Personal finance is an important aspect of our daily lives. It involves managing our money, ensuring that we have enough funds to meet our needs and goals, and making smart decisions about our finances. One crucial tool in personal finance is budgeting. Budgeting helps us keep track of our spending, and it enables us to save money for the future. In this article, we’ll discuss different types of budgeting methods and provide illustrations for each.
Method 1 : Traditional Budgeting
The traditional budgeting method involves creating a budget based on your income and expenses. To create a traditional budget, you need to determine your income sources and expenses, including fixed expenses such as rent or mortgage payments, utilities, and insurance, as well as variable expenses such as groceries, entertainment, and transportation. Once you have a clear understanding of your income and expenses, you can allocate funds accordingly. The goal is to ensure that your expenses do not exceed your income.
Illustration:
Let’s say you earn INR 40000 per month, and your expenses are as follows:
Rent: INR 10000
Utilities: INR 2000
Insurance: INR 1000
Groceries: INR 5000
Entertainment: INR 2000
Transportation: INR 3000
Savings: INR 12000
In this example, your expenses add up to INR 25000, leaving you with INR 15000 for savings or additional spending.
Method 2 : Envelope Budgeting
Envelope budgeting is a cash-based budgeting method where you allocate funds for different expenses into different envelopes. You can use physical envelopes or create digital envelopes using budgeting software. With this method, you need to determine your monthly expenses and allocate funds into different envelopes. Once an envelope is empty, you cannot spend any more money in that category until the next month.
Illustration:
Let’s say you allocate INR 5000 for groceries and INR 3000 for entertainment each month. You would place INR 5000 in a physical envelope labeled “Groceries” and INR 3000 in an envelope labeled “Entertainment.” When you need to purchase groceries, you would take the money from the “Groceries” envelope. If the envelope is empty, you cannot purchase any more groceries until the next month.
Method 3 : Zero-Based Budgeting
Zero-based budgeting involves creating a budget where your income minus expenses equals zero. In this method, you need to determine your income and expenses and allocate funds to each expense category until your income is fully allocated.
Illustration:
Let’s say you earn INR 40000 per month. With zero-based budgeting, you would allocate your income as follows:
Rent: INR 10000
Utilities: INR 2000
Insurance: INR 1000
Groceries: INR 5000
Entertainment: INR 2000
Transportation: INR 3000
Savings: INR 12000
In this example, your income of INR 40000 is fully allocated, resulting in a zero balance.
Method 4 : 50/30/20 Budgeting
The 50/30/20 budgeting method involves allocating 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. With this method, you need to determine your income and expenses and allocate funds to each category accordingly.
Illustration:
Let’s say you earn INR 40000 per month. With the 50/30/20 budgeting method, you would allocate your income as follows:
Needs (50%): INR 20000
Rent: INR 10000
Utilities: INR 2000
Insurance: INR 1000
Groceries: INR 5000
Transportation: INR 2000
Wants (30%): INR 12000
Entertainment: INR 2000
Dining Out: INR 4000
Shopping: INR 6000
Savings/Debt Repayment (20%): INR 8000