Budgeting Systems Explained: How to Choose the Right One for You

budgeting system

Budgeting systems are here to help us understand our financial goals.

At the moment there are many budgeting systems, one for each personality. All you have to do is to find the one that suits you. If you have a hard time doing that then the list below is for you.

I will explain in detail each budgeting system in order to help you choose the right one for you.

The 50/30/20 Budgeting System

This system works great for the people who have busy lives and need a simple budget that will allow them to save money each month without even noticing.

Divide your after-tax income into three categories: Needs 50%, Wants 30%, Savings 20 %.

50% Needs

Anything that has a high impact on your quality of life is a need. These include:

  • Rent/Morgage
  • Council tax
  • Utilities
  • Travel costs
  • Car payments
  • Groceries
  • Personal Care
  • Minimum debt payment on credit accounts
  • Insurance

However, people may have different understandings of a ‘need’. For example, some people cannot live without cable TV while others live very comfortably without it.

30% Wants

Your ‘wants’ are the things that you enjoy doing but are not too extravagant. They are not essential but will make our lives better. Some examples are:

  • Movies or video games
  • Electronic upgrades
  • Holidays and weekend trips
  • Dining out
  • Make-up and perfumes

20 % Needs

At least 20 percent of your income should go towards your emergency fund, debt repayment or retirement.

budgeting system

Envelope System

This is the best budgeting system to help you stop overspending and keep track of your cash.

It is quite a rigid system, but it totally works. You only need to divide your cash income between each envelope for all your expenses (groceries, utilities, insurance and so on).

Then every time that a payment is due, you will take the money out from each envelope. Or when you need to buy food you will have to take the ‘groceries’ envelope with you.

Once an envelope is empty, it cannot be refilled until the next month. Do not take the money out from a different envelope to cover overspending from another. Try to estimate better next month.

Zero-Based Budgeting System

This method takes a bit more time but is very efficient for the people who want full control over their money and cut their spending as much as possible.

You will have to record every single expense and plan all your money even the last penny.

At the end of the month your income minus your expenses should be zero.

If your income does not equal your expenses at the end of the month then something is wrong. It is important to give your money a role, you will have to record the payments for everyday essential, pay off debt or build an emergency fund.

Reverse Budgeting

This method is very simple and it is great for the people who want to save more money.

You focus on your savings first, for example, if you want to save a percent of your income every month, you transfer that amount into a saving account first and then build your spending plan.

You do not have to track every single expense, just pay all the major ones first and then whatever is left from your income you can use them to build an entertainment fund or any other expense.

Conclusion

To sum up, the best budgeting system is the one that works for you.

It is all about your lifestyle, your personality, and your financial goals. Take all of them into account when you decide what budgeting system to use.

If you are still not sure which one works best for you, you can switch between methods until you find the one that is right for you. I recommend trying one for at least a few months before moving to a different system.

What budgeting system do you use?

Let me know in the comments below.

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