Most people don’t keep track of their personal finances.
In fact, a huge 65% of Americans have no idea how much money they spent last month.
Why is budgeting important?
First, let’s look at why you should budget in a bit more detail.
If you want to save money, personal budget formulas will keep you on track and help you achieve your goals.
More importantly, it makes sure you always have enough money for the things you need and keeps you out of debt.
Regardless of how much you earn, budgeting is a key skill to learn to protect your personal finances.
10 budget formulas that actually work
There are tons of budgeting formulas out there. It’s important to pick methods that will give help you control your spending and save more money.
Don’t waste time browsing the internet for personal budgeting formulas.
We’ve done the hard work for you and selected the 10 best budget formulas that actually work.
1. Traditional budgeting
Let’s start with the traditional budgeting method.
This method is proven to help you manage your money better.
How does it work?
- Make a list of all of your expenses and create a total.
- Add in your total monthly income after tax.
- Subtract the total for your expenses from your monthly income.
The number you have left is what you have spare to allocate towards your savings goals or for leisure activities.
The advantages
- Easily make adjustments to your spending categories.
- See where all your money is going.
- Helps you reign in your spending on areas where you overspent.
2. The envelope method
How does it work?
Create an envelope for each spending category. For example, bills, gas, groceries, mortgage, etc.
Work out how much of your monthly income to allocate to that envelope based on previous bank statements.
Next, withdraw that amount out of an ATM then place the cash into the appropriate envelope.
When you go shopping or need to pay a bill, take the money from the right envelope.
You can only spend the cash in the envelope for each category. Once it’s gone, it’s gone.
If you have any money left in any of the envelopes at the end of the month, you can either add it to your savings fund or keep it in that envelope for next month.
The advantages
- Stops you from overspending by limiting the amount of cash you have available to spend.
- Your budget becomes tangible, meaning you’re much more likely to stick to it.
- It reduces wasteful spending.
3. 50/30/20
The 50/30/20 personal budgeting formula is a simple yet effective method to help you manage your money more effectively.
How does it work?
Divide your monthly income into the following three categories:
50% needs – essentials such as your mortgage, rent, groceries, bills, and insurance.
30% wants – this covers everything that isn’t essential such as beauty products, eating out, and any subscriptions you sign up to.
20% savings or paying off debt – start saving an emergency fund or pay off any credit card bills or loans.
The advantages
- Allows you to take control over your money by showing you exactly where every cent is going.
- Keeps you on track for your wider financial goals.
- Shows you which categories you are overspending on every month.
4. Zero-based method
Zero-based budgeting takes every cent that you earn and gives it a purpose.
Your income minus all of your expenses should equal zero.
How does it work?
If you earn $2,500 a month, everything you spend or save should add up to $2,500.
Write down your monthly income and expenses. Start with the most important things such as rent and bills, and subtract your expenses from your income until you reach zero.
Don’t forget to include your monthly savings contribution.
The advantages
- Allows you to make sure your money is being put to the best possible use.
- Zero-based budgeting is extremely accurate.
- Enables you to eliminate any problem areas immediately.
5. Half payment method
The half payment method divides the cost of your regular expenses such as bills in two, so one paycheck covers half of what’s owed and the next paycheck covers the other half.
This budgeting technique works particularly well if you get paid twice a month.
How does it work?
For each paycheck you receive, put aside half of the bill’s payment so you can pay it in full when it’s due.
The half payment method spreads out the cost of your expenses, meaning you are less likely to run out of money for essentials.
Planning is key to make this budgeting technique work.
The advantages
- The half payment method breaks the cycle of living paycheck to paycheck.
- Prevents overspending by moving half of your money into a separate account that is only used for paying bills.
- Eliminates the financial stress of waiting for your next paycheck.
6. Goals driven budgeting
Goals driven budgeting works by allowing you to focus on your personal financial priorities.
How does it work?
Create a list of effective, realistic financial goals. For example, “I want to save $20,000 for a down payment for a house in the next 18 months.”
Once you have your goals, allocate a proportion of your monthly income to them. Setting up an automatic payment into another account will help keep you on track.
The advantages
- Goals driven budgeting keeps you motivated and reduces wasteful spending.
- Ensures that you are continuously contributing towards your goals.
- Allows you to adjust your spending and saving as required.
7. Cash only budgeting
Cash only budgeting uses just cash to cover all of your monthly spending. No credit or debit cards can be used.
How does it work?
Choose which of your spending categories is suitable for using cash only such as groceries and bills.
Decide how much to budget for these areas and set a date every month to take out the cash from an ATM.
If your money runs out, you can take money from another cash only pot, however, don’t be tempted to get your credit card out.
The cash only budgeting method works well with the envelope system.
The advantages
- Keeps your spending on track by considering your purchases.
- It’s a low-maintenance budgeting technique that doesn’t require any planning.
- Using cash has a positive impact on your spending and motivates you to stick to your budget.
8. The 60% solution
Similar to the 50/30/20 method, the 60% solution allocates 60% of your monthly income to fixed expenses (mortgage repayments, bills, and food), and the remaining 40% is used for everything else.
How does it work?
The bills that need to be covered every month are dealt with by using 60% of your regular income.
The remaining 40% can be divided into categories such as:
- Savings (10%)
- Retirement (10%)
- Leisure and entertainment (20%)
The advantages
- Helps you understand your fixed expenses and identify areas that you can reduce spending on.
- The 60% solution deals with the most important outgoings first, so you won’t be left short at the end of the month.
- Contributes to your savings fund every month.
9. Values-based budgeting
Values-based budgeting aligns your money with what’s important to you. For example, if your family lives far away, you might allocate more money to travel than for eating out.
How does it work?
By going through your monthly statements, you can identify your top five biggest spend areas.
Next, ask yourself if each area aligns with your priorities. You then allocate a proportion of your earnings to each area.
The advantages
- Values-based budgeting is a great technique for people who already have some control over their spending and want to take their budgeting to the next level.
- Prevents impulse purchases.
- Encourages you to spend on the things that matter to you the most, meaning you are more likely to meet your financial goals.
10. Reverse budgeting
How does it work?
Reverse budgeting is where you contribute to your savings fund first, before using what’s left to pay for expenses and social activities.
Assess your spending habits by looking through at least three monthly statements.
Next, you need to make a list of short and long-term savings goals.
Set up an automatic deduction every month from your current account to your savings account.
The advantages
- It’s easy to use.
- You don’t need to constantly check your balance or do lots of math.
- Makes saving a priority and allows you to meet your goals earlier.
Budget your way to financial confidence
The most important thing about budgeting formulas is finding the right one for you.
So, what are you waiting for? Give these budget formulas a go and start achieving your financial goals.If you want to know more about budgeting and how it can help you better manage your personal finances, take a look at our collection of informative articles.
