Types of Budgets

Having a budget is a great way to stay on top of your spending and develop good money habits. You may be hyped to start a budget and may know How to create a budget from scratch in 5 steps , however, you may not know which budget is best for you. There are a few broad budgeting types you may use. These include the following:

Pay yourself first

This budget type is best for someone who struggles with saving each month or doesn’t want to focus too much on budgeting for each and every minute expense. At the beginning of the budgeting period, you first put money away into savings and investments accounts, debt payments as well as any halal assurance products you may choose to take out. Once money has been allocated to these categories, you can then spend the rest of the money however you see fit. You obviously need to prioritize your necessary expenses and bills. However, you don’t have to watch where you spend your discretionary income after that.

The envelope system

This budget type is all done in cash. You plan out how much you’re going to spend each month and use an envelope for each spending category. Then you withdraw as much cash as you need to fill each envelope based on your budget.

If you go shopping for groceries, for instance, take your grocery envelope and pay for your items with cash. If you run out, that’s all you can spend in that category for the month unless it’s an emergency. You can then take cash from other envelopes. Ideally you should avoid raiding other envelopes too often and have an emergency envelope as well.

This only works well when your primary means of payment is cash. It is also ideal for those who struggle to stick to a budget and those who require the materialisation of cash to temper spending.

Zero-Based Budget

Zero-based budgeting is when your income minus your expenses equals zero.  In this budgeting type you take your income and allocate every cent to a particular expense category for the budgeting period (month). All the expenses should add up to precisely zero. Categories may include rent, groceries, medical expenses, and savings.

This budgeting method is best for people who have a set income each month, or at least can reasonably estimate their monthly income. This budgeting type is extremely time consuming and is best for those who have some experience with a budget.

50/30/20 budget

The 50/30/20 rule is a popular budgeting method that splits your monthly income among three main categories: needs, wants and savings. 50% of your income is allocated to needs. Necessities are the expenses you can’t avoid such as utilities, health care and groceries. 30% of your income is allocated to wants. Wants are things which aren’t essential in your life. These include things such as entertainment, travel and eating out. 20% of your budget is allocated savings and investments. This 20% would include building up an emergency fund or contributions to a retirement fund.

This is a well-known budgeting method popularised by Senator Elizabeth Warren. This may not be the most realistic mix, especially in South Africa where households have significant debt payments and struggle to make ends meet. However, the budget can be adjusted to meet an individual’s particular needs.

A good budget is able to consider things which might come up periodically, like Zakah. You may also adjust or combine the different budgeting types. It is important to note that each individual may have different needs and requirements and the budget that suits you is unique. It is always a good idea to seek professional advice if you are unsure what is best for you. In fact, the best budget type for you may not even be on the list!

Allah Knows Best