Everyone needs to have a reliable way to track their income vs expenses. This will allow you to see what you are spending your money on and where savings can be made. Budgets are one of the first basic steps to take on your way to financial independence and retiring early.
Methods of Budgeting
01 – Traditional (Income vs Expenses)
This is a basic budgeting technique where you list your income, list your expenses, and find the difference. Goal is to be earning more than you’re spending, and save whats left over. Problem is most of the time there is not much left over.
Also you can set goals for how much you want to spend in each category, such as groceries, gas, and entertainment.
02 – The 50/30/20 method
The 50/30/20 budget is a simplified plan in which you break down your expenses into three categories: needs, wants, and savings.
50 percent of your take-home pay should go towards needs, 30 percent should be devoted to wants, and 20 percent should get put into savings.
Dividing needs from wants can be tricky. “Needs” include your only vital necessities. You might think that groceries are a need, but there are items that are “wants.” For example, the fruits and vegetables you buy at the store are a “need,” while the Oreo cookies you buy at the store are a “want.”
Lumping them together under the broad umbrella of “groceries” causes you to co-mingle “needs” and “wants.”
03 – The 80/20 or Pay yourself first
The 80/20 Budget is a simplified budget of paying yourself first. Under this strategy, you simply save a portion of your income first, and then freely spend the rest. A direct transfer of funds away to a different saving account where you wont be tempted to spend it.
Twenty percent is the minimum you should save. You should put at least 10-15 percent away for retirement. You can use the rest for emergencies, buying your next car in cash, home repairs, and other long-term savings goals.
You can also modify this method to the 70/30 budget, 60/40 budget, or even the 50/50 budget, depending on how aggressively you choose to save and your lifestyle.
The beauty of this budget is that once your savings are catered for, you don’t need to worry about where the rest of your money is going.
04 – Budgeting Tools & Apps
This is not a budgeting method per say but there are many apps and tools which are freely available that do all the heavy lifting and tracking for you. Apps such as Personal Capital, You Need a Budget, Wally and Mint.com can help you track your spending within a variety of categories.
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