If you’re looking for a better way to manage your money or if you’ve struggled with budgeting in the past, here are 10 budget methods to try. I’m sure you’ll find at least one on this list that you can start and stick to.
Posted By Sara Graham
Posted In Budgeting
Last Updated: 01/14/2023
Budgeting Methods for Personal Finance
Everyone can benefit from having a budget.
Even if you don’t have any money problems, setting and sticking to a budget will help you reach your financial goals faster. You’ll avoid overspending, and you’ll be able to put more money away toward longer-term goals like education, homeownership, and retirement.
But if you’ve never budgeted before, how do you get started? Unfortunately, the answer is not so simple. Several budgeting techniques are available to help you track your income, manage your expenses, and reach your financial goals.
10 Budget Methods to Try
While there is no perfect budget system that works for everyone, the good news is there doesn’t have to be. You can reach your financial goals using any of the budgeting strategies below. Here are ten popular budget methods you can choose from when creating your first budget:
1. The Traditional Budget
The traditional or line-item budget is one where you record all your income and monthly expenses, then decide where to reduce your spending. You’ll set goals based on how much you want to spend in each expense category. When people think of budgeting or budget methods, this is usually what they have in mind.
For variable monthly expenses like utilities or car maintenance that fluctuate, go through your past six to twelve months of bills and come up with an average.
If your income varies from month to month, calculate your average monthly income for the past year. Since your income is the basis for your monthly budget, it’s better to make conservative projections.
The traditional budget tracks every single expense and all your income to the penny. With detailed expense tracking, you’ll see at a glance where all your money goes.
That’s ideal if you need to eliminate unnecessary expenses or cut down your spending. You’ll probably find plenty of things you can stop spending money on.
However, it takes a lot of time and can lead to budget burnout. If you’re new to budgeting your money, it’s a good way to create your first budget, but you might long for something easier and less time-consuming.
2. The Envelope System
The envelope budgeting system is a straightforward way to pay bills and cut down on unnecessary spending. It’s not the most flexible budgeting method, but it can help you get your finances under control.
Create an envelope for each of your monthly expenses (rent or mortgage payments, food, gas money, etc.), then figure out how much money you need to set aside for each expense category. Place the amount of cash you allocated to each category into the appropriate envelope.
Once your envelopes are created, you can only spend what’s in the envelope for each expense category. For example, if you have an envelope for clothing expenses, you’re done spending money on clothes for the month as soon as the envelope is empty. Using cash envelopes prevents going a bit over budget in any budget category.
Since we don’t pay all our bills in cash these days, an envelope budget might sound impractical or outdated. You probably don’t hand over an envelope of money when you pay your electric bill. The idea is sound, though.
You can use a spreadsheet or a budgeting app instead of actual envelopes. Pay for things electronically or with your debit card as you normally would. Just keep track of each expense by category and don’t exceed your spending targets.
3. Zero-Based Budget
If you follow a zero-based budget, your budget will equal zero at the end of every month. That doesn’t mean you spend everything you earn or blow any leftover dollars on toys. It means you need to account for every dollar and treat your savings like any other expense category.
People who follow this type of budget refer to it as “giving every dollar a job.” That means you put every dollar you make toward a predetermined expense.
You also set aside money every month for irregular budget items and bills you don’t pay monthly, like car registration fees or annual expenses that might be due in the upcoming months. That way, when the bill comes, you just pay it since you have the money. There’s no panic or scrambling to come up with the money for these expenditures.
Zero-based budgeting, or giving every dollar a job, is the principle behind the popular budgeting software You Need a Budget (YNAB for short).
YNAB helps you get one month ahead on bills. Once you reach that point, you pay the current month’s expenses using last month’s income. Your checking account balance will never hit zero, plus you’ll have a built-in cushion in case you need it.
4. The 50-30-20 Method
The 50-30-20 budget has become one of the more popular budgeting methods. The 50-30-20 rule was highlighted by Elizabeth Warren and her daughter Amelia Warren-Tyagi in the book All Your Worth they co-authored. With the 50-30-20 budget, you assign a certain percentage of your income to a broad expense category. The proportions you use with 50-30-20 are:
- 50% goes toward your needs. Think food, shelter, utilities, etc.
- 30% is earmarked for your wants. Your wants can be anything. Trips, dinners out, whatever.
- 20% is allocated to your savings. Savings can go toward your emergency fund, debt repayment, or investments.
So if your household income is $4,000 a month, $2000 would go toward your essentials, $1,200 would go to things you want, and you’d put $800 into a bank or investment account.
There’s a lot of flexibility built into a percentage budget or proportional budgeting systems like 50-30-20. That might not be a good thing if you’re starting a budget because you’re in financial danger or if you have trouble distinguishing between wants and needs.
