What will you learn?

  1.  
    What is budgeting?
  2.  
    What budgeting methods exist
  3.  
    How to determine the most appropriate budgeting method

The final and no less important tool of financial planning is budgeting.

 

By budget, in our case, we understand a financial planning tool with which you can structure finances and draw up a final and detailed plan of income and expenses.

The basis of budgeting is the analysis of income, expenses, free cash flow and monthly deductions to achieve financial goals.

 

The easiest way to plan income is if there is a constant source of income. If the income is irregular, then, when making a budget, calculate the average monthly income for previous years.

Cost budgeting

It is much more difficult to budget expenses. There are several ways to budget future expenses:

  1.  
    historic;
  2.  
    zero budget method;
  3.  
    50/30/20 method;
  4.  
    80/20 method;
  5.  
    the four-envelope method;
  6.  
    six jugs method.

Historical method

Based on an analysis of expenses for previous periods. The method is suitable if you have previously kept records of expenses or if it is not difficult to recall them.

 

For ease of accounting, you can use the form of a personal statement of income and expenses, compiled in the fourth lesson, replacing in the column "amount" the actual amount of expenses with the planned one.

Very often, a person after drawing up a budget fails to follow the plan. This happens because of large seasonal expenses, which are usually forgotten to include in the budget.

 

When making a budget for the year, it is worth considering the costs of gifts, vacation, fitness, medical examinations, wardrobe updates, insurance payments, tax payments, as well as scheduled technical inspections of the car.

It is also recommended to lay from 5% of income for unplanned expenses. As a rule, people tend to underestimate their expenses, and in order to smooth out this effect somewhat and not worry when it is not possible to meet the planned budget, you should create a reserve.

At the same time, we note that the financial safety cushion is calculated separately from this category.

How much to reduce costs?

You spend 40% of your income on entertainment, and you want to cut it. How much does it cost to reduce costs when budgeting for the next month, so as not to fall off in a couple of weeks?

 

Zero budget

A budgeting method that allocates every penny of income. In this method, the amount of free flow (income minus expenses) is zero.

 

Using this strategy, you will know exactly where all your money goes every month.

If you manage to save in one category, you should redistribute the unspent money to another category. If you exceed the budget in one of the categories, you will have to reduce the other category of expenses to compensate for the excess.

 

In this method, savings and expenses for early repayment of loans are also budgeted.

Method 50/30/20

A very simple method from the point of view of accounting. The average monthly income is divided into three parts and is used to cover the following types of expenses:

  1.  
    mandatory (rent, loans, transport, products) — 50%;
  2.  
    optional (leisure, restaurants, gifts) — 30%;
  3.  
    savings (or early repayment of loans) — 20%.

Method 80/20

A more simplified version of the 50/30/20 method. You can not keep records of expenses and not budget them at all, but direct 20% of your income to savings. All other funds are spent at your own discretion

You can also change it to the 70/30, 60/40, or even 50/50 method, depending on how aggressive your budgeting is.

 

Which of these methods may be suitable for you if you have never previously kept records of expenses and do not want to devote a lot of time to it?

 

Six Jugs Method

We distinguish six categories of expenses and plan spending in the specified percentage of monthly income.

 

1. Daily mandatory expenses – 55%.

 

2. Entertainment — 10%.

 

3. Investments — 10%.

 

4. Education — 10%.

 

5. Large purchases — 10%.

 

6. Gifts and charity — 5%.

Four Envelope Method

To begin with, you need to subtract the amount of mandatory expenses and savings from income. Then the resulting amount must be divided into four parts and distributed in envelopes.

 

In modern realities, you can use different bank accounts or savings deposits.

 

The amount in envelopes (or on accounts) can be spent at your discretion - one for each week.

If you manage to spend less in a week, the difference can be directed to investments. This method allows you to monitor expenses based on the weekly budget, which creates less risks for exceeding.

If you're prone to impulsive purchases, you can use physical envelopes, restrict access to bank accounts, or put weekly limits on them.

 

Which of these methods will suit you best if you tend to make a lot of impulse purchases?

 

Where to store savings

We talked about the analysis of finances, all kinds of budgeting tools, cash flows and financial goals.

 

We have to decide the main question – where to put savings, where to store them? This, as they say, is a question of taste, principles and risk-taking.

 

Let's talk about a few ways.

Brokerage and individual investment account

The most interesting and promising tool. Unlike bank deposits and accounts, here you can expect a yield an order of magnitude higher than conventional instruments can offer.

 

But we must not forget about the possible risks, therefore, before moving on to independent investment, it is recommended to understand the structure of the exchange and instruments.

Savings Account

One of the easiest and most conservative ways to save money. When we open a savings account, we deposit our money in the bank. For this, we are owed interest from the bank.

 

The system of work of savings accounts is quite flexible: after opening an account at the request of the client, money can be deposited and withdrawn, and without losing savings and accumulated interest.

The savings account has no restrictions on the terms of validity, amounts of opening, replenishment and withdrawal. Interest here is not grandiose, but it allows you to receive a small income with regular replenishment and minimal withdrawal at the time of interest accrual.

 

There can be several savings accounts. You can create a separate account for each financial goal so that you do not get confused about savings and track progress on each of the goals.

In addition to the accumulation function, the account will help protect savings from fraudsters: the bank card is not associated with a savings account.

Bank deposit

Another good tool for accumulating funds. However, unlike savings and savings accounts, bank deposits are term deposits, which means that they have a limit on the term of placement.

 

Also, bank deposits have restrictions on the amount of opening, withdrawing and replenishing, as well as restrictions on the balance of funds.

You will not be able to close the deposit and at the same time save the accumulated interest. When closing before the placement period, your income will be recalculated at the demand rate (0.01-0.1%).

The comparative advantage of this instrument is an increased percentage, it will depend on the amount deposited, the term of placement and additional conditions of the bank.

 

My Link