There are many different budgeting methods and techniques. If one isn’t working for you, then choose another that helps you achieve your goals.
Budgeting is a crucial element to help you determine in advance how you will spend money. It also lets you understand if you have enough money to do what you would like to do. You may not know how much you’ve spent if you do not have a budget. Also, spending money without a budget may cause you to incur unnecessary and avoidable expenses.
Regardless of the amount of money you have, you will need to set a budget to separate what to spend and what to save. You have options when it comes to choosing a budgeting method that works for you. And luckily, technology has made things more accessible with a stream of financial tools and apps making budgeting easy.
Below are some of the most helpful budgeting methods to spend your money better.
In the Article
Incremental Budgeting
Incremental is a traditional budgeting method using the budget of the previous period. It means that the budget for the subsequent year is generated from the past year. With this budgeting method, you’re keeping your lifestyle the same and accounting for changes in costs.
The word incremental is used because there may be a slight increase from the last budgeting period to the new period. There are some advantages to incremental budgets such as not having to start from scratch, easy to understand since you’ve done it before, and keeps spending on your lifestyle consistent.
Activity-Based Budgeting
This budget method is used to determine how much money is needed to do something aka an activity. For instance, how much money must be budgeted for a down payment to purchase a home. Basically, once you’ve established what you’d like to buy or do, you create a budget for it.
The advantages of using activity-based budgeting are that you’ve identified what you’re spending on and the associated costs. It gives a clear cost breakdown of how much is needed to achieve your activity. Want to travel the world for a year? Then you can use an activity-based budget to prioritize covering your fixed expenses while you’re not traveling and the cost of your actual travel experience.
>> Learn how to budget in 3 steps
Cash-Only Budgeting
With a cash-only budget, you’re only using cash and that means no credit or debit cards or even checks. Basically, you’re choosing to opt-out of technology. This is often used with the envelope budget system where you identify all your expenses into separate envelopes.
There are clear advantages to using a cash-only method. No more purchases once you run out of cash. It is suitable for people who succumb to impulse buying. The method physically shows that you haven’t budget for that spending and you have “run out of money” for your identified categories. And since you aren’t relying on credit or using debit cards, you’re only going to spend what you physically have cash for.
Zero-Based Budgeting
With zero-based budgeting, you must justify each expense for the upcoming period. This method has you start from a “zero-base” after each period. Zero-based budgeting is a method that has you allocate all of your money to expenses, savings, and debt payments. The goal is that your income minus your expenditures equal to zero by the end of the month.
The zero-based budgeting keeps you mindful of how much money flows in and out. This is helpful in preventing you from overspending. And in situations where you have money left at the end of the month, you can then place that towards a goal. Then, adjust next month’s budget so you’ll end with zero. Using this budget method is helpful, but can be tedious for some as it requires a great deal of attention and time.
What Budgeting Method is Right for You?
It all really depends on your goals and what really would work for you. A budget is only as useful if it is used and adhered to. To be honest, none of these methods are practical for the majority of people to follow. But it’s important you understand there are different styles. It’s also helpful to know there are actual budgeting apps that help you budget with ease.
Best Budget Apps
YNAB (You Need a Budget) is hugely popular and based on the zero-budgeting method. The goal of the app is to help users minimize expenditures and live on the previous income. It offers many benefits like free workshops and a community of die-hard YNABers.
PocketGuard is a free personal finance tool more aligned with activity-based budgeting. It helps you track your spending, create a budget, set goals to save and invest more, and lower your expenses.
Goodbudget is a budget tracker that digitizes the envelope budgeting method.
