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Modifying Budget Models to Meet Your Needs

Updated: 2 days ago

Disclaimer: For informational purposes only. It is not financial advice, nor is it intended to replace financial advice.


Where to Start?


In our last post, we discussed the 50/30/20 model, the zero-based budgeting rule, and the envelope budget. Today, we are going to show you how to adapt these models to fit real-world situations.


Refresher

  • The 50/30/20 budget is a method that distributes 50% of your income to needs, 30% to wants, and 20% to savings.

  • The zero-based budget allocates every dollar, there shouldn’t be any money unaccounted for.

  • The envelope method is when you distribute the money you budgeted among envelopes. This will help keep you aware of your spending limits.


We previously used a $2,400 monthly income for our example. We will continue to use that figure.



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What if 50/30/20 doesn’t work for you?


While 50/30/20 is a great reference point and target, it isn’t always possible. People’s expenses aren’t based on income, which means lower income households may have to allocate more than 50% of their income to needs. On the contrary, higher income households may be able to meet their needs with less than 50%, and can move that money elsewhere.


It is important to understand that both high income and low income households can struggle financially if they don’t live within their means. Living within your means is another way to say, “spend less than you make”. Although this may sound logical, it can be very difficult to turn down a tempting purchase. Plus, it’s not always possible. There are times when someone’s paycheck can’t cover their expenses and they have to resort to using credit cards and loans. Credit should only be used for necessities, such as housing, utilities, food, etc. when your income isn’t sufficient. If you catch yourself frequently spending more than you make, then it’s time to reevaluate your budget.


Real-World Situation



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Imagine your monthly finances are as follows:


Monthly Income: $2,400

  • Money earned from working: $2,400


Monthly Expenses: $2,160

Needs:

  • Rent: $1,240

  • Food: $160

  • Gas: $40

Wants:

  • Movie Tickets: $200

  • Sneakers: $240

  • Streaming Services: $160

  • Video Games: $120


Monthly savings: $480

  • Investments: $120

  • Savings: $240

  • Sinking/Emergency Fund: $120


As you’ll notice, these expenses add up to $2,640; beyond our income of $2,400. If we continue to spend this way, we’ll have a monthly budget deficit of $240. One way we can restructure the 50/30/20 model is to allocate money from the wants category to the needs. Although restructuring it means it won’t be 50/30/20 anymore, we will still keep those proportions in mind and try to stick as close to them as is practical. Here is a good suggestion for a new budget:


Monthly Income: $2,400

  • Money earned from working: $2,400


Monthly Expenses: $1,920

Needs:

  • Rent: $1,240

  • Food: $160

  • Gas: $40

Wants:

  • Movie Tickets: $200

  • Sneakers: $0

  • Streaming Services: $160

  • Video Games: $120


Monthly savings: $480

  • Investments: $120

  • Savings: $240

  • Sinking/Emergency Fund: $120


The final proportion of our new budget is:


Needs: 60%

Wants: 20%

Savings: 20%


Notice how I cut spending for sneakers to zero. If I already have sneakers that could last much longer than a month, then buying a new pair is something I can sacrifice. It’s always a good idea to begin trimming the wants category before diving into the savings. Restructuring a budget is very personal, and everyone has a preference.


An exercise that can help you decide what to cut back on and what to keep is to list all your wants and rank them. You can then revisit the list and adjust it several times to see what you’re comfortable cutting out. It may sound like a good idea to do away with most of the wants and stick to necessities and savings. However, it’s still important to allocate some money for wants. Without proper budgeting, you will be more likely draw from the other categories. This can make it difficult to adhere to spending limits, leading to the possibility that your savings or necessities might fall short.


In this next example, let’s explore some of our options for a budget surplus. Your new finances are as seen below:


Monthly Income: $2,400

  • Money earned from working: $2,400


Monthly Expenses: $1,680

Needs:

  • Rent: $760

  • Food: $160

  • Gas: $40

Wants:

  • Movie Tickets: $200

  • Sneakers: $240

  • Streaming Services: $160

  • Video Games: $120


Monthly savings: $480

  • Investments: $120

  • Savings: $240

  • Sinking/Emergency Fund: $120


In this budget, we have a $240 surplus. When deciding where to allocate it, it’s also important to develop expectations about the future. For example, if you anticipate an increase in rent, it may be wise to put that money into a sinking or emergency fund. If you anticipate a decrease in the cost of gas, (lower cost of needs in the future) you can probably put some of it in the wants category. If you believe your investments will do well within the next quarter, you may want to invest it.



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When developing expectations, it’s important to evaluate fixed and variable costs. Fixed Costs are costs that generally stay the same over a period of time, like rent. A Variable Cost is a cost that fluctuates frequently over a period of time, like the price of gas. You can assume your rent will be the same next month, and the month after that, all the way until you end your lease. This means you can predict this expense with relative certainty and budget accordingly. Gas prices, on the other hand, tend to change frequently. Although it may be difficult to predict the exact price of gas, you can make an inference and estimate its future price.


While you can use the whole surplus on wants, it will be more responsible to divide it between the wants and savings category. You can divide it using the same proportions in the 50/30/20 model (60% or $144 on wants and 40% or $96 on savings). If you are satisfied with the amount of money you allocated to wants, then the $240 can go to savings. (This is $240 on top of the $480 you already moved to savings).


Although a budget surplus may appear to be good, it means you aren’t budgeting efficiently. A surplus is certainly better than a deficit, however, the excess money could be used on investments or a savings account. This is why the zero-based budget rule is also important to follow. Allocating every dollar will allow you to budget efficiently and effectively.



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We will now return to the last budgeting tool, the envelope method. Keeping a spreadsheet of your expenses will do just as well as dividing your income among envelopes, but might be more practical. Accurate bookkeeping is crucial to any budget, as you have to know where your money is going. A small amount of accounting every time you make a purchase will go a long way when you evaluate your budget.


In conclusion, budgets are almost like a living thing. They grow and adapt over time to meet different needs. They are also very personal, a result being that everyone’s budget looks a little different. Needs take priority and wants can be sacrificed to avoid putting necessities on credit. If you operate on a budget deficit or surplus for multiple months in a row, you aren’t budgeting properly. A deficit means you are living outside your means, and a surplus means you could be putting your money to better use, like investing it.




Bibliography & Source List


1. For Fixed vs. Variable Costs


2. For Adjusting the 50/30/20 Rule


3. For Credit Card Usage & Living Within Means


4. For The "Zero-Based" Concept of Surplus












 
 
 

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