Managing finances can be especially difficult nowadays when the cult of consumerism rules our society. However, there's something that can help: budgets. Budgets allow us to limit expenses within a certain period of time. Your future financial well-being depends directly on this, so it's important to do it right.
Ways to Create a Budget
The easiest way to create a budget is the «envelope method», which is used all over the world. This method has developed over time, and new methods have been based on it.
The Classic Envelope Method
You distribute all of your income into «envelopes», i.e. categories of goods and services you are planning to spend money on. Every time you need to make a purchase you take the money out of the corresponding envelope. If the category is an important one (such as food or health), you can take money from the other envelopes in an emergency. However, if the category is entertainment or eating out, you don't want to spend more than what is in the envelope. This helps you stick to your budget and reach your financial goals. At the end of the month, you analyze your successes and adjust the amounts in the envelopes if your original attempts turned out to be unrealistic.
The 50/20/30 Method
This method divides all of your expenses into three big categories. Every time you get the money you distribute it in the following way:
- 50% goes to mandatory expenses. This includes rent, utilities, maintaining your health, and food. Every month these expenses should be more or less the same.
- 30% goes to non-routine expenses. These include entertainment, hobbies, travel, etc.
- 20% goes to savings or paying off existing debt. If your mandatory expenses make up more than half of your income, you will need to cut back on your non-routine expenses. If they make up less than half of your income, you put the extra money into savings. This allows you to make fewer unplanned purchases and increase the efficiency of your spending.
Max Krainov's Four-Envelope Method
It can be quite complicated to plan a budget for an entire month, especially when dealing with numerous categories. This method works on a week-to-week basis. You take your monthly income and set aside about 10% for savings and large purchases, then set money aside for mandatory expenses. Then you divide the rest of your money by 4.3 (the average number of weeks in a month), and that's it - your weekly budget is done. If you manage to spend less, put the money in next week's envelope. If you overspend, take money out of next week's envelope. If there is any money left at the end of the month, put it into savings. It's simple and effective.
All of these methods have one big drawback: they all require you to spend extra time and energy on them
You constantly have to think about your envelopes, their sizes, and their values. It can be exhausting. We're confident that this is the reason why so many people give up on trying to stick to a budget in first place. However, with Moneon this drawback has become a thing of the past.
Budgets in Moneon
In Moneon we've made budgeting simple and efficient. You start by determining which expenses you would like to moderate. Do you go out to eat too often or ride around on Uber Black instead of public transport? Then let's start building your budget. The menu of the iOS version has a special "Budgets" section. In the lower right corner is a very visible button for creating a new budget. In the Android version all of the basic tools are located on the main overview screen. To add a new budget, tap the «Add budget» button in the «Budgets» section. After that, configuring the budget works the same way in all versions of the app. Let's take a look at the most important parts of the process.
- Naming and selecting categories: you can give a budget any name and assign it to a certain category or a tag. This will make it easier to cut back on expenses in «problem» categories such as cab rides. You can also set a filter based on tags. This is especially convenient if you want to manage your expenses while on vacation. All you have to do is add a «vacation» tag to all of your expenses during it.
- Time period: when selecting a time period for your budget, think about your goals. A monthly budget will help you reduce your daily expenses and can serve as an excellent alternative to the «envelope method». When planning a vacation budget it is important to capture two phases: the planning period, when you pay for tickets and lodging, and the vacation itself. The time period could be longer - a year, for example. It's easier to plan major purchases this way.
- Set an amount for the budget. This is the most important step when creating a budget, where you place a limit on your potential expenses. You should analyze these expenses during the previous period and divide them into regularly- and non-regularly-occurring expenses. Then evaluate how realistic it might be to reduce the second ones and create an optimal budget size based on this.
The application will always keep track of whether or not you remain within the framework of your budget and will warn you if you need to spend less. It's important to always record your purchases (even the smallest ones) into Moneon.
Sticking to a budget will allow you to get the most bang for your buck and make plans for the future without extraneous expenses. Analyze your spending, build your budget, and live in harmony with your finances. We'll give you a hand.