New Year, New You: How to Set Up Your Budget Correctly for the Year
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Adopting the right budgeting methods is the first step to personal finance management. Here’s how to manage your expenses and financial budget in 2023.
You work hard for your money, but is your bank account growing in tandem or is the balance not looking quite on par with what you’ve imagined? Don’t fret. The solution lies in adopting the right budgeting methods and knowing how to manage your expenses. When you do it right, you can certainly look forward to a more prosperous bank account in 2023.
It’ll be great if you can hire a professional financial advisor to help you out. But if you prefer to manage your financial budget personally but don’t know how to, read on because we have a few budgeting tips for you.
Budgeting Methods for Better Personal Finance Management
If you’re new to budgeting, here are four basic strategies that can help you get started.
The 50/30/20 Method
This method is suitable for those who need a general guideline to help them allocate budgets. The basic rule of thumb for this budgeting method focuses on dividing monthly after-tax income into three spending categories: 50% for essential needs (like food, utilities and mortgage), 30% for wants (like entertainment, personal care and travel) and 20% for savings or paying off debts. Keeping to this ratio will limit overspending and cultivate saving habits.
The Envelope System
This is a cash-based personal finance management in which a specific amount of cash is set aside in an ‘envelope’ for monthly expenses. The beauty of this method lies in enforcing meticulous financial planning at the start of every month since you’re not allowed to use any credit facility and are limited to spending the cash allocated.
If carrying cash envelopes sounds like a ridiculous strategy in our cashless society, you can always adapt the concept to modern-day e-wallets or digital payment apps for more efficient transactions.
If you’re more of a free spirit who prefers less restrictive methods, the values-based budgeting method may pique your interest. This method respects your priorities and allows you to allocate more budget to what you enjoy doing. Whether you love to travel or dine at Michelin-starred restaurants, you can personalise your budget according to your preference instead of sticking to rigid guidelines.
The “Pay Yourself First” Method
As the name suggests, this budgeting method prioritises savings before expenses. Unlike the other budgeting systems that aim to systemise how to manage expenses, the “pay yourself first” method merely requires you to set aside a sum as savings and the rest of your monthly income can be spent however you choose.
This method requires the least amount of planning. If you don’t have time for tracking your expenses, this is probably the best strategy for you.
Serious about getting your finances in order? The zero-based method is what you need because it requires you to track every dollar you spend or save until your income reaches zero. There is no room for mindless spending and everything must be accounted for in a deliberate way. The tracking process can be tedious, so do consider using an expense tracker app that can help you manage your money on the go.
How To Pick the Right Budgeting Method
Before you pick a budgeting method, there are three factors to consider to ensure the chosen strategy can truly help you achieve your financial goals.
1. Your Current Financial Status and Goals
In general, the more financially stable you are, the more freedom you’ll have to adopt less rigid budgeting methods like the “Pay Yourself First” method or the Values-Based System. Conversely, if you’re in debt or have ambitious goals like buying a property or car in the near future, meticulous strategies like the 50/30/20 or zero-based methods are more likely to expedite your progress.
2. Your Commitment Level
How much effort are you willing to put into tracking and managing your expenses? Do you have the time to keep up with monthly budgeting? Taking a closer look at your lifestyle and work commitment may give you a glimpse of how much time you can put into budgeting and which system is more suitable for you. If you’re always on the move, it may be tough to execute a system like zero-based budgeting that requires to-the-dollar tracking.
Manual Budgeting vs Digital Budgeting
Engaging the help of digital apps or personal finance management software like Mint and YNAB can be convenient for effective tracking and even helps to categorise your expense for future analysis. However, if you’re less tech-savvy and prefer more manual approaches like working with a spreadsheet or recording details in a notebook, adopting a simpler budgeting system may be more efficient for you.
The start of 2023 is the best time to start your budgeting habit. Budgeting need not be a time-consuming process as long as you choose a method that suits your financial goals and commitment level. At its best, mindful budgeting can even help you uncover your spending weaknesses and reduce debts with timely debt consolidation planning or personal loans before they spiral into insurmountable consequences.