If the pandemic has taught us anything over the past two-plus years, it’s that things can absolutely change in the blink of an eye. You can go from having a stable job to being stuck at home for months in a matter of weeks.
Therefore, it is always a good idea to plan your spending before your income arrives. This makes it easy for you to avoid impulse spending and also keep some of your income for rainy days. Fewer than 4 in 10 Americans can pay an unexpected $1,000 bill from their savings account, according to a survey from Bankrate.
When it comes to budgeting, there are several approaches you can take. Let’s look at some of them.
Different Types of Budgets
When it comes to personal finance, there are seven different types of budgets. They include:
- The savings first budget: This budget plan prioritizes saving over anything else.
- The zero-based budget: A zero-based budget indicates you will budget all of your earnings, allocating every penny to different needs.
- The no-budget budget: With the no-budget budget, you pay your bills, save some money, and spend the remainder of your money any way you see fit. This budget assumes you make enough to meet your necessities as well as some of your desires.
- Reverse budgeting: A reverse budget requires you to prioritize yourself in your budgeting plan rather than prioritizing your saving targets.
- The no spending budget: With this budget, you pay your bills as soon as you get paid and save the remainder. This budget type does not allow for any further spending beyond basic expenses.
- The 50/30/20 budget: The idea is that you should spend 50% of your monthly income on expenses, and 30% is put into savings, retirement, or investment accounts. Then the remaining 20% you can spend as you deem fit.
- The cash envelope budget: The cash envelope approach entails taking out cash for your expenses at the start of each pay cycle. Cash envelopes are typically used for items like food, gas, entertainment money, and anything else purchased with cash. Each envelope can be labeled so you know what it’s for.
Creating Your Personal Budget
So, now that you know the types of budgeting plans available, here are a few tips to help you craft your personal budgeting plan.
1. Define Your Income
This might sound obvious, but it’s not enough to have a general idea of what you are expecting in terms of income. You have to narrow it down. A piece of income that you didn’t factor into your budget can seem like a windfall, but it can also trigger impulse spending. You need to know exactly how much you are on track to earn for the period for which you are budgeting.
2. Create Budget Categories
Almost as important as defining your income is creating budget categories. You should define the categories of expenses that you need to budget for. Anything that doesn’t fall into your budget categories you probably shouldn’t be spending on.
If you do a lot of online shopping, use a budgeting app like Monorail to help you stay within your limits. The wishlist app not only encourages safe spending and saving habits but also helps you create a dedicated shopping budget and gives cashback rewards for meeting your budget items.
3. Create a Timeline for Meeting Your Budget
Here’s where most people fumble the ball when it comes to budgeting. Creating a timeline and adding time constraints to your budget helps you prioritize. If there’s a deadline to fulfill a particular item on your budget, it becomes easier to prioritize that item when your income comes in.
Budgeting Made Easy
It’s okay to switch your budget plans where necessary and as your financial situation demands. Your budget is not meant to be set in stone. However, it should be a guideline for making good financial decisions on how to spend your income. So choose the right budget plan, stay true to it, and use the right tools to help you stay on track. You’ll hit those money goals faster.