Budgeting is an essential element of managing money. Without establishing a budget, you may not know how much you have spent or what you can afford to purchase. Knowing how to budget makes it easier to estimate how much a person can spend and how much he or she can save.
Different Budgeting Methods
There are many different budgeting styles that approach budgeting in different ways. Different budgeting methods work better for different people. We will discuss some of the different types of budgets below and briefly explain how each budgeting technique works.
Traditional/Incremental Budgeting Method
One of the simplest budgeting techniques is the traditional form of budgeting. It considers all of the budget data from the previous year and forms the budget for the next year based on that information. Except for incremental changes, everything remains the same as the previous year. This is why this type of budgeting is also known as incremental budgeting.
An advantage of this type of budgeting is that you don’t have to start from scratch. You simply have to look at the last year’s budget and carry that information forward. A drawback of this method of budgeting is that it assumes that all expenses required in the previous year are also required in the current year.
Activity-Based Budgeting Method
Activity-based budgeting determines the cost of the activity that will occur or the item that you purchase. A budget is made based on these costs. The biggest advantage of activity-based budgeting is that you know exactly what the purpose of your spending is and what you’re spending your money on.
Zero-Based Budgeting Method
This type of budgeting is the complete opposite of traditional budgeting. While in traditional budgeting, you form the basis of your budget based on the previous year’s budget, in zero-based budgeting, you start from scratch and make a record of all income and expenditures. One advantage of this type of budgeting is that you can add or remove items with each new budget.
The Cash-Only Budget Method
The idea behind this type of budgeting method is that you use cash for purchases instead of using a credit card. An advantage of this method is that spending stops when cash runs out. Many people think that it is more difficult to pay for items with cash than swiping a credit card. For those people who have difficult time limiting their purchases, buying everything with cash can help.
Balanced Money Formula Technique
This type of budgeting works on the simple concept of expenditure and savings. An example of this method is to budget to spend 50% of your earnings on needs, 30% on wants and desires and the remaining 20% goes to savings. There are many other balanced money formulas similar to this. Select the levels of spending that work best for your unique financial situation.
Priority-Based Budgeting Method
Just as the name suggests, in priority-based budgeting, you make a list of items that you require from the most important to the least important. You can either start making the budget from scratch or use a previous one as a base. Priority-based budgeting is a good option as it helps you determine which items are most essential to your needs. If you approach your spending limit, do not purchase the items that are least in priority.
Tips for Sticking to Your Budget
All these different types of budgets exist to help control your spending. Maintaining a budget can be hard work. There are many steps you can take to make it easier for you to maintain a steady budget.
- Before you start following a certain budget, make sure to review it. Verify that your expected costs are as accurate as possible.
- If you are still falling short on money despite your budgeting efforts, you may postpone new projects or spending on items that you do not need for that month.
- Freeze the expenses. If you can see that you are going over budget, then stop spending or keep spending to a minimum.
Each budgeting method has its advantages and disadvantages depending upon your preferences. It is up to you to decide which one fits you best. You can always change methods if you find a certain type of budget is not working for you. Sometimes different life events, such as having kids or getting married, will require you to shift your budgeting method as well. Try several of them until you find the one that works best for you.
Create an Effective Budget With First Alliance Credit Union
There are several different methods you can use to create a budget. When you find the one that works best for you, budgeting becomes a lot easier.
You can also get help creating a budget when you become a member of First Alliance Credit Union today. You can read more about creating your own budget in our How to Create a Budget guide, download the free budgeting calculator in our resource center and even keep track of your spending by using the My Money feature of our online banking platform.