Budgeting feels a lot like dieting, right? We have to plan ahead, get realistic about our goals, track incoming and outgoing units, stay within specific margins, and most importantly, recognise that there is no “one size fits all” approach to our financial decisions.
Depending on your needs, the characteristics of your budget may vary from your sister’s or brother’s or best friend’s budget. Our vastly different personalities and personal circumstances can make certain strategies a better fit for us, and we’re going to consider three of them today.
The Envelope System
Dave Ramsey made the envelope system famous about 25 years ago when he revolutionised the approach to financial peace (in the US). When it comes to budgeting, he keeps it very simple. But who benefits best from this budget strategy?
Do you have a preference for using cash with all of your variable expenses, like groceries and gas? Are you working on self-discipline with your spending habits? Perhaps you don’t want to track every single transaction but you still want to stay within the margins of your predetermined budget. If the above statements resonate with you, the Envelope System may be a great option!
There is flexibility within the envelope technique that allows you to borrow from other envelopes to get your necessities, but it keeps you on track by preventing overspending. If you have to pull from your grocery allotment to cover unexpected gas expenses, you can do so. There may be a learning curve as you decide how to allocate your spending, but over time, you can really appreciate the level of discipline that comes with this simple approach to personal finances.
A Purpose for Every Dollar
Similar to the envelope system, the goal of setting a purpose for every dollar is to create a discipline with determining where your money is going, but allowing for inter-category spending to manage the unexpected.
This method is typically planned using the prior month’s data with the purpose of not relying on future income, but rather paying more attention to past spending patterns.
Unlike the envelope system, this technique is a little more hands-on with tracking expenses. You’ll likely find that instead of capping your spending in each category manually, you will use this approach to analyse spending and become more intentional with all the aspects of your budget. You wouldn’t have an immediate cessation of funds just because you overspent in one category like you would when using envelopes to manage your outgoing cash flow. Instead, you’d be responsible for checking in with your spending, determining how to manage your various categories from a more analytical point of view, and in a timely manner.
The 50/30/20 Budget
If you are a pie graph kind of person, who thinks in big-picture percentages and prefers to chunk their spending into broader categories, this would be a perfectly effective strategy for you.
The features of this budget are simplistic, and perhaps they are best suited for the person who has great self-discipline with their spending and less need for the detail-oriented budget.
So what are these ratios specifying? This particular budget strategy suggests that 50% of take home pay be used for needs like rent or mortgage, utilities, insurance, gas, groceries, minimum payments on credit cards, and the like.
30% of your take home pay should be reserved for “wants.” These “wants” are the things we can do without. A nice purse you’ve been eyeing at your favorite store or the popular video game that you’ve been hearing about and wanting to try are “wants.”
Lastly, the 20% of your take home pay that remains is meant for debt repayment and savings. Ideally, if you have a lot of debt you would like to pay off, you could use more of that 20% toward those bills. However, if you choose to use this budget strategy but haven’t established an emergency fund, it is helpful to focus on doing that first before putting additional money toward paying down your debt.
Which strategy suits you best?
*This article is opinion only and should not be taken as financial advice. The information is general and has not taken into account your objectives, financial situation, or needs. Check with a financial professional before making any decisions.