Budgeting Systems: Exploring Different Methods for Financial Success
Break Free from the Traditional Way of Doing Things
Hola mi gente!
Budgeting has a bad rep but it’s actually a powerful tool that can help you take control of your finances. It allows you to gain a clear understanding of your financial situation, empowering you to make more informed decisions and achieve your financial goals.
Tracking your income and expenses gives you financial awareness. When you have financial awareness, you think twice when you are scrolling on social media, and you see an Amazon find that you don’t really need but have to have! Creating a budget will allow you to reach short-term goals like paying off credit cards or a much-needed vacation. With a little patience, it can also help you achieve long term goals, like a downpayment for a home or saving for retirement. When you start to track your expenses, you can even find some recurring charges you may not know you were paying for, like an Apple subscription you don’t use or paying way more for your SiriusXM subscription because your promo ended. Yes, that last example happened to me. I would have never reached out to them to lower my price if I didn’t begin to track all of my expenses.
Some may think of budgeting as a tool that tells them what they can and can’t spend money on. Instead of looking at budgeting as something that is limiting, you should see it as the financial plan to help you reach your financial goals.
Everyone is different and you can’t be expected to copy someone else’s budgeting tactics and apply it to your life. There are different ways to create a budget that will fit your style. The best budget style is the one that keeps you making progress and sticking to your financial journey.
Traditional budgeting involves tracking your income versus your expenses within a specific time period. You allocate funds to specific categories depending on your priorities and your financial plans. You can use historical data to determine how much money to allocate to each category. Make sure to track your actual spending and compare it to the planned spending to help identify any discrepancies and allow yourself to make any changes needed to stay within your budget. This is probably the type of budgeting most of you may know about. This is definitely the system that I always used in the past. When I used this system, it was reliable and did the job, but I never remained consistent. The disadvantages of the traditional system are that it is rigid and inflexible which does not work for everyone.
Zero-based budgeting is reaching your goals by giving a job to every dollar until you reach zero. This does not mean that you need to spend every dollar you make, it just means that you know where all of your money will go. This allows for a more personalized system that is based on your current needs and not historical trends. When you get paid, you give every dollar a purpose until you reach zero. There is a lot of preparation with zero-based budgeting, and you need to revisit and revise your budget based on your income, wants and needs. Every purchase you make should fall within the guidelines that you set for yourself. Once you spend all of the money for a certain category, you are forced to stop spending. Some disadvantages of this system is that it is very time consuming to maintain consistency and it is challenging to assign a job for every dollar for variable expenses.
Envelope based budgeting, also known on TikTok as cash stuffing is a system where you keep track of your income through cash in envelopes. Each envelope has a specific category that you will fill with cash and once that cash runs out, you no longer can spend on that category. If there is money left over in your envelopes, you can reallocate the cash to other categories. Some people only use this method for their variable expenses and continue to pay their fixed expenses through the bank. Some do however use this system to budget all of their income. A benefit of cash stuffing would be that you would not overdraw money from the bank avoiding any fees. Since you are dealing with cash you are physically prevented from going over budget. There is no risk of mindless swiping since you are paying for everything with cash. There is also a different mindset when paying with cash because you physically have the money in your hand causing you to think twice before making a purchase. Some of the disadvantages are the frequent trips to the bank or ATM machines. Carrying cash also makes you vulnerable to loss or theft. We live in a digital age and some places don't take cash, especially after Covid. You will run the risk of walking into a place that you can’t do business with. Having cash can make it challenging when making purchases online. I guess that would be a pro and a con. If you have to go to the bank and make a deposit in order to make the purchase, you may think twice about it. There are online cash stuffing envelopes available that eliminate using cash all together making it convenient to use this system. That’s a little confusing to me since the whole point is using cash...but hey I am all for it if this method works for you!
Value-based budgeting entails providing justification for all of your expenses. It helps you spend your money only on the things that matter. Over time your spending will align with your values. This can include anything from traveling to saving for family experiences. You may want to spend your money on something as personal as self-care if that is what's important to you. You don’t have to cut out everything in your life to be good with money. First you need to understand what your values and priorities are. I actually started to try this method for myself. I would say at this moment in my life I value freedom. So I am trying to make sure that what I am spending on aligns with what I value in life…although it is so hard to ignore when I get an email about a sale. Sure, you shouldn’t be so strict and I’m not that bad. I just need to realize that as much as I love that new skirt from Zara, it does not help me reach financial freedom.
Whether you are inspired by the ease of using only cash or you would rather budget your money based on your values, create a budget that can be sustainable for your unique needs.
I want to leave you with some actionable steps that will help you with your journey towards financial empowerment.
Explore: Look into the different systems we have discussed. Consider the pros and cons of each system and what would be compatible with your lifestyle and financial goals.
Experiment: Feel free to try different ones to see which one may resonate with you the most. It is not about being perfect, it’s about working with a system that helps you progress.
Commit: Once you find a system that works for you, be consistent and commit to working towards your financial goals.
Be Flexible: Life is full of expected twists and turns so understand that you may need to adapt your budget to these changes. Flexibility allows you to stay resilient and keep your eye on your financial prize!
Budgeting is not just about tracking and managing your money, but it can also help you take control of your financial future and build the life that you deserve.