Importance of Budgeting
Since your income and expenses keep changing, budgeting is a continuous process rather than a one-time exercise. Hence, it becomes very important to review and update your budget at regular intervals. The exercise of budgeting is also essential because it keeps your expenses in check so that you don’t end up spending your money without saving much for investing it further. Also, budgeting assists individuals in continuing to work towards their objectives.
Through this blog, we will try to discuss about the two main methods of Budgeting- The 50/30/20 Rule and the Envelope Budgeting Method. So, if you want your short-term and long-term goals to be in synchronisation for the future, track your revenue, expenses and cash flow effectively.
What is the 50/30/20 Rule of Budgeting?
The 50/30/20 rule of budgeting is a very popular method that enables individuals to split their monthly income among three main categories and accordingly make decisions.
Under the needs category, those bills are included that you really must pay and which are vital for survival. Some of them are, rent or mortgage payments, auto payments, groceries, insurance, medical bills, minimum debt payments and utilities are a few examples of these expenses.
Unfortunately, things like television and vacations that you can actually live without fall into the "wants" category rather than the "needs" category.
The second category, and the one that can make the largest difference in your budget, is the expenses that enrich your lifestyle. Although many of these expenses or luxuries now have more of an obligatory role in modern society, some financial experts still view this category as entirely optional. Everything is dependent upon your goals and the level of self-sacrifice you wish to indulge in.
These personal lifestyle costs cover things like your cable bill, cell phone plan, and excursions to the coffee shop. Other items in this category include weekend getaways, gym memberships, eating out with friends etc. You alone may choose which costs you can classify as "personal" and which ones are in fact required.
This category refers to the take-home pay that you can direct to your savings. This includes retirement accounts, debt repayments, emergency money and investments among others. Basically, this category mainly includes the things you should contribute to generate wealth over a period of time.
The underlying idea is that you should consider this category only after you've taken care of your necessities and before you even consider anything in the final area of personal expenditure. However, it is very important to keep in mind that starting early has the benefit of earning compound interest the longer you let this investment to develop.
The basic purpose of using the 50/30/20 rule of budgeting is to simplify the process of classifying each individual expense into three categories to track. While some individuals might find it more difficult to find strategies to change their spending patterns, expert advice from experienced financial advisors can surely help in the long run.
How Envelope Budgeting Method works?
An interesting method of budgeting is the envelope budgeting which instils a lot of discipline in individuals and helps them keep a track of their expenses in a systematic manner.
Under this method, you physically separate your monthly income into several envelopes to reflect various types of spending. Cashing your checks at the bank or taking their value from an ATM means liquidating your income.
The money in each envelope is spent once it is used. When the envelope is empty, you can neither increase the money in it nor decrease it. Nevertheless, if you have any money left over at the end of the month, you can choose to either save it or carry it over into the same envelope, in the following month.
To start using the envelope approach, keep a record of your spending. Until you determine how much you are currently spending, you won't know how much to put in each envelope. Attempting to cut back on your spending is another option, but at the same time, it is important to ensure that your budget is reasonable. Setting strict spending restrictions and making daily purchases with cash rather than credit or debit cards can help in the long run.
You can really see how much money you have in each budget category, with the budgeting strategy. If you see a highly overstuffed envelope, you can rethink about why you are spending so much in that area and whether you can make some cuts to enhance your debt payments, increase emergency money, savings (and further investments).
Closing Note
Are you facing a hard-time saving your precious money each month? Well, it is time that you take control of your expenses by indulging in proper budgeting. With growing inflation rates, it may sometimes be difficult to meet your financial goals with just a monthly salary or a fixed income. It is important that you ensure appropriate budgeting so that you can keep track of your expenses, set savings goals and inculcate discipline by minding your spending habits.
mastertrust has gained expertise in helping clients with budgeting and maximising return on investments. Connect with us to understand budgeting in a more detailed manner.