Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do.
Budgeting is essential because it helps you control your spending, track your expenses, and enable you to save more money. Additionally, budgeting can help you make better financial decisions, prepare for emergencies, get out of debt, and stay focused on your long-term financial goals.
It is simply balancing your expenses with your income. If they don’t balance and you spend more than you make, you will end up sinking into debt.
According to Sheila Mmboga, a financial literacy expert in Kenya, while most people must have a budgeting system, not all budgeting methods are a one-size-fits-all strategy.
Here are some budgeting techniques to consider:
The Traditional Budget
The traditional budget is the one that comes to most people’s minds first.
“You list your income, your expenses, and find the difference. After that, you set goals for how much you want to spend in each category, such as groceries, gas and entertainment,” says Mmboga.
This can be an excellent budgeting technique for detail-oriented people who have more time.
“It’s not so great for people who are “big-picture” thinkers, creative types and busy people,” adds the expert.
50/30/20 Budgeting technique
The 50/30/20 budget is a simplified plan in which you break down your expenses into three categories, i.e. needs, wants and savings. Fifty percent of your take-home pay should go towards needs, 30 percent should be devoted to wants, and 20 percent should be put into savings.
Using this method helps you allocate where your money should go. It also lets you figure out if you are spending 30% on living expenses and 60% on personal expenses. It’s a great way to figure out what you are spending and where.
This technique involves assigning spending categories to individual envelopes. Each one is allotted a certain amount of cash which is then used to cover spending for that category.
The incremental budgeting method is one of the most frequently used techniques. All you have to do is adjust the existing or last fiscal period budget by an increment or percentage to obtain the new or current year’s budget. The predicted operating budget for the new year adjusts according to the previous year’s expenditures.
There is no set formula for incremental budgeting- simply follow the assumption that the expenditures that occurred in the previous fiscal period will be the starting point for the new fiscal period.
You can use this budget if you are an established business with a historical record of your profits and losses. It is also ideal for companies that want to build the value of their departments, create fast and efficient budgeting processes, and for companies whose funding requirements are predictable and consistent.
Whichever technique you opt for, ensure that it will enable you to prioritize your needs according to your budget and help you achieve a healthy financial state in your life.