Last Modified on November 18, 2019

According to a survey conducted by the World Bank in 2017, America is the world’s largest consumer market in the world. This data gives us a clear insight into the country’s consumer spending behavior. The modern world presents each of us with various products and services to spend our money on. Whether it is grabbing a bagel on our way to work, or adding the latest trends to our wardrobe, managing expenses can be a real challenge. These small and often impulsive purchases also have the potential to interfere with bigger financial plans. But implementing simple budgeting guides can help you stay on track with your overall short-term and long-term financial goals. 

General Rules of Budgeting

Budget rules are not complex to follow. In fact, most people are taught to save from a very young age. In essence, it is all about categorizing your money into savings and expenses. Here’s how:

1. Find out your net income for the month

The easiest way to reduce your tasks at hand is by opting for automatic withdrawals from your salary. These withdrawals are directly contributed to other savings and investments that you may have, for example, a 401(k) retirement account, an emergency account, or a 529 education plan. The money that you are left with after paying taxes and contributing to your savings and investments, is your net income for the month.

2. Deduct recurring expenses

These expenses can include insurance premiums, rent, gas, groceries, interest on loans, mortgage, etc. These expenses are, in a way, unchanging for every month and will cost you the same, unless you make changes at the source. This could include moving to a more expensive neighborhood, taking up a new loan, or upgrading your insurance plan. Since there is no way to avoid recurring expenses, try to pay them off from your net income as soon as your salary is credited to your bank account, so you do not run short of money later.

Types of Budgeting Methods

Every person has a different set of financial goals in mind. It could be a long-term goal to buy a house in the next 10 years, or a simple short-term goal to buy the new iPhone. Based on your future goals, spending habits, and income, here are the different methods of budgeting that you can adopt.

1. The Zero Plan

You are in a zero-budget plan, if you are left with no funds after contributing to your savings and having paid all your expenses. This plan works for people who like to be precise in their calculations and never leave a room for doubt. They only spend on necessary items and put the rest into their future savings. This approach can be beneficial for someone hoping to build a big fortune in the future. But it is a frugal way of living with absolutely no scope of impulsive shopping.

2. The Envelope Plan

This plan relies on the use of cash for all your expenses. People following this plan withdraw money from the bank at the beginning of each month and put them to their respective envelopes. For example, $1500 for rent, $1000 for groceries, $150 for cell phone and TV expenses, and likewise. You are allowed to spend only the amount specified for each of these categories and cannot cross the overall limit. So if you decide to buy some extra groceries and go beyond $1000, you will have to cut back on your cell phone and TV expenses. The idea is to cut back on one category of expenditure to accommodate another, so you don’t dip into your savings.

3. The 50:30:30 Plan

As the name suggests, this plan divides recurring expenses, non-recurring expenses, and savings, into the 50:30:20 rule. 50% of your income goes into monthly expenditure like rent, insurance premiums, loan payments, groceries, transport, etc. 30% of your income goes into occasional expenses, for example, buying a new pair of boots or a short trip over the weekend. The remaining 20% goes into your savings and investments. The plan is quite flexible and can be adjusted according to individual needs, but requires consistency.

4. The Flexible Plan

This is particularly great for freelancers or businesspersons, who may not have a fixed income each month. The flexible plan lets you analyze your requirements for each month and devise an approach appropriate for the time. Although flexible, this plan requires a lot of dedication and discipline. The plan should also not be mistaken for not having a plan at all. The goal is to be dynamic and change your budget allocation depending on your income for each month. 

Budgeting Tips to stay on Track

Even with a proper plan in place, it can sometimes be hard to stay on track. Falling out of flow or losing sight of your goals, can happen to the best of us. Try these simple tips to stay focused: 

• Use an app: These days there are several mobile applications that help you devise and follow budget plans. You can keep track of all your expenses, set up reminders for bill payments, and warnings to know if you have surpassed or are close to reaching your monthly limit.
  

• Open a joint account: This can be a good way for couple, to keep their financial actions in check. The conscious thought of knowing that your spouse can see your financial activities can be a good way to not falter. But this only works for couples who share the same vision and financial goals.
  
• Don’t use a credit card: Losing track of your budget is a common problem if you are a spendthrift. Credit cards further add to the problem with a false sense of financial security. Not having a credit card in the first place, will leave you with no other option but to stick to your budget.  

To sum it up

Budget requirements can be different for different people. They can also change with time and other factors in your life. But regardless of your age and income, having a budget is imperative to reach your future goals. Try to follow a budget that is attainable in the long run. Many people make strict budgets that end up affecting their peace of mind. A realistic understanding of your income concerning your future goals can help you draft the most suitable budget for you. 

If you are not sure about which path to follow, you can consult an experienced professional. Financial advisors can guide you in the right direction to budgeting and financial freedom.