If proportional budget methods make sense for you in terms of ease of use and time commitment, but 50% of your income won’t cover all of your necessary expenses, you can do something like 75% – 15% – 10% or 80% – 10% – 10% to ensure you have everything covered while saving as much as you can. If 30% is too much to allocate to your wants or you’d prefer to bump up your savings a bit, consider the 30-30-30-10 budget rule, which earmarks 30% for savings and 10% for fun money.
5. The 60% Solution
The 60% Solution is another proportional budgeting technique developed by Richard Jenkins, the former editor-in-chief at MSN Money. This method of budgeting is called The 60% Solution because Jenkins advocates spending 60% of your pre-tax income on fixed expenses, which are your basic needs.
Divide the remaining 40% equally into four categories. Put 10% of your income toward:
- Retirement – This can be a 401(k), IRA, or any other retirement fund.
- Long-term Savings – Money for purchases you plan to make in the future. These could be major purchases like a new car, home renovations, or education expenses.
- Irregular Expenses – Can cover periodic or unexpected future expenses like repair bills, vacations, furniture, etc.
- Fun Money – Entertainment or anything else you want as long as it stays below 10% of your income.
If you look at the 60% solution strictly from a needs, wants, and savings perspective, you’ll see there isn’t much room for wants. That’s fine if you need to get your financial life in order, but it might feel restrictive for others.
6. The Values-Based Budget
Values-based budgeting is an interesting approach to budgeting featured in the New York Times.
The values-based budget doesn’t require you to use any tools, spreadsheets, or budget apps, but it requires more thought. This budgeting process requires you to examine your expenses and ask yourself these three questions when reviewing each transaction:
- Does this transaction align with our values?
- Which of our values does it line up with?
- Is there an alternative that might cost less?
If the answer to the first question is no, you just identified an expense to cut or replace with a cheaper substitute if possible. If you don’t have a definitive answer to the second question, that’s another expense you should rethink. The third question might be yes or it might be no, but either way, it will force you to look for ways to trim expenses.
Value proposition budgeting is probably not for you if you’re in financial trouble or have specific money goals like making extra student loan payments. For couples, it requires being on the same page with your partner on money and values.
7. The Reverse Budget
With reverse budgeting, every month, you pick one financial goal to achieve for that month. Example goals you can set include:
- Pay an extra $300 on the credit card with the highest interest rate
- Pad your emergency fund by $250
- Funnel $500 into my savings account
Make sure you can hit your goal after covering all your expenses.
The basic idea is a reverse budget will generate small wins which add up to big wins over time. If you hate budgeting, you’ll appreciate the time savings in other budgeting strategies. It’s not a complete money management solution if that’s what you’re looking for.
8. Pay Yourself First
The pay-yourself-first method is very effective if you never seem to have money to put away at the end of the month.
The way it works is simple. You transfer a portion of your income to savings every time you get paid. That can mean a bank account, an investment account, or a retirement account. You can do this without having to think about it by setting up automatic transfers.
After you pay yourself first, you use the rest of your paycheck to take care of your expenses.
It’s too easy to ignore the consequences of not saving money by telling yourself you’ll get to it when you have extra cash. Paying yourself first makes saving money your top priority.
9. The Half Payment Method
Many of us are faced with more and higher bills at the beginning of the month. You feel broke for one half of the month and flush for the other half. The half-payment budget system smooths out that roller coaster ride.
The half-payment method works well if you get paid twice a month. You divide your fixed expenses by two, then set aside that amount from your first paycheck of the month. Use your second paycheck of the month for the other half.
For the half-payment budgeting method to work, you must be half a month or a month ahead on bills. You also need the discipline to keep track of your bills and ensure you don’t spend your half-payment money. If you can stay on top of it, it does relieve the stress of the bill-heavy half of the month.
10. The Hybrid Budget
After considering your options, you might decide the best option is to incorporate elements of multiple methods of budgeting. You’ll then be able to create the perfect budget system that works for you.
For example, you could pay yourself first, give every dollar a job, and incorporate values-based budgeting into how you spend your discretionary income.
With So Many Different Budget Methods, How Do I Pick One?
You can stabilize and improve your finances with any budget system. Unfortunately, no budgeting technique works for everyone.
Different budget methods have different strengths and weaknesses. Some budgeting systems are great at addressing specific money issues, like out-of-control spending or being late on monthly payments to creditors.
If you ignore your retirement account and want to stop, try paying yourself first. The envelope system might be best for you if overspending is a problem. If you don’t know where all your monthly income goes, start with a traditional or zero-sum budget where you log and categorize everything.
Some budgeting methods are also more labor-intensive than others. That can make it harder to stick with. Reverse budgets and proportional budgeting systems take less time to manage, which is part of their appeal.
What Is The Best Budgeting Technique?
There are many types of budgets to help you manage your money. Which one is best? The best budgeting method is the one you’ll stick to every month until you reach your financial goals.
Whether you need rigid rules or general guidelines, pick a system and start budgeting today. It doesn’t matter if you work out your budget on paper, use a spreadsheet, or have dedicated budgeting software. You can be successful with any of these budgeting techniques, but you have to get started and keep up with it.
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