This article was written by Sharon Hoyes, Chartered Accountant and Managing Editor MoneyProblems.ca
Managing your money doesn’t have to be about spreadsheets, keeping receipts and writing down everything your spend money on. Budgeting is really about managing your finances in a way that will help you meet your financial goals and is efficient. After all, if you give up after a month or two you won’t succeed. Here are 5 different personal budgeting approaches that can help you manage your money better.
Monthly Tracking
The traditional method of budgeting is writing down all your fixed and variable expenses on a spreadsheet, allocating funds to those expenses and keeping track every month. You can do this with a simple excel spreadsheet or with the many on-line budgeting programs available today.
Benefits: By keeping records, you know exactly where your money goes. It can help you identify ways to save money, increase savings and pay off debt sooner.
Disadvantages: This budgeting method works for some but it takes time and structure and more often than not people give up after just a month or two.
Jar or Envelope Budgeting
The envelope method has become popular again. In this approach you break down your spending into 5-7 categories like groceries, transportation, entertainment, savings etc. You place money in each jar or envelope and use that money to pay for items with cash. It doesn’t matter how you choose to spend your money as long as you stop spending when that particular jar is empty.
Advantages: For those who find themselves spending too much when using credit this is a great method to control impulse spending. It’s also simple to apply and understand.
Drawbacks: To work you will still need to accurately predict and allocate your expenses into appropriate categories. This method works better for regular spending (rent, groceries, entertainment) than for bigger picture items like savings and debt reduction.
Bucket Budgeting
Similar to the envelope system except this method takes advantage of online and electronic banking. Under this method you set up 3-5 separate bank accounts for managing your money:
- Bill paying account.
- Everyday spending
- Emergency fund
- Savings account
- Fun / Plan fund
Figure out how much money you want to spend on each area every pay and have that amount transferred into the appropriate account every payday. How you spend the money is not tracked as long as you stop spending once the ‘bucket’ is empty.
Advantages: Again this system works well if you accurately determine how much money you should set aside each month for different categories.
Disadvantages: You may have to spend time transferring funds between accounts on a regular basis. It also does not help identify ways to improve your spending and savings habits.
Reverse Budgeting
Reverse budgeting is based on the idea that you pay yourself first. Essentially you save a fixed amount each month, then spend the rest.
Advantages: This system works well in that it is simple to follow, forces you to save money and does not dictate where you should spend the rest.
Disadvantages: If you are having trouble making ends meet, this type of system won’t help you get on track. It only works for those who have a good income but are poor savers.
Manage Your Payments
Rather than starting with savings like the reverse budgeting method, this system starts with making sure that you have enough money to pay all of your bills. What’s left over is yours to prioritize. Under this budgeting approach, you pay a portion of your bills each and every payday. If for example your hydro bill is $200 and you are paid weekly, you pay $50 each month towards your hydro bill. Setting up preprogrammed payments through online banking makes this easier. For bills that you can’t pay online, set up a separate bill paying bank account and put money into this account every pay period. If your rent for example is $2200 a month and you are paid twice a month, put $1,100 aside each month. Pay for everything else with cash or put money aside into your bill payment account for any credit card bills you accumulate each month. Now what’s left over is yours to spend or save as you see fit.
Benefits: By ensuring all your bills are paid in full and on time every month you don’t run out of money at month end due to over spending. It’s simple and works well for people who are tempted to spend money if it’s in their bank account and don’t plan ahead for future expenses.
Drawbacks: You are not tracking any of your spending patterns so you don’t know if you are spending wisely or not.
Whatever system you choose, budgeting is an important step in meeting your overall financial goals. Choose the plan that best helps you.
This article was written by Sharon Hoyes, Chartered Accountant and Managing Editor MoneyProblems.ca
