Find A Budgeting Method That Works For You
You need a budget. You’ve read enough of iMoney to know that keeping a budget is the first step towards taking control of your finances. But you have no idea where to start.
Sitting down and planning a budget may not be the funnest thing on the planet, but we’re here to help. Below, you can find popular budgeting methods, and you can find out which one would best suit your lifestyle. Whether you like being in control of everything, or you like a little more freedom, there’s a budgeting method for you:
This is the most familiar budgeting method, and one that lets you control all aspects of your spending. You start from your income and deduct all your expenses, ending with zero. Set up categories like ‘bills’, ‘entertainment’, ‘savings’, or ‘groceries’. Then, assign specific peso amounts to those envelopes until you’ve assigned a category to every peso of your income — and you stay within the limits you’ve set. For example, let’s say you take home P24,000 a month:
Debt Payments: P3,000
Savings/Emergency Fund: P3,000
(Depending on your situation, you might need more categories or different amounts than this.)
The assigned amount is the limit you can spend in that category for that month. If it’s the 25th and your restaurant envelope for the month is already empty, you shouldn’t eat out until you refill your envelope next month. On the plus side, if the month ends and you still have P500 in your restaurant envelope, you can add it to next month’s restaurant (or total) budget, or you can put it in savings, or use it to pay down debts.
You can use literal envelopes, which you fill with the amount you’ve assigned for that month, or you can set up a spreadsheet where you set limits and keep track of how much you’ve spent in each category.
It will take some time before you can figure out how much should go into each envelope, so in the first month you do this, don’t be afraid to adjust between categories — as long as you don’t overspend on your total budget! And when setting categories, identify problem spots. Do you tend to spend too much at restaurants? Give yourself a limit to address this problem. Do you want to save, but are having a hard time starting? Set aside an envelope just for savings.
Once your categories are set, you’ll have to exercise discipline and not spend beyond the allotted amount for the month.
If you feel this method is limiting, you can add an envelope for ‘fun money’, which you can spend however you like. If you still don’t think this is right for you, try the following methods:
Is the envelope budget is too penny-pinching? The 50/30/20 budget might be better for you. Instead of agonizing over which peso goes where and how much you should assign to each envelope, you get more freedom:
50% for needs — everything you absolutely need to pay, like power bills, minimum credit card or loan payments, rent, and groceries, goes here.
30% for wants — spend this amount however you like, guilt-free.
20% for savings and debt — use this amount to make extra payments beyond the minimum towards your debt, and to grow your emergency or retirement funds.
So taking a P24,000 monthly salary, you could break it down like this:
P12,000 for needs
P7,200 for wants
P4,800 for savings
The 50/30/20 budget is sound, but you might have different needs that need different percentages. Before you start with this method, go over your expenses over the last month and see if you can easily fit. If not, make adjustments: would a 60/30/10 work better for you? Think of 50/30/20 as a framework you can work within, and not a hard and fast rule. This way, it can help you make the most out of your income.
80/20 or: the easiest budget ever.
But what if you hate the idea of tracking your spending to figure out needs and wants? Or find it hard to stick to restrictive budgets? If this is you, try the 80/20 variation of the previous method:
20% towards savings
80% towards everything else
In our earlier example, you’d simply put away P4,800 for savings, and live off the P19,200 left over. Easiest budget ever. With the savings already taken out, you can spend the 80% with no guilt.
If you’re hesitant about saving 20% of your income from the get-go, or you absolutely cannot afford it, try a 90/10 budget first. Then, once you’re comfortable, move to 80/20. You can even move to 70/30 if you want more savings and can cut down on expenses.
Write everything down.
This isn’t exactly a budgeting method, but if assigning fixed numbers or percentages to your spending doesn’t seem possible for you (perhaps because you have an irregular income), just write all your expenses down.
To paraphrase JD Roth of Get Rich Slowly, keep track of every peso that enters or leaves your life. “Tracking your spending helps to demystify money — you begin to perceive it as a tool,” he writes. You gain a sense of power over your money. And with this power comes the power to improve your financial situation.
So get a notebook and start recording all your spending. The simple act of writing it down can help cut down on your expenses, and you won’t even have to constrain yourself to percentages.
Can’t decide which budgeting method to go with?
The only bad budget is no budget at all! No matter which budget you use, it’s going to take some time to get used to it. It may be awkward and difficult at first, but after a few months, it’s going to be a normal part of your life. But the most important step is to start now. Control your money — don’t let it control you.
To help you get started on your budgeting, why not check out these 5 finance management applications for your computer, or these 10 budgeting apps for your smartphone?