Master Your Finances: The Top Budgeting Methods for Effective Money Management

April 10, 2023
Master Your Finances: The Top Budgeting Methods for Effective Money Management

Budgeting has become increasingly important, along with personal finance and money management, to help one take better control of their expenses and savings. A budget refers to a spending plan for a defined period. It helps one determine how to spend money wisely, make smart purchase decisions, and balance their earning and spending.

There is no right or wrong for budgeting since everyone has their own approach when dealing with their income and savings. However, to fight the current recession and high inflation rate, everyone is keeping a tight budget and cutting down on unnecessary spending.

Saving as much as possible is an ongoing trend, and there is no indication that it will stop soon. While everyone lives by the motto “a penny saved is a penny earned,” finance and money experts suggested useful budgeting methods or so-called “rules” to help people manage their money and personal finance better, and make payments with peace of mind.

So here are the top rules for budgeting.

The 50/30/20 rule.

It was suggested by Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan.” It’s a simple and basic framework for anyone who wants to begin budgeting. It is advised that your monthly income should be divided into three categories: needs, wants, and savings. So basically, this is how you will treat your money:

  • 50% needs: You should spend half of your income on necessary means such as rent, food, healthcare, utilities… These everyday expenses can not be compromised. That’s why a large portion of your money should be dedicated to this category
  • 30% wants: Everything that makes you feel happier about your life, but not necessarily essential. They are nice-to-haves, like entertainment, hangouts with friends, and meals and drinks at fancy restaurants… 30% of your money should be enough to cover these costs.
  • 20% Savings: Setting aside money is always a good thing to do in case of emergency, extra payments, or debts. Most of all, savings are crucial if you have financial goals and want to achieve them quickly with your personal budget.

Generally speaking, the 50/30/20 rule is a go-to for anyone who seeks a simple and flexible guide to budgeting, by reassessing the amount spent versus how much they earn. It also leaves a lot of flexibility in giving you a choice to spend more of the budget on what you want than what you have to put aside.

However, it’s not one size fits all. Some might find this is just a temporary solution to budgeting since people’s wants and needs can change over time, and maybe 20% of your budget over time might not be enough for one unexpected event.

The 60/20/20 rule

Sounds similar to 50/30/20 budgeting rule? The logic behind it is quite the same, with some tweaks to the categories. 60% of your money should be spent on living expenses – what you need, 20% on financial goals – savings for emergencies or investments, and 20% on discretionary spending – what you want.

For example, if someone earns $1000 as their after-tax income; when using the 60/20/20 budgeting rule, they will spend $600 on essentials, $200 will be set aside for savings, and $200 will go toward non-necessity.

This rule is outlined by Scott Pape from The Barefoot Investor. Another percentage-based budgeting rule allows people to track their spending flexibly and simply. However, it also has the same disadvantages as the 50/30/20 rule that anyone should consider before following this method.

Zero-based budgeting

This method is often used by companies. However, it’s still suitable for individuals and families looking for alternative ways to create an effective financial plan and achieve a better money management approach. People who follow this technique have to make a budgeting plan from scratch based on their expenses and needs for the next period (usually the next month). It involves starting from zero and trying to justify every payment decision for the time considered.

You can follow these 4 steps for a zero-based budgeting rule:

  • Identify and group all expenses into categories like utilities, rent, food, travel
  • Determine whether each expense is essential or discretionary. In other words, knowing which amount of money is for your needs and which to spend on your wants.
  • Calculate the money spent on each category: Based on the available amount of the budget you have, and the priority of each expense, you can determine how much you have to spend on each category
  • Make necessary adjustments and keep track of the budget based on changes in circumstances or incomes.

This method doesn’t involve strict numbers or percentages. However, it encourages transparency within every amount of money spent. As a result, businesses or individuals can assess and improve their budgeting and financial plans by knowing where they could cut back on spending to save more money.

While the 50/30/20 budgeting rule is a popular guideline, several alternative methods exist, including the 60/20/20 rule and zero-based budgeting. Each method has its strengths and weaknesses, and the best approach will depend on an individual’s unique approach to money management, financial situation and savings goals.

Regardless of the method chosen, the key to successful budgeting is to regularly monitor and adjust the budget to reflect changes in income, expenses, and financial goals. Ultimately, the key is to find a budgeting method that works best for your personal circumstances and make it a habit to consistently follow it for an effective money management strategy.

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