What is a budget planning strategy?
A budget planning strategy is an approach to managing the money you earn each month. If you set up a goal that you want to reach by the end of the year, the budget planning strategy is a plan that you have to follow to reach that goal.
Some people use budgeting strategies to purchase a new car, pay off debt, and make sure their expenses don’t exceed their income.
<h2Budget planning strategy examples:>
- Classic Budgeting Strategy
- Zero-Based Budgeting Strategy
- 50 / 30 / 20 Budgeting Strategy
- Cash Envelope Strategy
- Pay Yourself First Strategy
These strategies are just a small fraction of the available possibilities, these ones are among the most popular ones. Below I will try to explain each one, with its advantages and disadvantages, and by the end of the article, you will be able to choose the one that fits your needs.
1. The Classic Budget Planning Strategy
This budget planning strategy is very plain and simple. It goes like this: you calculate your income and necessary expenses and the difference you set aside for entertainment and saving. Basically, you don’t have a clearly defined plan. You just wing it along the way. This strategy is more suited to people who like to improvise and who don’t do well following set plans and imposed constraints.
The advantage of this budget planning strategy is that it is pretty straightforward and simple. You don’t have to create any plans, you don’t spend energy on thinking ahead a lot. You take whatever you got, and you do the most possible out of it.
The most important disadvantage of this budget planning strategy is the lack of a plan. And the fact that you can’t easily optimize and improve it. For example, it’s very hard to reduce spending in the food department if you don’t know how much you spent in the previous months. If you don’t know which items are unnecessary or which ones ate a lot of the budget because they were expensive, how can you make cuts and save more? This works mostly for people who earn very well, and when it’s better for them just to spend their time on earning more than focusing on saving.
2. The Zero-Based Budget Planning Strategy
The idea behind the zero-based budget is simple: the money that comes in, minus the money that goes out should be equal to zero. This means (as Dave Ramsey put it) that you’ve told every penny exactly where it’s going to go. This method has been popularized by Dave Ramsey, and it’s actually easier than it sounds. There are basically 3 steps:
- List your income after taxes for the next month you want to budget.
- List all your expenses for that month that are mandatory expenses (meaning you can’t live without them). Let’s call them necessities.
- List the rest of the expenses that you need, including subscriptions or holidays.
- If you’ve still got some money left, put it aside in a savings fund, so you end up with zero left. If it’s the other way around, and you have more expenses than your income, then you have to start cutting your expenses, starting from the less important ones. Maybe all those subscriptions are not necessary, or maybe you can cut the gym subscription and start doing some running. Anyway, in the end, you should finish with zero money left. All of it is distributed in the direction you want.
3. The 50 / 30 / 20 Budgeting Strategy
The idea behind this budgeting strategy is also very simple: you should allocate
- 50% of your income to needs
- 30% to wants
- 20% to savings
The next important part is to understand what each need, want and savings mean. Let’s break them down one by one:
- What does “needs” mean? Needs are basically something that you can’t live without. Or something that would greatly inconvenience you if you stopped having it. We have to include here a few important spending categories like food, housing, transportation, and utilities.
- What does “wants” mean? Wants are basically stuff that causes minor inconveniences in your life, for example the gym membership. This is probably important for your fitness and well-being, but did you know that there are ways to train that don’t involve paying a subscription? Like, for example, calisthenics, running, or even yoga. Yes, maybe it’s more inconvenient than going to the gym, but it is certainly not a need, meaning something you can’t live without. In this category, we can also put new clothes/shopping, dining out, streaming services, and stuff like these.
- What does “savings” mean? In this category, we include the emergency fund. Also paying out debt should be included in this category. Student loans, credit card loans, car payments, stuff like these.
And now back to the 50 / 30 / 20 Budgeting Strategy. The idea is to divide your income between these 3 categories. In the beginning, it may not be easy, and, for example, the needs category might eat up more than 50% of your income. This is not a problem. Cut something from wants. But strive to reach these numbers after a few months of adjustments. You can also reduce the savings a bit. But the most room to juggle will be in the wants category. Try to be as frugal as possible until you manage to afford more things. And then introduce more wants as long as you can afford them.
4. The Cash Envelope Strategy
The cash envelope strategy is a way to track exactly how much money you have left in each budget category. This is very helpful to a lot of people because they lose the ability to track spending, and as a result, they end up overdoing it. For example, if you don’t pay attention, you might end up spending way more on food and then throw it away. In this way, you can easily differentiate between money that goes to rent, gas, food, or groceries. If you keep your pre-allocated money for gas in a separate envelope, then you will spend as much as you decide at the beginning of the month. And you will create envelopes for each major spending category. Compared to other budget planning strategies, this one has a psychological aspect to it. It can give you peace of mind, assuring you that you are not spending the rent money on some cool shoes. The only disadvantage is that you have to split your wallet into many cash envelopes and always carry them around. If this is not a problem for you, then you should give this method a try right away!
5. The Pay Yourself First Budgeting Strategy
I left this budgeting strategy the last because it’s more useful for people who don’t stick well to plans. If you have a history of making plans and not sticking to them, then this budgeting strategy might be the one for you. The idea of the pay yourself first budgeting strategy is simple. Whenever your paycheck comes in, first pay yourself. This means that you put aside money into your savings first. You have to calculate what your savings should be, and what you think you can afford. It might be 10% of your income, it might be 20%. Do you have an emergency fund? Do you have debt? After you answer all of these questions, you should come up with a decent estimate. You have to put this money aside as soon as you get your paycheck, and try to avoid spending it (there might be exceptions, but this is the general idea, don’t get discouraged if sometimes you don’t manage to keep it apart from the rest). And after you pay yourself, you can do the rest of the budgeting as you did before. Or even apply another budgeting strategy for the rest of the money. Why not?
There is an interesting way you can do the Pay Yourself First budgeting strategy automatically, without putting any effort into it. If you want to see it, you can watch this video created by Marko, from the Whiteboard Finance YouTube channel:
Conclusion:
These are just some of the most popular budget planning strategies, but they are not the only ones. I hope that at least one fits your needs and requirements or it matches the way you think. If it doesn’t, then I suggest you take a look on Youtube; there are a lot of channels that talk about budgeting, with plenty that go into personal examples, with step-by-step coverage!