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Budgeting is the 1st step to financial freedom, but which budgeting method should you use?
But, you can utilize different budgeting methods to help you get back on track.
This article will review four budgeting methods that can help you increase your financial health.
Each of the four budgeting methods is based on take-home (net pay).
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Budget Method 1: Budgeting with the envelope or cash system
This is an old-school method. Set out envelopes for each category of your budget, determine how much you’ll need for each spending category, and put cash in envelopes to cover the expense for each category. Once you run out of money in the envelope, game over.
These are some of the top categories:
Housing
Transportation
Personal insurance and pensions
Healthcare
Groceries
Entertainment
Restaurants and meals away from home
Cash contributions
Apparel and services
Education
Miscellaneous
Personal care
Alcoholic beverages
Tobacco/smoking products (e.g., cannabis and vaping)
Reading
Pets (Bonus)
Technology: phone, wifi, tablet (Bonus)
Taxes (Bonus)
Budget Method 2: Budgeting using percentage breakouts
This method calls for allocating a specific percentage of your income to each category in your budget. Decide what categories are in your budget for the month and start allocating.
For example, you may allocate 30% to housing costs, 25% to debt, 20% to miscellaneous (e.g., healthcare, insurance, education, extracurricular activities, or pets), 10% to transportation, 10% to food, and 5% to entertainment.
Budget Method 3: The reverse budgeting approach
Reverse budgeting means determining how much debt you owe + expenses, and whatever is left is free to use as you please.
This method is suitable for those with specific payoff goals that always want to ensure the debt and expenses take precedence before any non-essential spending. It’s also a sound system for accountability if you need assistance in that area.
Budget Method #4: Zero-based budgeting
You might be familiar with this method if you’ve read any Dave Ramsey books.
Leave no penny unaccounted; everything must be appropriately allocated in the zero-based budget.
It’s a solid strategy to ensure you’re productive with every penny you bring home from your endeavors.
Instead of leaving money up for grabs as you would in budget method 3, you can allocate this leftover money to investments or your emergency fund.
Budget Categories
You may only need 5–10 budget categories listed above. The fewer categories you have, the better.
This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.