Budgeting is an essential component of financial wellness. During times of economic turbulence, it becomes infinitely more important. Making sure you are effectively allocating your hard-earned money requires some form of budgeting. Here are a few popular budgeting styles that can help improve your financial habits and build a better future.
50/30/20 Budget
Perhaps the most common type of budget is the 50/30/20 system. The idea is to put your after-tax income into three different buckets: 50% towards needs, 30% towards wants, and 20% to savings. Needs include your essential payments such as rent/mortgage, transportation, groceries, etc. Your wants are all things you could live without, such as dining out, entertainment, and vacations. The portion dedicated to your savings includes contributions to your emergency fund, 401k or any other retirement savings plans, along with repaying any debt you may owe.
Depending on your situation month to month, you can shift your allotment to each category, but you want to stay as close to the percentages as possible. For instance, if you have a loan you are trying to pay off quickly, you can shift some of your money from your wants to your savings bucket. If your wants for a certain month exceed 30% of your income, you can explore ways you could potentially lower your needs expenses to accommodate. This is a method that emphasizes saving, which is a critical aspect of your financial health. If you're looking to be better about saving, this could be the method for you.
Envelope Budget
If you're a hands-on learner and are guilty of frivolous spending, envelope budgeting is an excellent option. With this system you are putting a spending limit on various expense categories. These categories can include groceries, entertainment, dining out, and more. Each paycheck, you put a set amount of money into each of these categories — once the money set aside for that category is depleted, you can't spend within that category again until your next paycheck. In years gone by, you would put cash into envelopes for this method. However, as most spending is done digitally now, you can track your spending using an online spreadsheet or a budgeting app such as Mint or Goodbudget. Any money left over in a category after a pay period should go towards savings.
PFCU members can use our money management tools that are linked into Teller Net. These tools allow you to track your spending and budget with your PFCU account. You can also link other accounts to help keep track of everything in one place.
Zero-Based Budget
The zero-based budget has some similarities to envelope budgeting and also suits over-spenders. This method requires you to tally up your monthly income and use each dollar in a deliberate way. The idea is that after you figure out what you're doing with all of your income, there should be zero dollars that are not accounted for. You start by setting aside money to cover all of your essential bills. With what money is left after that, you should budget for savings, being specific about where it is going, such as your 401k, emergency fund, or debt repayment. Finally, what's left after assigning money to savings is your discretionary spending money. With this category you also need to be specific, assigning money towards things like dining out, movie tickets, or clothes.
You can use the 50/30/20 framework to give yourself a baseline when starting this budget, but as you go along you'll get a better sense of how much you should be allocating for different areas.
Reverse Budget
If you're looking for a system that prioritizes savings, reverse budgeting is a way to go. With this strategy, you build your spending plan around your saving goals. You start by laying out what your savings goals are for the month. They could be things like putting aside $100 towards a future down payment on a house, adding $50 to your emergency fund, and paying off $150 worth of credit card debt. If those are your three goals for the month, after you allocate the $350 for those goals, your remaining income is to be used to cover your other expenses. Your savings goals can remain consistent each month or you can change them as you see fit. Just make sure you are budgeting to have enough left over to cover necessary expenses. The point is that you prioritize saving without neglecting you and your family's needs.
There is not one set style of budgeting for everyone. It's important to take stock of your finances and establish what your financial goals are. From there you'll be able to pick out the best budgeting method to put yourself on track for long-term financial success.
Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM