An important principle of financial planning is accounting for your income and expenses. Analyzing the amount of income is quite simple, especially when it comes to a fixed monthly salary. But how to control costs? How much can be spent and for what needs? These questions most often arise for those who are just starting to keep a budget and take control of their finances.
In this article, we will share three common spending planning methods for managing your personal budget.
Distribution of personal budget Rule 50/30/20
The 50/30/20 financial rule of thumb for planning and spending is best for beginners. According to this rule, you need to divide your “net income” for the month into three categories:
50% – for basic/basic expenses, i.e. needs;
30% – for emotional (secondary) expenses, it can be going to the cinema, buying clothes, or playing in the online casino Bettilt India;
20% for savings.
Such a scheme will allow you to plan your budget easily and efficiently without complicated and lengthy calculations.
Method 6 jars
A similar method of cost planning is the method of jars. Its content is to distribute money monthly among six “jars”, each of which is intended for certain needs.
Jar 1. Spending on essentials (55% of your budget) is money for everyday needs, utilities, transportation, food, clothes, and more.
Jar 2. Entertainment expenses (10% of your budget). These are funds for “emotional” purchases, leisure and hobbies.
Jar 3. Savings (10% of your budget).
Save funds in the third jar to have financial stability. This money should not be spent, it forms your “safety cushion” in case of force majeure.
Jar 4. Education expenses (10% of your budget).
Invest not only in financial instruments, but also in your self-development – studies, books, trainings, consultations. A person may lose his property, but his knowledge and skills will remain with him and will always be useful to start over. In addition, additional knowledge and continuous self-improvement will certainly be appreciated in the labor market, which will enable you to earn more.
Jar 5. Reserve fund (10% of your budget).
Create a reserve fund in advance for particularly large purchases. Then the sudden burnout of the vacuum cleaner or the theft/malfunction of the phone will not turn into a “hole” in your budget. Moreover, you will be able to plan in advance the purchase of household appliances, a car or other expensive purchases.
Jar 6. Spending on gifts and charity (5% of your budget).
They talk about it in whispers and are afraid to admit it, but gifts often take the lion’s share of the budget. However, it is worth agreeing that we know the main dates – birthdays and holidays – in advance. Or at least you can find out about it thanks to social networks or messengers, and therefore plan expenses.
Method 5 envelopes
This method of planning is somewhat similar to the method of jars, but here the distribution of funds is not based on the percentage principle, but on the category of expenses. According to the methodology, your income must be distributed among five envelopes, each of which is responsible for different needs. Significant attention in this method of budget allocation is paid to the achievement of financial goals – both short-term and long-term.
Envelope 1 – regular expenses for basic needs (housing and utilities, food, transport, medicine, etc.).
Envelope 2 – regular annual expenses. From this envelope, you will be able to finance, for example, car insurance, the organization of holidays or birthdays, the purchase of gifts for family and friends for various occasions, and more.
Envelope 3 – for achieving financial goals. In this envelope, funds will accumulate for the realization of your greatest material aspirations – buying an apartment, purchasing a car, planned repairs, a dream vacation, etc.
Envelope 4 – for the formation of a financial “safety cushion”. This is the amount of money saved in case of unforeseen events, such as job loss, illness or injury, car repairs, etc.
Envelope 5 – for motivation. Your personal “reward” for observing financial discipline. Put here the funds that remained after the distribution among the four previous envelopes. In the future, they can be spent on pleasant little things for yourself, your whims and for encouragement.
According to this method, if you have spent all the money from a certain envelope to satisfy a certain need, you should wait for the next income to make a purchase in that category again.
Note that when it comes to an “envelope”, it doesn’t have to be physical. It can also be separate card accounts or other methods of distribution of funds offered by your online banking.
When choosing a method of spending planning, consider your own needs. Whichever method you choose, you can partially modify them by adapting them to your financial behavior. Maintaining financial discipline will enable you to control your spending, spend less than you earn, build savings, and accumulate funds to meet your financial goals.
