People who are trying to make a budget plan usually have a tough time deciding how they will do it. The concept is simple but there are various systems that can be used. Choosing the right system will help make your budgeting efforts more effective. Some people create a budget but end up failing in the implementation because their circumstances and their personal attitude is not suited for the method that they chose.
We advise that you research on the different ways that you can create and implement your budget and feel free to revise it as you go along your budget. The first one that you create will not be set in stone. You can change it as you see fit. After all, our expenses and income change over time.
Regardless of the type of budget that you will use, there is always two important factors that you will encounter: your income and expenses. This is what we will be focusing on as we discuss two different budgeting methods that you can follow.
Budget method 1: Income first before expenses
Making a budget plan is quite tedious at first but once you have created it, the revisions will get a lot better. One way that you can create your budget is to consider your income first then you list your expenses. This is actually the most common method that people will use. The idea is to get your income, divide it into percentages that will go to your needs, wants and savings. Here is an example of how you can divide it.
50% will go to your needs or fixed expenses. This will include your mortgage, utility bills, insurance premiums and other constant expenses that you make every month.
25% will go to your wants or variable expenses. This can include your grocery, food, clothing and even your entertainment expenses.
25% will go to your savings or any debt payments that you have to make.
The percentage will depend on how much you need for each category. For instance, if your home is fully paid, then you can probably lower your breakdown to 40/40/20. Or you can make it 50/30/20. It all depends on what your lifestyle will require from you. If you have to save up for something big in the future, then boost your the percentage for your savings.
The good thing about this is you are basing your expenses on what you can afford. If the wants end up amounting to $1,000 a month, you know that it is your limit for food, groceries and other things that you need. If your money runs out, then you need to stop spending on it.
The downside of this method is it does not really promote increasing your income. On the contrary, it urges you to lower your expenses to meet your limited resources. If your income is not too big to begin with, it may be tough to stick to this plan.
Budget method 2: Expenses first before income
If you think that the first method will not work for you, then another way to set up your budget is to consider your expenses first before your income. This is not a very popular method because you are in danger of overspending.
Contrary to the first, this method will begin by listing all the expenses that you have – or at least what you want to have every month. Then, you total that amount and you aim for that figure as your cash inflow.
Fixed expenses: mortgage ($1,500), insurance ($100), utilities ($200), car payment ($250) = total of $2,050
Variable expenses: food ($300), groceries ($200), cellular phone ( $100), gas ($150), entertainment ($500) = total of $1,250
Savings: retirement ($500), vacation money ($200), college fund ($250), emergency fund ($100) = total of 1,050
If you get the sum of all these, you will get a total expense of $4,350. That is the amount that you need to earn every month. If you only earn $3,500 a month, you need to do something in order to earn the $850 deficit. You can get a second job or you can set up an online career. There are various options to grow your income and meet the needs that you have listed. You can also look for investment opportunities that can grow your cash inflow.
The great thing about this option is it encourages you to make more money instead of just cutting back and ending up being miserable.
Choosing the best budgeting method
In any case, it is hard to determine which is the better option between the two. Some people will benefit from only one while others need both cutting back and earning more to strike a balance. Gauge your personality and what you can sacrifice to arrive at a budget method that you can easily follow.
If you are not sure where to start, you can research budget plan templates like the one that you can use here on the National Debt Relief site. We have a free budget planner worksheet for you to download. To help with your calculations, there are online budget calculators like the one from the Mapping your Future website.
Here is a video that will teach you how to make a budget for your household.