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3 ways to budget

By Paula Pant · Bankrate.com
Monday, June 10, 2013
Posted: 2 pm ET

What's the best way to budget? There's no "right" answer -- personal finance is, after all, personal.

However, here are a few of my favorite options. Look them over and find the budget that works best for you.

The 50/30/20 budget

Write out a list of everything you spend money on each month -- housing, groceries, utilities, clothes, movie tickets, cat food, gardening supplies, soccer balls, you name it!

Then, create three lists:

  • Needs
  • Wants
  • Savings/debt payoff

Look through your monthly spending history to find out what percentage of money you're spending in each category. If you have an item that is paid one time annually -- like Christmas gifts or a summer vacation -- divide by 12 so you can estimate a monthly amount.

Under the 50/30/20 budget, each month you should ideally spend 50 percent of your income on necessities, 30 percent on discretionary purchases and 20 percent on savings or accelerated debt payoff.

If your account history reveals that the numbers are skewed, decide where to cut spending so you can maintain those ratios.

The 80/20 budget

Try this budget if you don't want to bother tracking your spending.

Under the 80/20 plan, you simply skim your savings off the top -- 20 percent -- and then freely spend the rest, which makes up the other 80 percent. This budget is simple, requires no tracking or line itemizing, and ensures that you "pay yourself first" by saving 20 percent right away.

This budget can be modified for more aggressive levels of saving. Variations might include the 75/25 budget, the 70/30 budget, or even the 60/40 budget. Twenty percent, however, is the minimum that I recommend saving each month.

Traditional budgeting

A traditional budget asks you to create a list of all the items for which you spend. Next to each item, you keep three columns:

  • In the first column, you guess at how much you spend on that item per month.
  • In the second column, write down how much you actually spend on this item each month. This requires you to look through your statements and receipts. (You can also use free programs such as Mint.com to help you track expenses.)
  • In the third column, you write down how much you hope to spend within this category in the future.

Revisit this budget monthly to see how your spending intentions line up with your actual spending.

Paula Pant blogs at AffordAnything.com about building wealth and living life on your own terms. She's traveled to nearly 30 countries, owns five rental units that produce thousands in passive income, and runs her own marketing business. Follow Paula on Twitter @AffordAnything.

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