- Date : 28/01/2022
- Read: 3 mins
Experts suggest two budgeting methods that can be successful, provided one sticks to them - the 50/30/20 budget and the envelope system.
For many, running short of money by the end of the month may not be unusual, even if they follow some sort of a monthly budget. And every time it happens, they wonder, ‘why is this happening?’
For salary-earners, the possibility of a month-end financial crisis become more real in the absence of a budget. But if this happens despite creating a budget, it is because we are guilty of spending money on things we don’t need. We forget what a budget is for - to help us live as per our monthly income, avoid overspending, and save.
The biggest benefit of having a monthly budget is that it helps us save and meet our financial goals, such as saving for retirement or making debt payments. Savings goals can also be for a house or a vehicle, an offspring’s wedding or higher education, or even an expensive gadget.
Moreover, a budget helps build an emergency fund for a rainy day - say, loss of a job or an unexpected medical situation (as many discovered when the pandemic broke out).
Most commonly, personal budgets fail because we are not serious about it. But often, a budget may have the following flaws:
- It does not address small extra expenses that add up;
- It does not plan for unavoidable expenses (e.g. weddings);
- It does not plan for emergencies (say, illness);
- It does not set goals.
Experts suggest two budgeting methods that can be successful, provided we stick to them - the 50/30/20 budget and the envelope system. Read on to find out what they involve:
The 50/30/20 Budget
The 50/30/20 method was first popularised by US Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their 2005 book, All Your Worth: The Ultimate Lifetime Money Plan. The book lays down a rule of the thumb for monthly expenses - a 50-30-20 division under three heads: needs, wants, and savings.
The bulk (50%) of one’s take-home pay covers most of one’s ‘needs’ (or necessities):
- Rent/home EMI;
- Utility bills (power, gas);
- Daily transport (including petrol);
- Pet care;
- Minimum credit card dues/other loan repayments;
- Annual insurance payments (health, auto) can also be adjusted here.
Next, 30% goes towards ‘wants’, or discretionary expenses:
- Dining out;
- New clothes;
- Gym memberships;
- Movies/entertainment subscriptions (Netflix etc.);
- Fancy groceries.
The remaining 20% is for savings to meet one’s financial goals (a house, for instance).
The Envelope System
Under this system, expenses are listed under separate heads, envelopes made for each, and the earmarked amounts put in the respective envelope. This means, when leaving for office, you take out your auto fare from the envelope marked ‘Daily Travel’. The same goes for your lunch bill.
The envelope system is cumbersome but effective if one doesn’t ‘steal’ from one envelope to meet a shortfall under another head or use credit cards. Above all, for either of these methods to succeed, one needs to cut down on extravagant spending.