Four Important Budgeting Techniques You Need to Know

Budgeting is an essential financial habit that gives you control over your money and helps you gain emotional security over your finances. There are different budgeting techniques depending on an individual’s preference.

These budgeting techniques include;

50/30/20 Budget Rule

This budget rule is common and the one that many individuals prefer or use. It has been tried and tested to be very effective. The rule dictates that 50% of your income should be set aside and used for personal needs. These needs must be met, and they may include; food, clothing, rent, and health care. 30% of your income is set aside for personal wants and desires, such as a trip or a getaway. The remaining 20% should be set aside for savings.

 Its advantages include;

1. It is effortless to account for your money at each month’s end.
2. It is simple and encourages you to save towards a specific goal.
3. Every time you get to evaluate your fixed costs and decide what to reduce so that each of your needs is accommodated in the 50%

Its disadvantages are; 

1. Spending 30% of your income on wants can be too much because you can do away with some of your wants.
2. If you have a more significant savings goal, allocating 20% of your income to savings can be limiting.
3. It may also not be very effective because it does not include a percentage that caters to debts making it difficult to pay off debts in time.
4. It may also be ineffective for individuals who are not intentional with their list of needs and in situations where you cannot differentiate between a need and a want. Paying for a WiFi subscription can be a want and, at the same time, a need.

Zero-Based Budgeting 

This budgeting technique dictates that your income and all the expenses incurred must balance and equal to zero. Before getting the next salary, you have to come up with a list of your expenses and their corresponding costs. 

After accounting for your income and expenses for that period, you can then go ahead and have a new budget for the next period with adjustments if you wish. Its advantages include;

1. You become aware of all your expenses and can easily track your spending. This also stops you from easily misusing money because you have to give an account of every single expense.
2. It gives you the advantage of operating on a flexible budget.

The disadvantages of the zero-based budgeting technique are;

1. A lot of time and resources must be put in for an effective budgeting system because a new budget is created after every income.
2. It also makes you prone to worrying about small expenses, especially if you can’t account for petty cash.

Pay Yourself First Method

This budgeting technique dictates that you pay yourself first with savings, and then the rest of your income can be used according to your desires. In this type of technique, savings is given priority over expenses. When using this technique, first figure out what your savings goals are, then you can figure out how much you want to pay yourself.

The advantage of this method is;

1. It is a good way of meeting your financial goals as the technique encourages you to save more.

Other than being a technique that helps you save a lot, it also has some disadvantages that may include;

1. It requires high levels of discipline, and one has to practice financial restraint to be effective.
2. It is also a technique that doesn’t prioritize debt repayment. You may be saving a lot and, at the same time living in debt. 

Cash Envelop Method 

This technique is the simplest and very easy for beginners. All you need is your cash and envelopes. Having your earnings in cash is the first step. Then, name your envelopes with the expenses you want each to have, like; rent, food, travel, savings, and many others. You then put in the money you want to spend on each expense and be disciplined. Avoid using money in envelopes that you don’t need to.

This method is good and has advantages like 

1. It’s easy to track your spending and know what expenses to cut down.
2. It enhances financial responsibility, especially when you get yourself to account for how money in a specific envelope was spent.
3. It is a simple technique and does not require any expertise.

Its disadvantages may include;

1. You can get a setback financially when you lose an envelope
2. It becomes less effective when one is working with large sums of money.

With all these budgeting techniques, it is advisable to choose what works best for you, and above anything else is discipline, which will save you from financial stress.