Here, we list some of the most common budgeting methods recommended by personal finance experts all over the world. If you don’t know where to start, or if your previous system isn’t working anymore, this list will get you up to speed in no time.
1. The Envelope System
The envelope system is one of the simplest and most traditional forms of budgeting. The system relies on a series of envelopes that are labeled with the different budget categories you have. The number of envelopes depends on your needs—you can have as few or as many as you want. Then, you can divide your money and place them in each envelope. When you need to spend for a budget category, you take out money from the corresponding envelope—and only that envelope.
The key here is that you can’t transfer money from one envelope to another. If there’s no money left for a budget category, then you have to stop spending for it.
Pros: The envelope system forces you to be realistic about your spending. You should have a good idea of your expenses so you can allocate enough money for it. This also helps you keep track of how much money is being spent on a particular category. It’s also easy to set up if you keep things small.
Cons: The system might take some time to perfect—you might have to make a few adjustments over the course of a few months before you can arrive at an effective way to allocate your money. There’s also the hassle of taking an envelope of money with you wherever you go. You also have limited access to your funds, especially if you keep your envelopes at home. The envelope system could also become complicated to manage if you keep adding and/or changing categories.
2. The 6 JARS Money Management System
This method was introduced in T. Harv Eker’s book, “Secrets of the Millionaire Mind.” The core principle is that you have 6 jars, each with a particular purpose and percentage. By order of importance, they are the following:
a. Necessity Jar or NEC (55%), which covers all basic expenses like rent, food, utilities, etc.
b. Financial Freedom Jar or FFA (10%), which is used for investments and income-generating ventures like businesses
c. Education Jar or EDU (10%), which can be used to further your education and personal growth
d. Long-Term Saving for Spending Jar or LTSS (10%), which you can use for big-ticket items like a house or a car
e. Play Jar or PLAY (10%), which is for short-term purchases and experiences that you really enjoy, like *~new shoes ~* or *~ traveling~*
f. Charity Jar or GIVE (5%), which is for project or a cause you believe in
Budget your money according to the breakdown and you’re good to go. You don’t really have to use actual jars when you implement this system; the important things to keep in mind are the purposes of the jars and their allotted percentages.
Pros: The nice thing about using the 6 JARS System to budget is that it gives you a visual reminder of where you need to put your money. The jars are easily visible and give you an idea of your financial status as compared to the envelopes which you can just keep in a drawer, away from sight. It’s also simple and easy to follow.
Cons: Like the envelope system, you might have limited access to your funds if you keep them in actual jars. It might also be less flexible in times of emergencies, since some jars are strictly no-touch zones. Not everyone also subscribes to the concept of setting aside money for charity, so the GIVE Jar might have to be allotted to another type of fund.
3. Pen and Paper Budgeting
Another rudimentary but very effective way to budget is to use the pen-and-paper method. Nothing too fancy here—you just need a small notebook and a pen to note down all the transactions you make in a day, and then subtract them from your disposable income.
Pros: Very easy and simple; it’s a good method for newbie budgeters. It also cultivates the habit of tracking your expenses and makes you aware of how you’re spending your money.
Cons: This method can immediately become tiring and time-consuming for some because it has to be done consistently—you can’t afford to miss a single day. It’s also easy to make errors when you’re writing things down and these mistakes could throw off your records.
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