Budget Plans for Savings and Financial Goals

Personal budgets can help decrease debt, increase savings and keep track of where your money goes. Find out more about five budgeting methods to consider which might work best for your situation.

Different budget types for saving and financial goals

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Whether it’s a New Year’s resolution or any time of the year, getting your finances in order usually starts with evaluating your budget plan or implementing new strategies to save more and track spending.

If you use traditional budgeting methods, you use your previous year’s budget as a base and work off that to implement a new budget for the current year.

In 2013, a Gallup Economy and Personal Finance Survey reported only 32 percent of Americans surveyed prepare a detailed written or computerized household budget to help with personal finances. 1^Gallup, “One in Three Americans Prepare a Detailed Household Budget,” 2013

However, since 2013, personal budgets are gaining in popularity. According to a 2016 Possibility Index study by U.S. Bank, 41 percent of Americans surveyed are using a budget for their financial planning needs. 2^U.S. Bank, “U.S. Bank Possibility Index,” 2016

While creating a budget can seem like a daunting task, a budget is simply a plan for addressing your expenses using your anticipated income for a specific period. While the traditional budget method is simplistic, it may not fit every person’s needs. There are many alternative budgets out there. The key is finding one that works best for you and your financial and retirement goals.

Zero-Based Budgeting

A CareerBuilder survey, which was conducted online by Harris Poll, found 78 percent of U.S. workers live paycheck to paycheck to make ends meet. In addition, more than one in four workers surveyed do not set aside any savings each month. 3^CareerBuilder, “Living Paycheck to Paycheck is a Way of Life for Majority of U.S. Workers, According to New CareerBuilder Survey” 2017

One budget plan that focuses on decreasing wasteful spending and boosting savings is the zero-sum budget. In a zero-sum budget, you allocate every dollar of your anticipated income to a specific expense. Your income minus your expenses should always equal zero. If it does not equal zero, then your budget is not complete.

When creating a zero-sum budget, it’s usually helpful to review previous months’ expenses so you have a better understanding of how to allocate your anticipated income for the upcoming month.

This doesn’t mean spend every dollar you make. In fact, with this budget, you have to justify every dollar you spend at the beginning of each month. When every dollar has a specified purpose, there is less room for wasteful spending throughout the budget period.

First, you allocate a stipulated amount of funds to each anticipated expense, such as groceries, insurance, housing, utilities and transportation. If, after allocating your anticipated income to all known expenses, there is still money left over, you must assign those excess funds to a category, whether that is paying a debt or adding to your savings accounts. Every dollar has a specific purpose and nothing is wasted.

If you decrease spending in one category, you must reallocate those funds to another category. This might mean paying off more debt or putting the extra money into a retirement fund.

This budget may be ideal for people who are good at tracking monthly expenses.

However, this type of budget might be hard for some people because it doesn’t account for unforeseen spending. For example, you might have to fix or buy a new refrigerator because your current one broke down. One suggestion is to allocate a portion of your income to an emergency fund to help alleviate unforeseen expenses.

Reverse Budgeting

A 2018 Federal Reserve report on the Economic Wellbeing of U.S. Households found one-third of adults surveyed either can’t pay their bills or are one modest setback away from a financial hardship. 4^Federal Reserve System, “Report on the Economic Well-Being of U.S. Households in 2017-May 2018,” 2018

If planning for retirement and future savings is essential to you, as well as preparing for an unforeseen financial emergency, the reverse budget plan might be a good fit. This plan is focused on making your retirement financial goals a top priority, as opposed to many other types of budgeting methods, which focus on paying current living expenses first and adding any leftover income to savings.

When you create your personal budget, you first decide on a savings goal and then work toward putting aside a portion of your income toward retirement plans and emergency funds. Your remaining income is then used to pay your fixed expenses such as housing, transportation, utilities and more.

Next, you allocate funds to cover non-fixed expenses that are still essential, which can include groceries and gas. Finally, any amount left over can be used for non-essential expenses such as dining out, traveling and other entertainment expenses.

This type of budget can be beneficial for someone who makes too many unnecessary impulse purchases, because money is first allocated toward retirement plans and then living essentials.

