Now that you have a picture of where you stand and some ideas about where you want to go, it’s helpful to choose a budgeting method that works for you. There are two popular budgeting methods that you need to learn about before you choose the one you want; the Zero-based Budget Plan AND the 50/20/30 Budget Plan.
The Zero-Based Budget Plan
Some people like using so-called zero-based budgeting, which means that each month, you set up your spending to zero out each of the budgeted actions you take. People who use zero budgeting like to put every dollar to work every month and don’t carry over any money each month.
To Implement a zero-based budget plan, follow these five steps:
- Write Down Your Monthly Income – Only include income you can count on in this figure, such as your paycheck, gig income, residual income, and so forth. If you’re bringing it in, you want to count it.
- Write Down Your Monthly Expenses – Include everything, including investments, phone, mortgage, food, shelter, etc. It’s best to list all the needs first, and then list the items you want in order of importance going down the list.
- Write Down Seasonal Expenses – One issue with zero-based budgeting is that sometimes one might forget seasonal expenses and forget to take a monthly amount out to pay that expense. For example, if you pay your property taxes every October, you’ll want to set up your budget to have the full amount to remit when it’s due in October, which will require that you move money to short-term savings for it.
- Subtract Your Expenses from Your Income – When you are done and subtract your expenses from your income, it should equal zero. If your expenses are more than your income, you’ll have to start cutting some of the expenses or make more money.
- Track Your Spending Every Month – Don’t leave everything up to chance. Track your spending every single month and even every single day if necessary, to make sure you don’t overspend or add debt.
The drawbacks of this plan are that it requires a lot of monitoring and thought each and every month because you need to start over every month with a new plan based on the amount of income you have, putting every single dollar you bring in to work for you. The zero-based budget plan can be overwhelming for some people, but it works better if you have a lower income.
The 50/20/30 Budget Plan
Other people like using the 50/20/30 budgeting plan, which states that half your money is for all needs, 20 percent is for saving and investing, and 30 percent of your income is used for all your wants. Wants are defined as anything outside of a basic need. For example, if you cannot cover an expensive car under the needs portion of your income, you might take some from the wants to make up the difference.
To implement a 50/20/30 budget plan, follow these three steps:
- Add Up Your Living Expenses – Include only the essential items you need each month to live – for example, shelter, food, utilities, and healthcare. You should not use more than half or 50% of your income to pay for these needed items.
- Add Up Your Savings and Investments – 20 percent of your budget should go to your financial goals like your emergency fund, retirement accounts, college savings, and also paying down consumer credit.
- Set Up Your Discretionary Spending – Finally, the remaining 30 percent of your budget is for your wants. For example, if you want a nice extra-fancy car over the basic one that your budget above allows, some of your discretionary money can go to that. Plus, of course, anything else is a non-necessity, such as travel, entertainment, and expensive beauty treatments or lifestyle upgrades.
When you set up a 50/20/30 budget plan, one thing that becomes clear is that you don’t have to think about the budget all the time. You know that you have a set dollar amount every month for your wants or discretionary spending and the rest is automated, so you don’t have to review it constantly.
The plan you choose will be one that works for you in a way that you understand. You need to know what’s going out, where it’s going, why it’s going there, and that you have the income to fund it – whatever it is. And, most notably, you need to know that an expense is not causing you to throw away your future.
Monitoring Your Budget Plan
Once you set up your budget, it’s essential to monitor it and track every action you take every single month. To ensure your success, you’ll want to take the following steps every single month and year.
- Check All Statements for All Accounts – It might seem tedious but mistakes happen, as does theft. Keeping track of your accounts by looking at them online or studying the statements each month is critical. Check your interest rates, what’s coming in and going out, and make sure it matches your records.
- Keep Track of Your Expenses – Even if you’re on the 50/20/30 plan, you must track those expenses that aren’t customarily tracked, such as your coffee shop purchase, your last-minute candy bar at the gas station, and so forth. Also, make it a habit to check up on auto subscriptions each month to ensure you’re really using them.
- Use Technology to Keep It Straight – Today, there are all types of technologies that you can use to keep your finances in order, often right from your bank account. Budgeting tools, notifications, and even monitoring can be outsourced with technology to a point.
- Note Areas of Improvement or Change – As you monitor, notice if your debts are going down or not and whether your investments and savings are performing as you wish.
- Check Your Progress Yearly – Always check your yearly progress for all your savings and investments to ensure that you’re earning what you thought you would. By studying your progress and checking your goals, you may figure out new ideas you didn’t think of before.
- Pull Your Credit Reports Yearly – Each year, you have a right to get a free credit report directly from the three major reporting agencies. Seeing what is on that report can help you keep your finances straight and avoid identity theft.
- Reassess Your Goals Yearly – Each year, you’ll want to check up on all your accounts, take a look at your written goals, and ensure that you are progressing toward those goals as you thought.
- Be Ready for Change – As you monitor your success with sticking to your plans, be ready to switch it up. For example, with a lost job, you have to move down to your emergency budget, which will slow down your investments. But since you planned and have the cash savings, it should not cause you to build debt.
Even if everything doesn’t go as planned, the fact is that with a plan, things will go more smoothly than without it. Sometimes the unexpected happens, but the longer you stick to your plan, the more likely you are to overcome a crisis should it occur.