Cons:
This method can be time consuming to plan and track and also needs to be done every month!
It doesn’t allow for unforeseen spending, that is the expenses you are not prepared for that month (like a car breakdown). This is where your emergency fund will come in handy.
Am not kidding, there are people that this works for them, these are people whose income exceeds their expenses even before they think of budgeting. It is also called the automatic method.
WIth this method payments are made automatically on a monthly basis from your account so you don’t see the money which means less temptation to spend.
How to do it?
Determine your expenses for each category
Set up direct debit and standing orders from your account to cater for those categories monthly
Pros
Completely hands-off, no tracking and lots of time savings.
This is good for those that already have a lot more coming in as income than expenses
Con
The initial setup must be right or else the whole result will be wrong, there is also a big tendency to overspend
This is the pay yourself first budget. You save first then blow everything else.
Savings is a priority, you figure out what you are saving for or just save as a lifestyle(my preferred choice).
A great tip is to start by saving a certain percentage then increase that percentage by 1% every month till you can’t anymore
How to do it?
Determine your goal, cost and target date
Agree on savings percentage to meet the goal
Set up direct debit for savings
Spend what’s left
Pro
It’s easy to combine with other budgets
With this type of budget you look at your expense and spend your money on what matters to you, simple. So if you value travelling you spend accordingly. This method is best for people that are frugal and disciplined with their money already.
Pro
It is very adaptable
These budget types are just guides, the most important thing is to create your own budget using one or a mixture of different types or maybe something unique and stick to it.
Creating and sticking to the best budget for you ensures you are proactive and intentional with your money
Be intentional, be proactive and simplify the process
