Good afternoon, my name is Tamara Were, a senior financial advisor with Tamara’s Financial Planning and Consultation. Today, we will delve into the definition of a budget, explore four types of budgeting, and understand how they work. Let’s focus on one type of budgeting and its practical applications.

What is a Budget?

A budget is a plan that outlines how you will spend your money monthly. It governs the financial transactions you engage in every month, ensuring you have control over your finances. As I mentioned in our previous discussion, having a budget is crucial for financial well-being. It helps you decide where your money goes instead of wondering where it went.

Types of Budgeting

1. Zero-Based Budget

A zero-based budget starts with the assumption that all expense items are zero and must be rebuilt from scratch. Every expense item added to the budget must be thoroughly vetted and justified. This method ensures that you have a plan for each shilling, preventing impulse purchases. It’s a stringent approach aimed at avoiding non-essential expenditures, making it a highly effective way to shake up your financial habits.

2. Envelope System Budget

The envelope system budget is similar to the zero-based budget, but with a significant difference: it uses cash. You allocate cash to labeled envelopes for each spending category. For instance, you take the grocery envelope when shopping for groceries and pay from it. This method helps you stick to your budget and avoid overspending by raiding other envelopes.

3. Pay Yourself First Budget

If you struggle to save, the pay yourself first budget is ideal. This system ensures that you save a portion of your salary before spending on anything else. For example, if you earn 50,000, you save 10% (5,000) first. This method prioritizes savings, making it a great choice for those who find it challenging to set money aside.

4. 50-30-20 Budget Rule

The 50-30-20 budget rule is practical and widely used. It allocates 50% of your budget to essential expenses, 30% to discretionary expenses, and 20% to savings and debt payments. For instance, if your after-tax income is 100,000 per month, you allocate 50,000 to needs, 30,000 to wants, and 20,000 to savings. This method allows you to identify necessary expenses and adjust accordingly.

Practical Application of Budgeting

Having discussed the types of budgeting, let’s look at some practical illustrations:

• Zero-Based Budget: Start from scratch each month, justifying every expense.
• Envelope System Budget: Allocate cash to envelopes for each category and stick to it.
• Pay Yourself First Budget: Save a portion of your income first, then allocate the rest.
• 50-30-20 Budget Rule: Allocate 50% to needs, 30% to wants, and 20% to savings.

Different budgeting strategies can be combined based on your financial goals. For example, you can follow the 50-30-20 rule and use the envelope system for specific categories. The best method for your budgeting will change over time, depending on your financial priorities.

Thank you for listening to my budget talk. I hope you have learned valuable insights into budgeting and financial planning. Remember, Tamara’s Financial Planning and Consultation is here to guide you from scratch to the top. Together, we are moving towards financial stability and success.

For any further advice or consultation, feel free to contact us. We are here to help you grow your wealth and achieve your financial goals.