Setting up a budget and sticking with it is half the battle. So, once you’ve made the decision that you’re going to improve your financial situation and set yourself up for success in the future by imposing budgeting discipline on yourself or your family, the next step is figuring out which type of budget to use. Here are some considerations:
- Basic Budgeting for Starters – You’ve got to start somewhere and for people new to budgeting, a simple top-down approach is a good place to begin. Since you probably don’t have much control over your take-home paycheque (if you have a fixed salary and taxes coming out), use that monthly income amount and subtract off all of your known expenses that repeat each month, like your flat, electricity, gas, water, car, food, a personal loan, insurance and such. You can either estimate this yourself or just look back at your prior months’ payments. Then add a little factor like perhaps 10 percent to account for things you missed or as a safety factor. When subtracting all that out, hopefully, you still have money left at the end of the month. If you don’t, you’ll need to go back and assess whether all the expenses are necessity, whether you can reduce any of those expenses somehow or whether you have opportunities to earn more money because otherwise, you’ll be moving backward instead of forward each month.
- Now Include More Detail – Now that you have a handle on a single month budget, there are probably certain times of the year when your budget changes a bit. For instance, you may pay much more in heating costs in the winter, or you might spend a lot on gifts around certain holidays. If you take a family vacation in the summer, that would impact your budget that month. So, now map out the 12 months and add in these additional large expenses. Make sure to take note that excess in good months may be eaten up by these high-expense months throughout the year. This will give you a better handle on how to run your full-year budget and warn you not to spend the extra cash in your positive months since you may need it to cover high spending months elsewhere in the year.
- Advanced Budgeting – Electronic and Envelope Systems – There are some ways to take the budgeting concept a step further. Some people choose to use various online budgeting tools or even the “envelope” budgeting system where they basically set up separate sub-accounts at their bank to manage different spending categories. The “envelope” name comes from the idea of using different envelopes with cash each month and only spending money out of that particular envelope for a particular expense. This is one of the more advanced methods of budgeting but if you have the discipline, you may save the most money this way.