Today’s young adults (and many adults too) have a serious problem with money management. A lot of these issues with money management can be attributed to poor budgeting. When you fail to have a budget, you won’t know where your money is going. Even if you decide to follow a budget, it could be quite confusing to choose from among the different budgeting techniques available.
To help you get a better idea of the budgeting methods, we’ve compiled a list of proven and widely followed methods used by millions across the world. The one that could save you from your financial turmoil could be right here. So, keep reading and choose the best budgeting technique suitable for you.
Related Article: 12 Basic Budgeting Tips to Increase Your Wealth
1. The 50-30-20 Model
The 50-30-20 budgeting model is very popular across the world. What it does is split your after-tax income into three categories. These categories include your needs (50%), your wants (30%), and your saving disbursement (20%).
Some of the key takeaways from this model are as follows:
- 50% of your taxed income should only be spent on your basic needs and commitments
- 30% of it can be used to buy the things you want
- And the remaining 20% should strictly be put into savings, investments, or debt repayments.
Why should you use this budget management strategy?
The 50-30-20 model enables you to manage your after-tax income efficiently. It tells you where you stand financially and creates a proper balance between spending and saving. Saving 20% of your monthly income helps you establish a financial discipline you’ve been lacking all your life.
This 20% may not sound like a lot in the beginning. However, when invested over the long term, this could give you some serious returns and can liberate you from your financial issues.
2. Zero-Based Budgeting (ZBB)
Zero-based budgeting or ZBB is a more complex budget management technique. However, applying it can save you a good amount of money. In the zero-based budgeting method, budgets are structured around the monetary needs for upcoming periods like months, weeks, etc.
Let’s not get into the complexities. In simple terms, zero-based budgeting gives you a plan for every single dollar of your income. Here, your income minus your expenses must be zero at the end of every budgeting period. This does not mean your bank account will be zero at the end of every month. Rather, every single dollar of your income has a plan.
For instance, if your monthly income is $5,000, your expenses, investments, savings, etc., should total $5,000. By following this technique, you won’t be left wondering where all your money went at the end of every month.
Here are some benefits of zero-based budgeting:
- It prioritizes saving more than spending.
- It can provide estimate data for upcoming periods.
- It keeps legacy expenses in check.
Why should you use this budget management strategy?
The zero-based budgeting method offers several benefits including budget flexibility, lower costs, and strategic implementation. It also prevents misallotment of resources that may occur due to budget fluctuation.
The 50-30-20 model can give you a great start when you want to budget as a beginner. However, the zero-based budgeting method is the next logical step if you want to get serious with budgeting.
3. Kaizen Budgeting
The word “Kaizen” is of Japanese origin and refers to the philosophy of continuous improvement. Kaizen budgeting means continuous improvement of wealth. This concept tends to improve your wealth condition slowly but continuously over a long period rather than focusing on fast and big improvements. Although this concept is mostly applied by businesses, it can be used by young adults as well.
It starts with reviewing your current way of tracking your income and expenses. If you haven’t achieved your budgeting goals lately, you need to start analyzing the reason and make improvements to it. The improvements could be anything from consolidating debt, moving funds to a different account, starting a new investment plan, etc.
Your improvements don’t always have to be big. Even minor changes to your financial habits can have a lot of benefits over time.
Benefits of Kaizen budgeting:
- It eliminates the need for short-term goals.
- It makes more improvements in comparison to traditional budgeting methods.
- Has a deeper emphasis on saving than spending.
Why should you use this budget management strategy?
Kaizen budgeting focuses on improving many factors of your wealth. People who follow this concept often find much more than they expect. Sure, it may not show big results at a fast pace but that’s what makes it so different. Kaizen budgeting can be a great start for those with no experience with budget management.
All you have to do here is keep improving consistently every month.
4. Activity-Based Budgeting
Activity-based budgeting or ABB works as an expense tracker and is a viable budgeting method. In this method, all the activities that lead to costs are analyzed and cut down accordingly. After all the experimentation, the budget is developed and carried on until there’s a need for more changes.
Benefits of Activity-based budgeting:
- Activity-based budgeting allows better resource allotment and decision-making.
- It operates on a sophisticated operational model, resulting in increased transparency and traceability of money.
- It breaks down the cost of each activity to determine weak links of the budget.
Why should you use this budget management strategy?
The activity-based budgeting method digs deep into your financial situation and analyzes it to provide satisfactory results. It allows more control over the budgeting process and hence, increases traceability of money. It may be a little expensive over the other methods here, but that’s truly worth it.
5. Pay Yourself First Model
The pay yourself first model is a popular mentality among finance gurus and investors. It’s a great budget management method as well. It conveys exactly what it says – “pay yourself first”, meaning paying yourself before paying your living expenses. This makes sure that enough money is saved before monthly living expenses are paid.
Benefits of the pay yourself first model:
- It puts you in front in every major way.
- It can save you money without having much to care about.
- It makes you more self-sufficient and strengthens your decision-making.
Why should you use this budget management strategy?
The pay yourself first model is a great personal finance strategy that can be started by anyone anytime. A regular habit of paying yourself first can do wonders for your financial condition. It’s a very effective way of ensuring that saving contributions are made month after month. Truly, it’s something everyone should consider.
Conclusion
Making smart financial decisions in your early twenties can help you create wealth in long term. Following any of the methods on our list will help you achieve this. Just remember that proper budget management is the key thing here, and without that, you may end up with no profit.
Don’t forget to download our FREE personal finance toolkit that can help you identify the best tools you can use to manage your wealth!
