When it comes to your finances, having financial independence is the goal. This means having enough income without having to be employed. But how can you take the proper steps to reach this level? The first step toward that goal starts with finding and using a great budget. Here, we will discuss two popular budgets to help you save, invest, and become debt free.
Zero Based Budget
The zero-based budget is a simple yet effective budgeting style. The name is self-explanatory of how it should be used, zero dollars should be left over when finalizing your budget. Because every dollar will be accounted for, it allows you to gain clarity on your spending from month to month. Here are the steps and how to get started:
- Calculate your income/wages to determine what you have available to spend.
- Allocate funds to your fixed monthly expenses, like car payments, mortgage, and insurance.
- Allocate funds to your necessities, such as utilities and groceries.
- Allocate funds to your wants & additional activities, such as travel, clothing, and entertainment.
- Allocate funds to your additional debt payments, such as credit cards, loan payments, and student loans.
- Any extra funds left over will be allocated to your emergency fund, savings, and investing funds.
After finalizing your budget, there should be exactly zero dollars left over from your income. This is how you’ll know you effectively used the budget correctly. The zero-based budget works best if your income is stable and consistent from month to month. If your hours and income tend to fluctuate, a different budget such as the 50/30/20 budget may work better.
The 50/30/20 budget is a simple budgeting tool that does not involve detailed budgeting categories. Instead, you divide your expenses into three main categories: needs, wants, and savings or debt. This can be a great tool for those who do not like tracking their spending in detailed categories and will allow more focus on the bigger picture of their overall budget.
- 50% will go towards your needs, such as your mortgage, utilities, insurance, and car payments.
- 30% will go towards your wants, such as travel, entertainment, and clothing.
- 20% will go towards debt payments and savings, such as credit cards, emergency funds, and retirement savings.
The 50/30/20 budget allows you to easily take your income and use the percentages to allocate the funds to the proper areas. Keep in mind that the numbers used in the 50/30/20 are flexible. If when calculating your budget, you can choose a percentage that works best for you, for example, 40/30/30 or any other combination that fits best. The flexibility of this budget is what makes it popular, easy to use and it doesn’t take a lot of time to implement.
Finding and choosing a budget that is right for you is detrimental to your financial well-being. It could cause you to make choices now that could greatly affect your goals of becoming financially independent. Visit Dover Federal’s Financial Education Center for more information on budgeting. We help you get there, wherever that may be.