When it comes to budgeting methods, there are so many different ways to do it. No specific budgeting style is the absolute best or worst way. It all depends on your needs and preferences.
However, there can still be some budgeting methods that have the potential to help or hurt your finances depending on your unique situation. If you’re confused about which budgeting method to use or just want to update and improve your household budget for the future, here are 5 different ways to budget your money.
1. Traditional Line-Item Budget
When you think of the word ‘budget’ the first thing that comes to mind is a traditional line-item budget. This is one of the most common budgeting methods because it’s straightforward.
Just list out your expenses and your income then make sure you have enough to cover your monthly expense categories. The key to mastering traditional line budgeting is to be as thorough as possible when listing your expense categories to ensure you don’t miss anything.
You can start by tracking your expenses for 30 to 60 days. Include periodic expenses as well like your car insurance, annual bills, etc. and start preparing for them by setting a portion of the money you’ll need aside each month.
Line-by-line budgeting can be tricky if you are too strict so one thing I like to do with this budgeting style includes a category for miscellaneous expenses. Live is unexpected so when small costs or store trips pop up, you’ll already have the built-in funds to handle this.
2. Percentages: 50/30/20 Method
The 50/30/20 budgeting method allows you to split your financial needs and wants up into 3 main categories based on a percentage of your income.
Here’s how it works:
- 50% of your income goes toward needs and fixed expenses
- 30% goes toward wants and flexible spending
- 20% goes toward savings and debt payoff
You might like the 50/30/20 budgeting method if you’re new to budgeting or prefer not to zoom in on every single expense you have. This type of budget could also work well if you have a variable income and very few fixed expenses that stay the same. Another benefit is that it creates space for you to save and pay off debt.
The major downside with this budgeting method is that is can be limiting for people who reside in a higher cost of living area or want to pay off debt or save more aggressively.
If you want to make the 50/30/20 budget work for you, you can always just take the concept of percentage-based budgeting and play around with the amounts. For example, you can have a 40/20/40 budget instead and allow yourself to put 40% of your income toward saving and debt payoff if that works better for you.
3. Cash Budget: Envelope Method
Your budget can be a great tool to help you manage your spending and avoid debt. This is why the cash budgeting method is so common ways to budget. It’s no secret that using a credit or debit card can lead you to be more likely to overspend. On the other hand, people who use cash are less likely to go overboard. Perhaps this is because cash is tangible and you actually have to part with it when you want to buy something.
To start budgeting with cash, consider the envelope method which allows you to dedicate a specific envelope to each spending category. When you get paid, stuff your envelope with cash and spend as you normally would during the month. When the envelope is empty, it means you need to stop spending money in that area.
For example, if you want to budget $400 per month for groceries, you will stuff your envelope with the cash and be more motivated to use it wisely and make it stretch.
The cash budgeting method almost guarantees you don’t overspend and get into debt. However, it can be a little dated. It may not be possible to pay some larger bills and expenses with cash so you should leave some money in your bank account and set up automatic bill pay. You also run the risk of losing the cash envelopes. Digital cash envelope budgeting is becoming more popular and sites like Mvelopes can help you get started for a small fee.
4. Zero-Sum Budget
The zero-sum budgeting method is great for anyone who is looking to make the most of every dollar. How it works is you set your budget expenses categories to equal your income, so you’re spending and saving every bit of your income. If you bring home $4,000, your budget categories should equal $4,000 and there shouldn’t be any more leftover.
Here’s an example of what a zero-based budget can look like.
- Rent: $700
- Car: $500
- Insurance: $500
- Utilities: $300
- Food: $500
- Entertainment: $200
- Shopping: $150
- Savings: $1,150
What makes this budgeting style a little different is that it encourages you to live on the previous month’s income so you know exactly what you have to spend each month. On the bright side, you won’t be living paycheck to paycheck. This also means there is will be very little wiggle room in your budget for unexpected or spontaneous expenses.
A zero-sum budget would be best for someone who is focused on putting every dollar to work and is willing to aggressively save and work toward specific financial goals.
5. Values-Based Budget
Finally, there’s a values-based budget which is one of the most relaxed ways to budget your money. With this particular budgeting method, you spend according to your values and what’s important to you.
I’d recommend this strategy for more advanced budgeters who have spent several years managing their money well and are very in touch with what they value in life. Our values are what’s most important to us but this also means that everything can’t be important.
As a result, you will end up saving money as well since you’re not spending on these you don’t value. For example, let’s say a family values private school education and is willing to include costly school tuition in their budget. However, they don’t value things like nice cars, a fancy cell phone, and cable TV. So yes, they will spend more money on school but less money in other areas.
Values-based budgeting is the most flexible, but it also doesn’t mean you still shouldn’t track your spending, save some money, and be frugal when needed.
Summary: Best Budgeting Methods to Start Using Now
These 5 budgeting methods could all be great strategies for the right people. I encourage you to try out a budget that best fits your needs and current situation. Over time, you may change how you budget and that’s okay.
The key is to find a method that helps you feel in control of your finances and meet your goals.
Which one of these budgeting methods is your favorite?