Apersonal budget (for an individual) orhousehold budget (for a group sharing ahousehold)[1] is a plan for the coordination of income andexpenses.[2]
Personal budgets are usually created to help an individual or a household of people to control their spending and achieve their financial goals. Having a budget can help people feel more in control of their finances and make it easier for them to not overspend and to save money.[3] People who budget their money are less likely to amass large debts, are more likely to lead comfortable lives inretirement, and are better prepared for emergencies.
In the most basic form of creating a personal budget the person needs to calculate theirnet income, track theirspending over a set period of time, set goals based on the information previously gathered, make a plan to achieve these goals, and adjust their spending based on the plan.[3] There exist many methods of budgeting to help people do this.
The 50/30/20 budget is a simple plan that sorts personal expenses into three categories: "needs" (basic necessities), "wants", andsavings. 50% of one's net income then goes towards needs, 30% towards wants, and 20% towards savings.[4]
In the pay yourself first budget people first save at least 20% of their net income, and then freely spend the remaining 80%. They can also choose a 70/30, 60/40, or 50/50 budget for more savings. The most important part of this method is to put one's savings apart before spending on anything else.[5]
This method is a variation of the pay yourself first budget, in which people create multiplesavings accounts, each for one specific goal (such as a vacation or a new car), and each with an amount of money that should be reached by a specific date. They then divide the amount of money needed by the timeline to calculate how much they should save each month.[citation needed]
For this method, people need to usecash instead ofdebit orcredit cards. They need to allocate their net income into categories (e.g. groceries), withdraw the cash allocated for each category, and put them into envelopes. Any time they want to buy something in one of the categories, they only take the designated envelope so that they cannot overspend.
In zero-based budgeting, all of one's net income must be allocated ahead of spending. Zero-based budgeting involves dividing income into different expense categories, ensuring that all funds have been assigned a purpose, and at the end of the month there is a zero balance in the budget.[citation needed]
In this method, users keep a paper notebook or digital ledger in which all take-home earnings are logged along outgoing expenses. Users determine how much money they have to spend, log fixed expenses, determine how much is left for discretionary (variable amount) spending, and track that discretionary spending into four broad categories: needs, wants, cultural, unexpected. Users also set themselves a savings goal for the month and note how they intend to achieve the goal. All discretionary spending transactions are promptly logged. Each week finishes with an accounting of spending, and the end of the month finishes with a final accounting, and notes about lessons learned and/or ways to improve. The prompt logging of expenditures and answering the questions related to it encourage mindfulness and reduction of impulse buys.[6]
Several personal financesoftwares andmobile apps have been developed to help people with managing their money. Some of them can be used for budgeting and expense tracking, others mainly for one'sinvestment portfolio. There are both free and paid options.
