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4 types of funding methods and which one you should choose

Funding is crucial even if you are well-off. It allows you to evaluate your expenses and come up with a strategy to keep a tight rein on them. Two in five people in Ireland are unable to pay an unexpected expense of €1,000. Having less money in pockets pushes you on the verge of debt. Unexpected expenses are inexorable. Of course, you would turn to direct lenders to borrow money when you are in a tight spot. The chances of falling into a debt hole are extremely high and therefore budgeting is vital.

There are various methods of budgeting. It is hard to determine which one will work better to take hold of your financial condition unless you try all of them. in fact, you may need to switch between methods as your financial circumstances and goals change.

Types of budgeting methods

Here are the four types of budgeting methods you should choose to be in the driving seat even in difficult times. Here are they:

Zero-based budgeting

A zero-based budgeting method is also called bare-bone budget. It means you allocate a purpose to every penny you earn making the balance zero. It does not mean that your budget will not have scope for saving and investing.

A zero-based budgeting method is aimed at helping those people who know their outgoings but want to know how much money you are spending on a particular category. This budgeting method is great for tracking your monthly expenditure. You can easily decide where to whittle down and save money.

How does this budget work?

  • It justifies your expenses. You can allocate each penny to a particular purpose. Youwill maintain a straightforward idea of how much funds you spent where.
  • You can specify your necessities and prioritise your spending accordingly. Discretionary expenses are not banned, but they are counted in the end.
  • You can cut back on expenses to allow for more savings.

Envelope budgeting

Envelope budgeting is aimed at those who want to know how much money they send in a specific category. You create envelopes for different categories such as travel, groceries, medical expenses etc and put money in those envelopes. Each envelope will contain a sum of money available to spend on that category for a while month.

The goal of an envelope budget is to keep tabs on spending on each category. Once the envelope is cleared, you are not allowed to spend a single penny more on that category until the following month. If you have left with a portion of your money, you should transfer that to your savings account.

How does this budget work?

  • First off, you requireto specify your budget categories. They generally include groceries, transportation, utilities, entertainment and medical expenses.
  • Label the envelopes and allocate money to each of them. Get an idea of your average spending on each category by evaluating your bank statement of previous three months.
  • Use cash from the respective envelope, meaning money for groceries should be taken out of the grocery envelope. Do not dip into another envelope for groceries if the grocery envelope has exhausted. Any left money should be transferred to your savings.

Pay yourself first

Paying yourself first allows you to save money for a rainy day first thing. You can prevent yourself from borrowing money from direct lenders every time you are in need of cash. Once you have stashed away, you are free to use what you have left with.

You should carefully analyse your spending in previous six months. Make sure you cut back on your discretionary expenses to allow for a smooth saving. This budgeting method allows you to be consistent with your spending. A pay yourself first budget helps those who are struggling to save money, so they do not have to rely on a quick cash loan in Ireland every time when emergency crops up.

How does this budget work?

  • You will have to identify your saving goals. It may include saving for an emergency cushion, retirement planning, and stowing away for a large purchase.
  • Choose a specific percentage of your income you want to save. Make sure it aligns with your provident goals.
  • Automate savings by linking your pay account to a savings account. Money will be automatically pulled from your pay account on the date you choose for the transfer.

50/30/20 budget

A 50/30/20 budget is a traditional budget. It allows you to allocate your money in three categories – necessary, discretionary and conserving.

  • Half of your income will go towards essential expenses.
  • 30% of your income will go towards discretionary expenses.
  • The rest 20% will be set aside.

This budgeting method chooses a fixed share of your earnings to save money on rent every month.

How does this budget work?

  • You should divide your allocation into three classes – needs, wants and savings.
  • It is not compulsory to consumeall the money allocated for wants. Any money left by the ending of the month should go straight into your
  • You can reduce your discretionary expenses if you have come acrossan urgent or big 
  • The percentage will vary by your financial circumstance.

The bottom line

The budgeting method you choose to be on top of your bank depends on your financial circumstances and goals. Bear in mind that your budget is simply a tool to assist you in managing your expenditures. You do not have to adhere to it strictly. Be flexible because you will have to make adjustments in your budget as your goals and financial condition change. 

It can be challenging for you to maintain a manual spreadsheet. Choose a budgeting app and link your pay account to it. You will get all expenses in one place, so it becomes easier to track your expenses. You should consult your financial advisor because you cannot gain financial independence by simply stashing away money. You should also learn to invest money.

Alex Ainslie

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