What is a Budget?
Author, speaker, and pastor John Maxwell said, “A budget is telling your money where to go instead of wondering where it went.”
The budget is the spending plan by which your cash flow is determined. It is the deliberate plan on how money will be spent or allocated as it comes into the household.
So often, we get towards the end of the month and wonder where all our money went, or worse, we do our taxes and are amazed at the income on the return while we feel we have nothing to show for it.
The foundation of being financially grounded is having a working budget. This budget needs to be one that you and your partner (if applicable) both agree on. A budget should never restrict anyone; it should be used to create guidelines to follow as money is brought into the home. With a budget, you know where all incoming money will be allocated. By following a budget, you can get out of debt or keep yourself out of it.
Budgeting Methods
There are many methods by which to structure a budget. Let’s examine some of the most popular ones. Once you understand how each works, you can decide which would work best for you. I’ll also let you know which we use in our family.
50-30-20 Method
The 50-30-20 Method is based on your after-tax income plus any pre-tax deductions. So, if your 401k or health insurance is taken out of your paycheck pre-tax, add those deductions to your after-tax income to determine the income you need to work with for this budget method.
Once you have that number, you split that number into 3 categories: Needs, Wants, and Save/Invest. You put 50% of the determined income into your Needs. You put 30% of your determined income into your Wants. Then, you put the remaining 20% of the determined income into your Save/Invest category.
A big task in this Method is determining what needs and wants are. A Need is required because it is essential rather than desired. A Want is having the desire or wishing for something; it is not crucial.
Zero-Based Method
A Zero-Based budget allocates your income to various expenses, savings goals, and debt payments. Your goal is to have zero income left over once you have completed the allocation.
The Envelope Method (Cash-Only)
The Envelope Method is very similar to the Zero-Based Budget. You don’t allocate all the money to the various expenses, savings goals, and debt payments until you reach zero income. Still, you also put the money for the different categories into envelopes. Yes, you go to the bank, withdraw cash (or just cash your paycheck if you get an actual check), and put that money into envelopes.
The 60% Method
The 60% Method, also known as the 60-40 Budget, is very similar to the 50-30-20 Method described above. However, instead of having separate categories for Wants and saving/investing, we combine them. This leaves us with only two categories: Essential Expenses (60%) and Everything Else (40%).
If you’ve never used a budget, this is the easiest one to set up and follow.
Comments
Post a Comment