Budgeting and Types of Personal Budget

Budget can mean different things for different people, but in each case, it is used as an effective tool for achieving a wide range of short and long-term financial objectives. Contrary to popular belief, budgeting is not a cut-and-dry, one-size-fits-all process. Rather, it needs to be planned carefully in accordance with the specific financial situation and needs of an individual. There are different budgeting styles that people can choose from to fulfil their financial objective in a timely and satisfactory manner. The most common of these budgeting styles are discussed in brief as follows.

The Traditional Budget

This is the most common budgeting style and is quite popular amongst individuals who are detail-oriented. This budgeting style involves listing the total net income and gross expenses for a specific time period. The difference between the two is set aside as savings, before breaking down the expenses into various categories and setting maximum expenditure goals for each category. This budgeting style is suitable for people who have ample time to plan their finances extensively and do not like to make any shortcuts in this matter.

The 50/30/20 Budget

Also known as the balanced money formula, this budgeting style offers a relatively simpler way of managing finances. The style comprises of breaking down the total expenses into three main categories, classified as needs, wants, and savings. It is based on the simple formula of setting aside 50% of the income for fixed expenses and fulfilling everyday needs. Out of the remaining 50%, 30% should be kept for expenses that might be related to personal and emotional comfort of an individual or even the repayment of any instant money loan they might have availed. . The remaining 20% of the income should be invested in various saving schemes according to the preference of an individual.

The 80/20 Budget

This method is also referred to as the ‘Pay Yourself First method’ and is perhaps the simplest budgeting style that can be used by people for efficient management of their finances. This method involves simply setting aside 20% of the total income in lieu of savings at the very start to the budgeting period. This leaves the individuals free to use the remaining 80% of their income as they deem fit. The best aspect of this style of budgeting is that it can be modified according to the existing income and expense needs of the individuals. This means that people can change the ratio of expenditure and savings to 70/30, 60/40 or even 50/50. However, care should be taken to ensure that the percentage of savings does not drop beyond 20% as this is the minimum amount that should be saved.

The Envelope Method

This is a somewhat an old fashioned budgeting style, which has still not lost its effectiveness. This style requires the individuals to save a specific amount of cash in different envelops labelled according to the various expenses for the budgeting period. This method ensures that the individuals do not spend more than the allocated fund for each category and minimizes the chances of overspending. One way to enhance the effectiveness of the method is to use sub-saving accounts rather than envelops. This will ensure that the individuals do not use the money from other envelops to cover up the extra expenses for a single category. In case of an emergency, the sub saving accounts can be used toavailinstant payday loans for covering additional expenses within a specific category.

The above given information about the common budgeting styles makes it easier for an individual to choose a style that matches their preferences and financial goals. It will also help in making budgeting a hassle free process rather than the cumbersome activity as most people believe it to be.