Proportional Budgeting

A 2017 HomeServe USA Biannual State of the Home Survey reported, if survey participants had an extra $1,000, 24 percent of them would use it toward paying off credit card debt or loans, 19 percent would use it toward building personal savings and 16 percent would put it into funds for taking a vacation. 5^HomeServe USA, “HomeServe 4th Biannual State of the Home Survey,” 2017

If you’re someone who likes dividing finances into proportions or percentages, then the proportional budgeting method would be good to look into. In proportional budgeting, instead of budgeting for specific items, you divide your expenses into a limited number of categories, and then allocate income to each category based on expenses. Typical categories for proportional budgets are needs, wants and savings.

For example, you might allocate 50 percent of your income to “needs,” such as rent or mortgage payments, bills, groceries, medical expenses and transportation costs. Thirty percent of your income may be allocated to “wants,” such as personal spending and entertainment, and the remaining 20 percent of your income would be allocated toward debt payments and retirement savings.

While the proportions of 50, 30 and 20 are common, you can decide which percentage amounts work best with your financial needs.

However, this type of budget might be challenging for people who don’t have a steady salary or paycheck every month with the calculations having to continually change.

Half Payment Budget Method

The HomeServe USA survey also found that nearly one in five Americans surveyed don’t have finances set aside to cover an unexpected emergency expense. In addition, approximately 31 percent of those surveyed don’t even have $500 to cover for such an expense. 5^HomeServe USA, “HomeServe 4th Biannual State of the Home Survey,” 2017

If you’re paid weekly or every two weeks and find yourself scraping to make it to the next paycheck after paying recurring bills, then the half payment budgeting method might work best for you. With traditional budgeting, you might see that your total monthly income does exceed your monthly expenses; however, large recurring bills such as rent or mortgage payments, car payments and utilities payments are often due at the beginning of the month. This can be a problem if you’re paid weekly or every other week.

With this personal budget method, on each payday during the month before payment is due, you set aside a “half payment” of a big monthly expense. When the bill is due, you combine both “half payments” and pay the bill in full.

For example, you might have a car payment due the first of every month for $400. If you are paid weekly, each week during the month before the car payment is due; you set aside $100 from each paycheck for the next car payment. If you’re paid twice a month, set aside $200 from the first paycheck and $200 from the second paycheck. By doing this, you are able to spread large expenses out over the entire month instead of using your entire first paycheck to pay your bills.

One tip for this budget method is to start in the pay period where you have the least amount of bills so you can get used to dividing up your income. You can also start with implementing the half payment method on just one of your monthly bills, and then implement this method on more of your regular monthly bills in the future.

This budget plan may be beneficial for equally dispersing your income over the entire month, so you don’t have to worry about whether you can afford additional living expenses after your recurring bills have been paid.

Cash-Only Budgeting System

The 2018 Federal Reserve report also found 22 percent of adults surveyed stated they expected to miss payments on some of their monthly bills, especially with not being able to pay or partially pay credit card bills. 4^Federal Reserve System, “Report on the Economic Well-Being of U.S. Households in 2017-May 2018,” 2018

If you have a lot of credit card debt, the cash-only budget method could be a good option because it calls for using actual cash to pay for variable expenses, such as groceries, gas, clothes and entertainment. This personal budget plan is also known as “envelope budgeting.” By using this method, you will hopefully start to spend less on frivolous expenses typically made by a plastic credit card.

With cash-only budgeting, you allocate your living expenses into separate categories and withdraw cash out from your bank account. Once this is done, you divide the cash into the categorized envelopes.

If you give yourself $350 to spend on groceries per month, the idea is to pay in cash for those expenses and focus on not going over. If you get to the register to pay and don’t have enough cash on hand to cover the entire bill, you’ll have to put something back. Having a strict cut-off amount forces you to decide what you can do without.

Once the cash is spent for the month, you can’t get more out. However, debit or credit cards can be used in case of an emergency.

While some people may find it a burden to always carry around cash, one benefit with this method is the money you used to spend on unnecessary purchases throughout the month can go toward paying off debt or put into a retirement plan.

When it comes to your finances, it’s all about finding the right budget plan to meet your short- and long-term goals. No matter what budget plan you choose, the important thing is to make it work for you and stick with it.



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