Personal budget explained

A personal budget (for an individual) or household budget (for a group sharing a household)[1] is a plan for the coordination of income and expenses.[2]

Purpose

Personal budgets are usually created to help an individual or a household of people to control their spending and achieve their financial goals. Having a budget can help people feel more in control of their finances and make it easier for them to not overspend and to save money.[3] People who budget their money are less likely to amass large debts, are more likely to lead comfortable lives in retirement, and are better prepared for emergencies.

Methods of personal budgeting

In the most basic form of creating a personal budget the person needs to calculate their net income, track their spending over a set period of time, set goals based on the information previously gathered, make a plan to achieve these goals, and adjust their spending based on the plan. There exist many methods of budgeting to help people do this.

50/30/20 budget

The 50/30/20 budget is a simple plan that sorts personal expenses into three categories: "needs" (basic necessities), "wants", and savings. 50% of one's net income then goes towards needs, 30% towards wants, and 20% towards savings.[4]

Pay yourself first method (80/20 budget)

In the pay yourself first budget people first save at least 20% of their net income, and then freely spend the remaining 80%. They can also choose a 70/30, 60/40, or 50/50 budget for more savings. The most important part of this method is to put one's savings apart before spending on anything else.[5]

Sub-savings accounts method

This method is a variation of the pay yourself first budget, in which people create multiple savings accounts, each for one specific goal (such as a vacation or a new car), and each with an amount of money that should be reached by a specific date. They then divide the amount of money needed by the timeline to calculate how much they should save each month.

Envelope method (cash-only budgeting)

See main article: Envelope system. For this method, people need to use cash instead of debit or credit cards. They need to allocate their net income into categories (e.g. groceries), withdraw the cash allocated for each category, and put them into envelopes. Any time they want to buy something in one of the categories, they only take the designated envelope so that they cannot overspend.

Zero-based budgeting

In zero-based budgeting, all of one's net income must be allocated ahead of spending. Zero-based budgeting involves dividing income into different expense categories, ensuring that all funds have been assigned a purpose, and at the end of the month there is a zero balance in the budget.

Software

Several personal finance softwares and mobile apps have been developed to help people with managing their money. Some of them can be used for budgeting and expense tracking, others mainly for one's investment portfolio. There are both free and paid options.

Notes and References

  1. Web site: Key Differences in Household Budgeting vs. Personal Budgeting . 2022-04-30 . US Lending Co. . en-US.
  2. Web site: Definition of BUDGET . 2022-04-30 . www.merriam-webster.com . en.
  3. Web site: How to Create a Budget in 6 Simple Steps . 2022-04-30 . Better Money Habits . en-US.
  4. News: Thomas . Holly . How the 50/30/20 budgeting hack can unlock your finances . 31 July 2024 . The Telegraph . 6 June 2024 . en.
  5. News: Winters . Mike . If you hate budgeting, try the 80/20 rule to save money without tracking every single expense . 31 July 2024 . CNBC . 24 May 2022 . en.