What Are The Main Budgeting Methods?

It doesn’t matter if you’re living pay-check to pay-check or earning a six-figure salary. If you want financial security, you'll need to understand where your money is going. You will need to make a budget.

Love it or hate it, if you want to achieve financial security, you need a plan. A budget is quite simply a plan for how you will use your money both now and in the future. It takes into account current and future income and expenses. 

Unlike what you might have heard, making a budget isn’t about restricting yourself. On the contrary, budgeting actually gives you the freedom to spend money on the things you love.

Want to take that trip to Hawaii? Maybe you want to save up enough to put a down payment for your dream house?

Whether we outright spell them out or not, we all have financial goals. Using a budget, you can better define your goals and timelines. 

Related: 7 reasons why you absolutely need a budget

So what are the most common budgeting methods?

Well let’s look at some of the main budgeting methods and find out what might work best for you.  

What Is The Best Way To Budget?

  1. The 50/30/20 rule
  2. Cash envelope method
  3. Zero-based budget
  4. Pay yourself first

1. The 50/30/20 Budget Rule

Life is busy. Maybe you've noticed?

With so many competing priorities, it might be easy to lose track of where all your money goes. That little gap right there is where a 50/30/20 budget comes in. 

If you're new to budgeting, too busy to dedicate much time to budgeting, or prefer flexibility over extensively tracking your money, the 50/30/20 rule budget might be a good fit for you.

Developed by U.S. Senator and bankruptcy law expert Elizabeth Warren and her daughter Amelia Warren Tyagi, this simple and intuitive budgeting method involves dividing your after-tax income into 3 distinct buckets to help you prioritize your monthly financial commitments: 

  • 50% to needs and essentials such as housing and food
  • 30% to wants such as travel and cocktails
  • 20% to savings and debt repayment

The 3 budgeting categories are broad and quite distinct for a reason. They help you maintain a birds-eye view of what is going on in your finances without drawing you into all the details. 

Are you struggling to stick to your budget? 

Do you often feel like pulling your hair out each month trying to keep track of what feels like hundreds of budget categories? 

Are you new to budgeting? 

If you answered a resounding yes to any of these questions, then the 50/30/20 budget might be just right for you. 

Given its simplicity, the 50/30/20 rule budget would work great for you. 

It really is that simple! 

Category 1 encompasses your needs, which you cannot live without. These include housing, food (nope, not fine dining or take-out, just groceries you need to basically stay alive), utilities, health insurance, utilities, debt payments, car payments, transport.

A good rule of thumb is to keep your housing costs less than 30% of your income. Millennials are sadly spending a whopping 45% of their income on rent alone according to a new study. 

Category 2 is for the fun stuff - your wants like travel, clothes shopping, new phone, getting your hair done. Yes, this is where your fine dining and take-out live! 

Finally, category 3 is for your savings and additional debt-repayment. 

Keep in mind that this is your budget- these allocations aren’t set in stone. You can make the percentage breakouts work for your unique financial situation. It can be a 50/20/30 breakout, a 45/10/45 breakout, 30/30/40 breakout. The point is to make the budget work for you and for your financial future. 

With a 50/30/20 rule budget, you can embrace the importance of maintaining a balanced lifestyle and integrating your financial goals on your road to financial freedom.

Who wouldn't want that? 

Cash Envelope Method

So here's something interesting.

Studies have shown that you spend on average 15-20% less when using cash. 

If swiping your plastic (or metal) card sometimes feel like you’re not really spending money, you’re not alone. It’s absolutely normal to feel this way. It’s easy to convince yourself, even subconsciously, that you’re not spending “real” money when using your credit card. 

It shouldn't come as a surprise then that this cash-based budgeting system works great if you are looking to curb your spending, especially in a particular category. When the cash goes poof, then that's it, it's over, gone - until the next month at least. 

And what's makes this even more exciting is that the cash budgeting method, much like the 50/20/20 budget, is simple and intuitive.

You simply start by subtracting your expenses from your income, identifying your expenses for each of your budgeting categories, then distribute cash amounts of each expense into envelopes labeled with each category (you can use virtual envelopes on apps for larger amounts).

You don’t have to do this for each spending category, you could only do it for 1 or 2 categories that you overspend in and are trying to reduce your spending on. 

Finally, take your relevant envelopes to the store when you need to buy something in a particular category.

If you have been struggling to stay within your budget in some categories such as dining out (weren’t we all thinking it?), then this might be a good option for you. 

Zero-Based Budget

So, you want to make the most of every dollar of your hard-earned money? 

The zero-based budget (zero dollar budget, zbb) might be just the answer that you're looking for! 

With a zero-based budget, your income minus your expenses (including savings & investments, and debt payment) equals zero.

Now, hold your horses! Before you go on saying that I said to spend all your money, let me clarify that a zero balance doesn't mean to spend all your money. 

Puzzling, isn't it? I know, I've been there before. 

On the contrary, the purpose of a zero-based budget is to give every single dollar of your hard-earned money a job. You won’t have zero dollars in the bank at the end of the month because you will have accounted for savings and investment in your budget as per your financial goals. 

Making a zero-based budget may sound complicated, but it’s not hard. It just takes some practice. Start by adding up all your monthly income, then identify and add up all expenses and savings, then finally compare money in and money out - they should equal zero. 

Related: Zero-Based Budget: The Beginner’s Guide

The zero-based budget is more favorable toward people with a regular income, but if you’ve got an irregular income, you can set up the budget based on your lowest monthly estimate.

Using one bank account to manage all your incoming and outgoing transactions is a great way to ensure that you’re sticking to your zero-based budget.

Pay Yourself First

The Pay Yourself First budget is quite fascinating.

Unlike other budgeting methods, this reverse budget is designed to help you build up your savings or investments before immediate expenses. It favors increased and consistent savings over time. 

It is a pillar of personal finance that if practiced consistently over time, can lead to incredible financial success.

Here's the thing: Reverse budgeting is the opposite of most budget methods where you subtract your expenses from your monthly income.

Here, you focus on your saving goals such as retirement savings or emergency fund, then as long as you meet your monthly savings goal, you can use the rest for bills and other costs. This way you don’t have to crunch every single number. 

The National Study of Millionaires found that three out of four millionaires (75%) said that regular, consistent investing over a long period of time was the reason for their success. 

“Successful investors typically build wealth systematically through regular investments, such as payroll deductions at work or automatic deductions from a checking or savings account,” says Jess Emery, a spokesperson for Vanguard Funds. 

Final Thoughts

There is no doubt that making a budget one of the most important ways in which you can improve your financial health and achieve financial goals. 

Whether you're new to budgeting, prefer flexibility over extensively tracking your money, are looking to curb your spending, would like to give every single dollar of your hard-earned money a job, or would like to build up your savings, there is a budgeting method for you. Find out what is the best way to budget for you. 

What Is The Best Way To Budget

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