Thursday, January 04, 2007

Budget Styles - Create a Hybrid

Two of the most interesting budgets I've come across are the Balanced Money Formula (BMF) and the 60% Solution. Both of these budgeting styles break your income down into fewer categories than traditional budgets and offer a quicker and easier method of staying on track.

In the BMF, the goal is to separate your bills into into just 3 categories: Must-Haves, Savings, and Wants. Each category gets a percentage of your income. Must-Haves gets 50%, Savings gets 20%, and Wants gets 30%.

Must-Haves are the things that you must pay for in order to ensure your survival. Bills like rent (or mortgage), utilities, insurance, food (just the basics), and auto expenses are Must-Haves. In other words, you must have them in order to survive and continue making money.

Savings is pretty much self-explanatory, except that additional debt payments are also considered savings. This is because making more than the minimum payment on your debts frees up your money in the future.

Wants are those thing that make your life fun, or more pleasant, but you could live without them. Bills like cable TV, additional phone lines or cell phones, long distance calling plans, entertainment, yearly clothing allowances, dining (eating out), and internet service are Wants. You could live without them if you had to (you might not like it but you could).

The 60% Solution is similar except it doesn't separate Must-Haves from Wants. In the 60% budget, you separate your Committed Expenses (both necessary expenses and fun/entertainment expenses) from your other expenses and commit no more than 60% of your income to this category.

The remaining 40% of your income is doled out in 10% chunks each: (1) Retirement, (2) Long-Term Savings, (3) Short-Term Savings, and (4) Fun Money.

I've tried both of these budgeting styles and found that although they both work, neither of them suits my lifestyle completely. So, I just created a hybrid.

I use only 3 categories of spending: Expenses (a hybrid of Must-Haves and Committed Expenses) , Freedom Accounts (a hybrid of Short-Term Savings and Wants), and Savings (a hybrid of BMF Savings and Long-Term Savings).

Check out these budgeting styles and see if they work better for you than traditional budgets. You may find them easier and more effective for your lifestyle.

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