Budgeting Methods for Every Income Level: Zero To Hero

What's Budgeting

 The process of planning, allocating resources, and managing expenditures is called the Budgeting method. It will help you to prioritize spending so you can keep a positive cash flow. The alignment between income, spending and saving is more important than number crunching. Sometimes, you make tough decisions and put limitations on your spending where you want. But it's most important to keep a close watch on your financial situation.

Why are Budgeting methods required?

 Budgeting methods help you to stay aligned with your means and further give control over your financial life by:

·       Tracking your spending habits

·       Giving your insight into the management of your spending habits

·       Supporting you in reaching your financial spending goals

Budgeting according to different income levels

Budgeting is like a restriction on your spending journey. But it helps avoid being vulnerable to unexpected expenses. Budgeting is essential at each income level.

·       Low-income levels: Essential coverage and avoiding debt

·       Medium income levels help make a balance between income, spending, and saving

·       Higher-income levels: prevent lifestyle inflation and promote sustainable wealth building.

Popular Budgeting Strategies:

 Are you looking to know how much you need to spend on each Budget category? There is no exact figure in each category for every person. You need to select the strategy that suits you. Below are some popular categories:

    i.         50/20/30 Budget:

In this Budget, 50% of your total net income goes to your needs, 20% savings,

and 30% where you want.

  ii.         Pay Yourself First:

In this Budget, the first payment is made into your savings account, then bills are paid, and the rest is allocated for your spending.

iii.         Zero-Based Budget:

In this method, every expense is linked to a specific income, resulting in a net balance of zero.

iv.         Envelope Budget

In this method, a specific amount of money is kept in an envelope and categorized by various Budgeting categories.

Various Budgeting techniques:

Here are eight types of budgets from which you can choose based on your income level and flexibility.

1) Incremental budgets:

It's suitable for lower to moderate income levels. A Budget is built on last year's Budget by making incremental changes to it for the current year's Budget.

Pros

·       Familiar and straightforward

·       Tried and tested

·       Comparatively easy to prepare

Cons

·       Perpetuate inefficiencies from previous years.

·       It is not very adaptable to the competitive market environment.

2) Justified zero-based Budgeting methods:

Zero-based Budgeting is powerful and flexible, Budgeting for all income levels. It's suitable for those who have goals to track their spending, clear debts, or save aggressively. In this Budget, each expense will be justified for the new year. The initial starting point will be zero-based. Every penny/cent will be included in the justified Budget.

Pros

·       Zero-based Budgeting methods align your financial habits and needs

·       Analysis of expenditures potentially reveals inadequacies

Cons

·       Intensive resources required

·       Time-taking

·       It can be harder to implement

3) Activity-based Budgeting method:

This Budget is suitable for each individual with activity-based spending habits. It's for medium-income levels who want to manage and optimize their spending habits. A Budget is based on the activity cost and the frequency of performing those activities.

Pros

·       Supports resource sharing and prioritization

·       Provides a granulated picture of resource distribution

Cons

·       Complex and time-consuming

·       Detailed analysis and process understanding required

4) Value proportion budget:

This Budget helps trim income levels to higher. For low-income households, it fosters discipline and ensures their survival. It balances planning, spending, and saving for middle-income levels. This Budget aligns spending with the values and goals of high-income levels.

Pros

·       Increases financial awareness

·       Works along all income streams

Cons

·       Intensive time required

·       It relies on the existing expense.

5) Continuous Budgeting:

It is a Budgeting method that requires regular updates, with one month or so added in various periods of the Budget. Furthermore, it is applied on a quarterly or yearly basis. It can be used across a range of income levels, from low to high. Allowing consistent amendments to salary and cost projections. It provides flexibility and accuracy for financial hardship compared to static Budgeting methods, especially for those with flexible salaries.

Pros

·       Gives more flexibility

·       Quickly adapts to changing situations.

Cons

·       Requires intensive resources for regular updates

·       Continuous Budgeting can result in a focus on short-term thinking.

6) Project-based Budgeting:

This Budget is based on the projects and resources allocated to it. According to income levels, money is allocated relatively to each task. It needs careful planning and tracking to ensure that each task remains within the allocated Budget and achieves its objectives. It's an ongoing, consistently working, not just a one-time Budget.

Pros

·       Financial alignment according to each specific project

·       Every task is allocated to a particular spending category

Cons

·       Project-based Budgeting is not beneficial for every organization because it's specific to each project

·       Demands constant changing updates

7) Collaborative Budget:

It is suitable for all income levels. The expenditures are aligned with personal needs, values, and priorities. This approach acknowledges the finite capacity of human resources and capital. So, it is an effective way of resource allocation. It provides practical techniques for various Budgeting techniques.

Pros

·       Improved efficiency

·       Realistic Budget

Cons

·       Time-taking

·       Traditional approach 

8) Flexible Budgeting:

A period Budget based on the activity levels of that period. Flexible Budgeting compares budgeted performance to actual performance. In this Budget, real-world variations are adopted. Furthermore, if you have variable income levels, you can adjust them accordingly to match your income and expenses. It results in more accuracy.

Pros

·       Provides a more accurate picture of individual expense levels and activity levels

·       Flexible, as it can adapt to the changes in the market

Cons

·       Very complex to create

·       The actual results and expected results comparison is hard

Final words:

Budgeting methods are a process of transforming and refreshing your financial goals. It is not simple to plan and choose a Budget to control your finances. What matters is aligning your priorities and spending. The right approach to Budgeting empowers you to spend wisely, save consistently, and ultimately achieve financial stability. It helps to make better selections and future stability.