For effective budgeting strategies, it’s important to understand the difference between budgeting principles and budgeting methods. When talking about budgeting principles I am referring to the underlying reasoning and rationale behind effective budgeting. The principles aspect has to do with the “why” behind approaches to budgeting. Effective principles of budgeting do not change over time, just as principles of mathematics do not change over time. After all, no matter how much the technology around budgeting advances, $3 less $2 will always equal $1.
When talking about budgeting methods I am referred to the “how” in terms of the tools, systems, and resources one employs to apply budgeting principles. But budgeting methods also has to do with various systems of budgeting one chooses to use to manage their money. The budgeting methods are as follows: the all-cash budgeting method, the envelope system, as well as check, debit card, and credit card budgeting methods. What this means is one person may track their budget using a pencil, paper, and their checkbook. Another may do so using credit cards and the latest integrated cloud-based personal finance software.
You can also take advantage of our budget calculator, which will assist you in creating a monthly budget. Yet despite the use of vastly different budgeting methods, each of these individuals could be equally proficient in applying principles of effective budgeting strategies. And what are these budgeting principles I’m referring to?
7 Effective Budgeting Strategies
- A budget needs to tie to how much money you actually have in the bank. It does no good if you’re budget says you have $100 to get through the month, but in reality your checking account is overdrawn $200.
- A budget needs to be realistic. Your estimated income and expenses need to be as close an approximation as possible to your actual income and planned spending.
- A budget should cover a specific period of time. Monthly budgets are best in most cases, but other budget periods (such as annual budgets) can also work if they more logically track your income and expenses.
- You should be able to update your budget quickly and easily. While this may sound like mere convenience, it’s important because if you find your budgeting method to be excessively cumbersome there is a danger you could stop doing it altogether.
- A budget is a vital communication tool, so it should be intuitive and easy to understand. Specifically, you should be able to clearly tell where your money is coming from, and where it’s going.
- A budget’s format should be flexible. This will allow you to easily modify it as your preferences and circumstances change over time.
- You have to be committed to and respect your budget. If you’ve budgeted $40 for entertainment and you spend $400 then you’re wasting your time.
This is okay, because as long as you follow effective principles of budgeting there are many different budgeting methods to choose from. Having effective budgeting strategies will allow you to better manage your finance to meet you financial goals. As long as you incorporate the principles outlined above, you can employ the budgeting method that best reflects your own personality, preferences, priorities, and circumstances.
3. Creating A Budget/Debt Reduction Plan