It may be the oldest personal finance tip in the book, but using and sticking to a budget works. It helps you keep track of your money and understand where it’s going.
Armed with this knowledge, you can make smarter financial decisions short and long-term. Whether you’re paying down debt or saving for a house, a budget can help you achieve your goals.
There are three popular budget types. You’ve probably tried or used one of these budgets before.
A zero-based budget makes sure that every dollar has a job. Every dollar you make from your paycheck gets assigned to tackling different expenses.
That means if you bring home $2,000 per month, you’ll know exactly where it will be used in your budget. That includes money going into savings, paying down debt, or regular bills.
The goal is for your income minus expenses to equal zero when your budget is complete.
Your budget includes both fixed and flexible expenses. Fixed expenses are things like your mortgage, car payments, or any bills that are the same every month.
Flexible categories are for costs that are harder to predict. Groceries fluctuate as does your power bill.
Zero-based budgets fluctuate throughout the month as you spend money. If you overspend in one category, you have to reallocate money from another. Your budget will always “zero out” at the end of the month.
This type of budgeting is best for people who are detail oriented. One of the most popular zero-based budgeting app is You Need a Budget.
The 50/30/20 Budget
This rule of thumb is most popular for those who don’t want to track everything they’re spending.
It’s often touted by financial planners and experts as a rough way to estimate spending and savings.
In this budget, 50% of your budget goes to things you absolutely need. Housing, car payments, and anything essential to your daily life.
30% goes to wants, or things that are less necessary. And the last 20% goes to paying down debt and saving.
It’s difficult to determine what is a need and what’s a want. For instance, your mortgage payments and utility bill are needs. You can also add health care and transportation costs to this category.
Your wants are more vague. They include cable TV subscriptions, internet, dining out, and anything else not essential for staying alive. This category can fill up quickly. But differentiating what you really need from things that make your life comfortable will help you plan better.
Finally, 20% should go to paying down your debt and saving for the future. If you have minimum monthly payments on a credit card, those are needs. You can’t avoid paying them.
But if you have debt hanging over your head with an outstanding balance, pay it down!
Start by building an emergency fund. Then pay down your highest interest rate debt first.
Finally, there’s goal budgeting. This is a short-term budget to help you achieve a certain financial goal.
If your car recently broke down and you need to get a down payment for a new one, you can start a goal budget. Or maybe you’re saving for your big wedding day.
Every extra dollar you have is redirected to this goal.
You may even make sacrifices in other budget categories to achieve this goal. It’s good for short-term planning but not for long term budgeting.
This is because your spending and saving habits will likely be skewed to accommodate your new goal.
You can use goal-based budgeting alongside another budgeting type.
Every household has a budget that works best for them and no two budgets look the same. It’s important to try out different budget types to see which one fits your lifestyle.
It’s OK if your budget isn’t perfect. The important thing is to start and try to stick to it.
As you track your expenses, you’ll notice trends and ways you can save or allocate your money differently.
A budget is there to help you, not hurt!