Building a budget —and committing to it — is a foundation of financial success. Not only can a workable budget help guide day-to-day money management, but it also gives valuable perspective about progress toward short and long-term financial goals.
That said, there are many different budgeting methods and finding the types of budgeting strategies that work best for you isn’t always obvious. Help find your fit by experimenting with these five popular budgeting methods. By learning more about each of them, you can compare their approaches and then choose one that matches your individual needs and planning style.
|
Types of Budgeting Methods: |
May be best for: |
|---|---|
|
Zero-based budget |
Organizers who like bottom-line results that track every dollar |
|
50/30/20 budget |
Budgeters who favor a streamlined guideline that’s adaptable |
|
“Pay yourself first” budget |
Savers who want simplicity with a straightforward plan |
|
Envelope budget |
Traditionalists who like having sorted spending limits |
|
Multiple account budget |
Planners who succeed with a goal-oriented approach |
1. Zero-based Budget
How it works: Also called the zero-sum budget, the goal of this method is to have income minus expenses equal zero at the close of every month. In doing so, it tracks every dollar coming in and going out. And you set — and reset — a budget for each month.
Essentially it aims to create a budget for the month that gives every dollar coming in a job. By putting your entire income toward a set spending plan, there’s nothing left over after distributing your funds to living expenses, savings, debt repayment or some other use. Then each month’s zero-based budget begins anew.
Who it may be best for: Zero-based budgeting methods funnel exactly what you make directly toward what you need to spend in a given month. That feature may make it a good choice for people whose monthly income varies — and for those who don’t mind adjusting the budget for that flexibility each month.
2. 50/30/20 Budget
How it works: The 50/30/20 budgeting method takes a spending category approach by divvying up your monthly take-home pay into expense allocations like this:
- 50% goes to “needs,” such as rent, mortgage and car payments, groceries, and utilities.
- 30% is devoted to “wants,” such as dining, entertainment, and vacations.
- 20% is earmarked for savings, reducing debt or other financial priorities.
Who it may be best for: The 50/30/20 budget technique is a kind of template to guide saving and spending decisions. Instead of detailed budget categories, it only requires you to track and divide expenditures into three main buckets. Compared to other line-item types of budgeting methods, this option may work well for those who favor a streamlined, less time-consuming approach that mirrors a financial plan without a lot of moving parts. What’s more, followers of this type of budgeting method can also shift the percentages — say, for example, 60/20/20 — to match their personal circumstances.
3. “Pay Yourself First” Budget
How it works: The “pay yourself first” budget is also known as reverse budgeting because it prioritizes savings before addressing living expenses. With this budgeting method, you decide how much money you can afford to devote to a savings goal first — like a retirement account, an education plan, or an emergency fund — and then use the rest toward paying expenses.
For example, let’s say you’d like to build a $5,000 emergency fund over time, and you plan to put $200 each month toward that target. For the next 25 months, you would allot money to that goal first, fund necessary expenses like rent or car payments second, and then cover variable expenses like entertainment and take-out meals third.
Who it may be best for: The “pay yourself first” budgeting method puts your future up front, which can be a meaningful way to ensure a consistent focus on big-picture plans and important goals. It also doesn’t require you to categorize expenses or maintain a detail-oriented record of every dollar spent. So, this budgeting system may be best for savers with limited debt who prefer an easy-to-follow, straightforward plan.
4. Envelope Budget
How it works: The envelope method of budgeting does exactly what you might expect: It uses a series of labeled envelopes to store cash for different day-to-day expense categories. For example, a portion of each paycheck gets tucked into each envelope, which is labeled with categories you choose that are tied to your monthly expenses. When it’s time to pay the electric bill, for instance, you take money from the “utilities” envelope to pay it.
Once an envelope is empty, the goal is to stop spending in that budget category until after your next paycheck arrives and you can replenish the envelopes. However, if an expense ends up costing more than you anticipated for that month, you can move funds from another envelope category that hasn’t been spent.
Who it may be best for: The envelope budgeting method makes the budget process simple and precise — in a very real and observable way. It relies on an all-cash technique, which may help curb overspending. In fact, recent research by the MIT Sloan School of Management finds people tend to spend less when using cash versus credit cards. That’s why it’s a budgeting system that may appeal to organized budgeters who enjoy a hands-on approach that helps encourage set spending limits each month.
5. Multiple Account Method
How it works: The multiple account budgeting method is a bit like a modern version of the envelope system. It assigns different expenses or financial goals to separate bank or credit union savings accounts. For instance, you could maintain different accounts to hold funds for emergency savings, mortgage and car payments, insurance, and vacation dreams. Then, each month or so, you deposit budgeted amounts (perhaps transferred from your checking account with each payday) in each bank account to handle each purpose.
You’ll want to check your financial institution’s rules on fees and minimum balance requirements before you decide to open multiple accounts. And some banks even reward multiple account holders who reach target savings goals they set, making them eligible to earn perks or interest-rate boosts.
Who it may be best for: This budgeting technique ties money directly to specific needs and goals, giving them a separate place to “live” until they’re needed. It also supports proactive planning and goal setting by giving you a way to stash cash for expected expenses as well as plan and make progress toward one-time purchases or future discretionary splurges. For these reasons, the multiple account method may work well for people who don’t mind managing more than one account, and like the idea of splitting budget money into different pots with a purpose.
Assessing Your Ideal Budget Method
Great budgeting methods can provide a clear picture of your current spending and saving patterns. And they’re often a starting point to craft a reliable financial plan. As you decide among the types of budgeting methods that appeal to you, realize that the one you pick today may not be your best fit forever. As your life, income and spending changes and new financial milestones come into view, you may find another budgeting system that will serve you better. Just as you can modify your personal finance plans when necessary, you also can finetune your budget strategies.
