Previously on the blog, we have talked about the process of developing a personal budget. In this process, four steps were listed out: 1. Tracking spending and income, 2. Self-reflection, 3. Creating the budget, and 4. Trial and error. While these steps walk through the process of developing a budget, it is also beneficial to understand the different types of budgets that are out there. Three common budgets used for money management are the cash budget, the zero-sum budget, and proportional budgets.
Cash Budget
The cash budget is also known as the “envelope” budget. This type of budget requires a person to spend all of their money in physical dollar bills (cash). The individual would figure out how much cash you would reasonably need for each category per month. After that, they could use envelopes, containers, or anything they decided to use to organize the cash per spending category. The goal is to make the cash last all month. Once the envelope is empty, you’ll either be done for the month or will need to take cash out of a different envelope.
Zero-sum Budget
Moving on, the zero-sum budget is a method that can be used to prevent a person from wasting leftover cash that they tend to have after taking care of necessary expenses. Using this budget, a person picks a job for each dollar so that there are no dollars leftover from your monthly income. This can really force a person to be thoughtful with how they are going to spend their money. This budget can take more time to plan but can be very effective because of the detail.
Proportional Budget
The proportional budget is a system where you assign percentages or proportions of your income to your needs, wants, and savings (and/or investing). A common proportion people use is the 50/30/20 rule: 50% of your income for needs (rent or groceries), 30% for your wants (shopping or dining out), and 20% for savings. The 50/30/20 rule is not the only proportional budget that you can use. Your needs “bucket” will probably be less flexible, but your wants and savings “buckets” will probably be more flexible to help meet your objectives. This budget can really allow the person to see the “big picture” of where their money is going, which can help spot the larger problems.
Ultimately, your behavior is one of the biggest indicators of your spending habits. Understanding why you spend your money a certain way(s) and the benefits/consequences of those actions can help you figure out your main challenges financially. From there, you can take actions to improve your decision-making and reduce situations where you’re wondering where all the money went from your checking account. The budgets mentioned above are not the only possible budgets for success. You can also use a mixture of these budgets or any other budget that works for you. For example, someone may want to use the zero-sum budget overall but use the cash budget method for a specific category they tend to overspend in like dining out. In the end, budgeting should not be oppressive but rather a plan to help guide decision-making with money. 🙂
Disclaimer: Thegrownwave.com is a personal finance blog, not a professional investment advisor. The content produced from the blog is provided for free and only for informational purposes. Thegrownwave.com does not and cannot promise the accuracy and reliability of any content in comparison to your individual circumstances.
Sources:
Richards, Carl. “The Solution to Maintaining a Budget Is Awareness.” Behavior Gap, 9 Mar. 2020, https://behaviorgap.com/the-solution-to-maintaining-a-budget-is-awareness/.
SoFi. “5 Different Types of Budgeting Methods.” SoFi, SoFi, 24 Aug. 2020, https://www.sofi.com/learn/content/types-of-budgeting-methods/.
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