The 6 Styles of Budgeting Explained | How to Make A Budget

Summary

In this video, Daniel from *Next Level Life* dives into six common budgeting styles: percentage-based, hard copy (cash-only), automatic, zero-sum, reverse, and values-based. He explains the pros and cons of each, helping viewers choose the best method for their personal finances. The video also features a real-life example, showcasing how different budgeting styles can impact financial goals. Whether you're aiming to save, reduce debt, or plan for the future, this guide offers valuable insights on how to take control of your finances and make informed decisions to improve financial freedom.

Takeaways

• 😀 The 6 most common budgeting styles include the percentage-based budget, hard copy budget, automatic budget, zero-sum budget, reverse budget, and values-based budget.
• 😀 The percentage-based budget is simple, dividing your income into specific categories like necessities, wants, and financial goals (e.g., the 50/30/20 budget).
• 😀 While the percentage-based budget is easy to follow, it may not work well if the percentages don’t align with your financial needs, especially in critical financial situations.
• 😀 A hard copy budget, such as the envelope or cash-only method, helps control spending by physically limiting cash usage in specific categories, but it may tempt you to overspend if not disciplined.
• 😀 The automatic budget (also known as the no-budget budget) helps eliminate manual financial decisions by automating payments for bills, savings, and retirement contributions, but requires defined financial goals to avoid long-term financial neglect.
• 😀 The zero-sum budget ensures every dollar is assigned a purpose, making it easy to track expenses and identify where to cut costs. However, it can be overwhelming due to the detailed setup process.
• 😀 Reverse budgeting focuses on saving first, then spending guilt-free on whatever remains. It prioritizes future savings, but you may face a tight budget in the beginning as savings take priority.
• 😀 Values-based budgeting helps you focus spending on things that truly matter to you, potentially increasing satisfaction while reducing unnecessary costs. It can be combined with other budgeting styles for more flexibility.
• 😀 The primary advantage of the automatic budget is its hands-off approach, making it easier to avoid impulse spending, but it may cause long-term goal neglect if not actively monitored.
• 😀 The zero-sum budget’s main benefit is its comprehensive nature, ensuring all expenses are accounted for, while its main challenge is the detailed planning required, especially for beginners.

Q & A

What is the main challenge people face when trying to create a budget?

The main challenge is the overwhelming number of different budgeting methods available, making it difficult to choose the right one for personal financial goals.

What are the six most common types of budgeting mentioned in the video?

The six most common types of budgeting are: Percentage-based budgets, Hard copy budgets (e.g., cash-only budget), Comprehensive budgets (e.g., zero-sum budget), Automatic budgets, Value-based budgets, and Reverse budgets.

What is a key advantage of percentage-based budgeting?

The key advantage of percentage-based budgeting is its simplicity. You know exactly how much of your income goes toward different categories like necessities, wants, and financial goals.

What is a potential issue with the 50/30/20 budget for someone with significant debt?

If someone has significant debt, the 50/30/20 budget could lead to insufficient funds being allocated towards paying down debt or investing for the future, especially if the individual is already struggling to meet basic financial needs.

How does the cash-only or envelope budgeting method work?

In the cash-only or envelope budgeting method, money is physically divided into envelopes based on categories like groceries, entertainment, etc. The goal is to limit spending by ensuring that you can only spend what you have in each envelope.

What are the pros and cons of using an automatic budget?

The pro of an automatic budget is that it reduces the risk of overspending by automatically handling payments for bills, savings, and retirement. The con is that it can lead to a lack of engagement with long-term financial goals if not regularly reviewed.

What is the purpose of a zero-sum budget?

The purpose of a zero-sum budget is to allocate every dollar of your income to a specific category, ensuring that your income minus expenses equals zero each month. This helps eliminate surprises and gives a clear understanding of where your money goes.

What is a key advantage of reverse budgeting?

A key advantage of reverse budgeting is that it prioritizes savings first, ensuring that you are consistently putting money aside for future financial goals before spending on discretionary items.

How does value-based budgeting differ from traditional budgeting methods?

Value-based budgeting focuses on directing your spending toward things that align with your values and priorities. Unlike traditional methods, it emphasizes cutting unnecessary expenses and maximizing enjoyment in the categories that matter most to you.

What are the potential drawbacks of value-based budgeting?

The potential drawbacks of value-based budgeting include a larger time commitment for setup, possible initial discouragement when seeing an unfavorable financial situation, and the risk of not properly securing your future financial goals if not balanced with savings.