Types of Budget
Contents
Zero Based Budget
Value Proposition Budget
Overview
There are several types of personal budgets you can use to manage your finances effectively. Each type has its own method and approach to organising and planning spending, savings, investments and debt repayments. In order to choose your appropriate budget style, you'll need to first think about what you want to use the budget for. Creating a budget is never a "one size fits all".
Zero Based Budget
With Zero-based budgeting, you start each new budgeting period (typically each month) with a clean slate, where every pound of income must be allocated to specific expenses, savings, investments, and debt repayments, ensuring that total income minus total expenses equals zero. This method ensures every pound is purposefully spent or saved.
It might not suit someone with limited financial skills because it requires ongoing commitment but can be extremely effective in managing your financial situation. It encourages proactive financial management and can lead to a healthier financial life by aligning spending and saving habits directly with personal financial goals.
How Zero-Based Budgeting Works for Personal Budgets
List Monthly Income: Begin by totalling all sources of income for the month, including salaries, freelance income, and any other cash inflows.
Allocate Every Pound: Assign every pound of your income to a specific category until there is no money left unallocated. Categories can include rent/mortgage, utilities, groceries, entertainment, savings, investments, and debt repayment.
Justify Each Expense: For every expense category, justify the amount allocated. This involves assessing the necessity and value of each expense, similar to the way a business would evaluate budget requests.
Monitor and Adjust: Throughout the month, monitor spending in each category. Since zero-based budgeting involves a precise allocation of funds, it’s important to stick closely to the set budget or adjust allocations as needed if income or expenses change unexpectedly.
Benefits of Zero-Based Budgeting for Personal Finances
Control Over Finances: This method provides a comprehensive overview of where money is going and helps in making intentional financial decisions.
Increased Savings: By allocating funds intentionally, it's often easier to prioritise savings and financial goals.
Debt Reduction: Zero-based budgeting can be effective for debt reduction as it allows you to allocate funds specifically for debt repayment.
Waste Elimination: Helps in identifying and cutting unnecessary expenses by requiring justification for every budget item.
How to Implement Zero-Based Budgeting in Personal Finance
How to Implement Zero-Based Budgeting in Personal Finance
Setup a Budgeting Tool: Use a spreadsheet or budgeting software where you can easily adjust categories and amounts. Many apps and tools are designed for zero-based budgeting.
Review Regularly: Since every pound is allocated, you need to review your budget frequently (ideally daily or weekly) to ensure you are on track and make adjustments as necessary.
Plan for Irregular Expenses: Set aside funds for irregular or unexpected expenses by categorising them as necessary, such as car maintenance or periods out of work. This helps avoid situations where unexpected costs disrupt the balance of your budget.
Adjust Monthly: At the beginning of each month, start the budgeting process anew. Previous months serve as guides, but every month is budgeted based on its unique circumstances and needs.
Value Proposition Budget
This budgeting method focuses on spending money on things that bring the most value, whether that’s happiness, practical, or return on investment.
Expenses are calculated based on the value they bring in relation to their cost, encouraging more mindful spending and investment.
How Value Proposition Budgeting Works
Evaluate Each Expense: For every potential expense, ask yourself how much value or joy it brings into your life. The assessment can be subjective and based on personal criteria such as happiness, utility, necessity, or return on investment.
Rank Based on Value: Prioritise expenses by the level of value they provide. For example, spending money on hobbies that significantly enhance your quality of life might be ranked higher than occasional luxury purchases that offer only temporary satisfaction.
Allocate Budget According to Value: Allocate more of your budget to high-value expenses while reducing or eliminating low-value spending. This might mean choosing to invest in quality healthcare, education, or experiences over luxury goods or convenience items that do not contribute significantly to long-term happiness.
Regular Reviews: Regularly review and reassess your expenditures to ensure they still align with your value priorities. This is crucial as values and circumstances can change over time, necessitating adjustments to your budget.
Benefits of Value Proposition Budgeting
Increased Satisfaction: By spending on what truly matters to you, this method can lead to greater personal satisfaction and a sense of fulfilment from your financial decisions.Cost Efficiency: It helps identify and eliminate wasteful spending on items that do not provide sufficient value relative to their cost.
Goal Alignment: Supports spending alignment with long-term goals and values, making it easier to achieve specific life goals that require financial backing.
Mindful Spending: Encourages a more mindful approach to consuming, which can contribute to more sustainable financial habits.
Practical Implementation
Implementing value proposition budgeting involves a shift from seeing budgeting purely as numbers management to understanding it as value management. Here’s how you can start:
List Current Expenses: Make a detailed list of current monthly expenditures.
Assign Value Scores: Assign a value score to each item based on how much satisfaction or utility it brings relative to its cost.
Adjust Spending: Increase funding to high-value areas and cut back or eliminate low-value spending.
Monitor and Adjust: Continuously monitor how these expenditures affect your overall happiness and financial health, adjusting as needed.
Value proposition budgeting is particularly effective for those looking to streamline their finances and focus on what truly enhances their life quality. It offers a flexible framework that can be adapted to different incomes, lifestyles, and financial goals.