We often take budgets for granted. We only create one once we are already running out of money to spend. Budgets come as an option rather than a necessity. This mindset should be changed. A good budget can make you rich in the long run. It could give you a blueprint for a stronger financial foundation.
Budgeting, in general, is far more than just paying your bills monthly. It is more of answering the question, “where should my money go?”.
When you budget your money, you are in full control on where it will go. You basically direct it rather than the other way around.
I will be very honest that I have a love-hate relationship when it comes to budgeting. I started creating a spending plan that looks more of a wish list rather than a realistic budget. I list down the categories, write down the planned amount but not execute the plan properly. I overspend, I become an impulsive shopper and I fail.
After years of working professionally, I came to understand that budgeting is an endless trial and error until you find one that works for you.
It is my hope that any of these four budget methods lead you to find your own.
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The Zero-Based Budgeting Method follows the concept of giving every peso a job. You don’t stop allocating your money until you arrive at zero.
Zero-Based Budgeting is made popular by Dave Ramsey.
Here how it goes:
Total Monthly Income – Expenses (i.e. Tithe, Savings, Investments, Bills, etc.) = Php 0.
For example, if you earn Php 28,000 per month you want to make sure that every expense you have is within that Php 28,000.
How to Do a Zero-Based Budget Method
Step 1. List your income
Same as with every budget method, you start by finding out how much your income is. This can be a combination of you and your significant other’s income or your income alone. If you budget your money together with the income you make from your side hustles, put them all in the total.
Step 2. List your expenses
Now you have to find out what your recurring expenses are. Make sure that you have a clear understanding on what goes with your budget categories.
Your list of expenses can include your savings, investments, and debt-repayment plan.
Step 3. Assign an appropriate budget for each
Lastly, allocate your income to each of your expenses. As mentioned, in the Zero-Based Budgeting Method, every peso needs a plan. If you have extra funds even after all expenses you’ve budgeted for, you’ll need to use that money for something else. As long as there’s money left in your paycheck, find a job for it. You can add it to your savings, your investments, or create sinking funds.
The 50-20-30 Rule of Budgeting, a rule of thumb popularized by American Senator Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan.
The basic rule is to divide your after-tax income into three categories – 50% on Needs, 30% on Wants, and 20% on Savings/Investments. It is one of the simplest and the easiest budget techniques you can use to decide what percentage of your income goes to expenses, savings or others.
Instead of budgeting your income to 20 or more categories right away, you are encouraged to focus on three main categories: Needs, Savings and Investments and Wants.
When we say Needs these are your essential expenses, the fixed items that you certainly need to pay no matter what. Examples will be your house rent, transportation allowance, food/grocery and/or utilities, electric bills.
Savings and Investments
Your savings and investments are money meant to help you towards better financial security. Count on here your debt payments, loans, savings and/or investments from different investment vehicles you own.
When we say Wants these are your “flexible spending” meant to pay for things that you personally need like hobbies, shopping and other miscellaneous expenses. Included in this is gym membership, clothing/shoes shopping allowance, etc.
I believe the 50-20-30 Budgeting is one of the earliest budgeting methods I tried and shared here in SavingsPinay. Currently, I am still using this budget method and I even released a budget template that follows this.
The 50-20-30 Budgeting Method is also flexible enough to suit your current means. You can change the rule to 80-10-10 or 70-20-10 depending on your financial preference. Think of it more as a guideline to strategically determine how much money you should be spending on what.
How to Do a 50-20-30 Budget Method
Step 1. Determine the income you are working with. For this we will be focusing on the net income — less government fees and deductions as well as less tithe.
If you have multiple sources of income you can either add them together or focus on your main source and save the rest as a cash cushion.
Step 2. Divide your income to three main budget categories – Needs, Savings and Investments, and Wants. Make sure that you are following the 50-20-30 Budget Rule (any other spending percentage you chose) for each category. Do not exceed the percentage you have. Adjust your budget accordingly until you match with your desired spending percentage.
Learn more about the 50-20-30 Budget Method in this post.
In reverse budgeting, you put your savings and investments in top priority mode. This is also called the no-budget budget because as long as you put money on your savings and investments, you can relax with the rest of your money.
Among the four budgeting methods in this list, this would probably be the easiest one to do. However, maintaining this budgeting method can be a struggle. We are inclined to spend first and save and invest what’s left on our monthly income.
How to Do a Reverse Budgeting Method
Step 1. Determine your income
Same as the previous budget methods, the first step you need to do in doing the Reverse Budgeting is to know how much income you’ll be working on. You can write just your main source income or combine it with your side hustles.
Step 2. Less Your Savings and Investments
Next is you write down the amount you’ll allocate for your savings and investments. Here you have the liberty to put how much money you will put on your financial goals. This will also include Tithes if you do follow giving 10% of your income to God.
Step 3. Subtract your income and your savings and investments
Lastly, the difference between your income and your savings and investments will now be money you are free to spend for whatever purpose. You can spend this guilt free as long as you truly follow your savings and investment budget.
Last but not the least on the budgeting methods you can try is the Half-Payment Method. The Half-Payment Method makes more sense if you are paid bi-weekly or the common 15th and 30th payday for example.
In the Half-Payment Budgeting Method you divide your monthly expenses into two and budget equally based on your pay date.
As you can see in the image, the expenses are divided almost equally to the two paychecks the person will receive. This method eases the stress of feeling broke halfway through the month because all your bills piled up.
How to do a Half-Payment Method
Step 1. Write down all your regular bills
Unlike other budgeting methods in this list, the very first step you need to do is to write down all of your regular bills including their due dates. Regular bills refers to your fixed expenses or those you pay almost the same amount every month.
Step 2. Divide each bill in half
With all your bills written down and their due dates, now you’ll have to divide your bills in half.
For example, if you pay Php 1200 for your phone plan every 21st of the month, you’ll set aside Php 600 from your first paycheck. Then, another Php 600 from your next paycheck.
Step 3. Transfer the money each payday
With your budget at hand, transfer the money needed to do the half-payment method each time you get paid.
You have two options here:
- Set aside money safely on a separate savings account used for expenses only or paying bills online.
- Withdraw the cash and put it in a cash envelope.
Step 4. Pay the bill in full
As soon as your next paycheck is ready, pay the bill in full. The prerequisite here is that you still follow the due date of the said bill. You don’t want to pay for penalties like late fees.
Another approach to the Half-Payment Budgeting Method is to simply choose which bills you’ll pay to a particular paycheck.
Here’s an example for you to visualize:
As you can see, instead of dividing each of the expenses in two you just need to select which bill will be paid by which paycheck. This is a good method to try if your due dates mostly fall after each paycheck.
Final Notes from SavingsPinay
You can also do a combination of the two-three of the budgeting methods in this list. This is something that I actually do.
The way I budget is a mixture of 50-20-30 Budget and the Half-Payment Method. What I do is divide my expenses based on which bill will be paid by my paycheck on the 14th and on the 29th. I only did this once at the start of the year. Now, for the month I normally use my 50-20-30 Budget Template.
You can watch my typical budgeting in this YouTube video:
Budgeting requires a lot of trial and error. Don’t fret if you fail on your first few tries. The more that you do it, the better. Also, budgeting or planning your expenses is just the first step. The next step is to follow it and track expenses as well.
I hope this post helps you.
Which of the above budget methods are you using?