5-category budget technique

BUDGETING is the most effective way to ensure that our money is going to the right places.

And there are several ways one can budget his finances such as the 80/20 budget which allocates 20 percent for savings and 80 percent for everything else, or the 50/30/20 budget which al­locates 50 percent for living expenses, 30 percent for flexible spending, and 20 percent for savings.

But you see, budgeting can actually be a personalized strategy, meaning, one can fashion his own budgeting scheme according to his preferences provided that all living expenses and savings (of course) are covered.

When it comes to budgeting, we would want to be more specific and structured. It is important that we are able to break down the categories where we intend to put our money in a way that will not be too confusing for us to plan and monitor, in short, learning to avoid putting too many categories on our budget list but rather to straightforwardly include the categories that require our immediate money-attention.

Let’s try this no-fuss, five-category budget technique:

1. Housing mortgage/rent

This pertains to the budget allocated for the house, whether it’s a payment for a mortgage or rent. Also included in this category are the maintenance, utilities such as water, electricity, and vil­lage association dues – in other words, everything that is housing-related is placed in this category.

I’m sure you will agree with me that housing-related expenses are indispensable. In fact, it ranks as the second most important item in Maslow’s Hierarchy of Needs which is Safety and Security.

Unless you want to end up as some­one who owns a car, a huge collection of fashion items but someone who also doesn’t have a place to come home to, then by all means, crash out this category from the list. But trust me, you would want to make sure that the money pays the house!

2. Transportation needs

Transportation needs are likewise as necessary as the housing needs which is why this is included in the five-category budget. Whether we like it or not, transportation is required to get us going, be it a personal transportation or commuting going to work, business, and even recreation, transportation is undoubtedly a necessity.

This category includes all expenses made for car payments, car insurance, repairs, and maintenance; gasoline al­lowance, parking fees, if you’re riding a public transportation, your fare for public utility vehicles. All expenses that involve transportation should be reflected in this category.

3. Other miscellaneous expenses

Others refer to this category as flex­ible spending. These are the expenses you make but are not necessarily im­mediate or important, meaning, you are still able to survive the coming days even without making these purchases.

Examples include special occasions, vacations, pet care, clothing allowance, recreation budget for movies, or dining out. These are the other expenses we often neglect.

4. Savings

So we’ve discussed about the im­portance of savings and the reasons why we need to save and how it can be beneficial to our financial journey, so it probably won’t surprise you that savings is incorporated in this five-category budget.

And since budgeting is a strategy in which we can keep track of the ins and outs of our finances, it is expected that after all the well thought out budgeting tactics, we are able to set aside money for savings.

5. Debt payoff

People usually expect savings to be part of the budget but not this one – not debt payoff. This is probably the most neglected part of one’s financial obliga­tions. Many reasons are attributed to why most people do not prioritize this – either they are too hopeless when it comes to paying off their debt, or they simply find other things more important than paying an outstanding debt.

But if you want to have a very effec­tive budget strategy, debt payoff is a must-included category on your budget list. If we don’t pay attention to our debts, we could end up saving a lot of money only to pay off existing debts – a very sad circumstance, just in case.

Learn to not underestimate the power of small steps such as having a budget plan in paying off debt.

THINK. REFLECT. APPLY.

What budgeting strategy are you currently practicing? How effective is it when it comes to your financial manage­ment? Why is it important to have a list of the things you intend to spend your money on, and how can this help your budget plan in general?