The other most common budgeting methods
The 50 30 20 Budget Rule
You've likely have heard it a hundred times - The 50/30/20 rule budgeting method.
First popularized by U.S. Senator and bankruptcy law expert Elizabeth Warren and her daughter Amelia Warren Tyagi, in their 2005 book All Your Worth, 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
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.
Pay Yourself First Budget
Designed to help you build up your savings, this reverse budget puts savings before immediate expenses. 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.
Cash Envelope System
Studies have shown that you spend on average 15-20% less when using cash. This cash-based budgeting system is 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.
Subtract your expenses from your income and then distribute cash among spending category envelopes and take your envelopes to the store when you need to buy something.
This helps you set limitations on how much you can spend.
Related: What are the most common budgeting methods?