When it comes to how you budget your money, there’s really no right or wrong way to do it.
As long as you’re tracking your expenses and income in some way or another, you should succeed.
I know that goes against common financial advice, but budgeting in its traditional form didn’t work for me, and I hate seeing people give up on budgeting after a few failed attempts.
That’s why we’re covering a number of different ways to budget in this article.
Let’s get to it!
1) The “Traditional” Line-Item Budget
We’ll start with the basic budget most people are familiar with, since other budgeting methods build off of this premise.
This method works best for those who need to get major spending issues under control, those who need to get out of debt, and those who don’t mind categorizing their expenses.
This is a more time-consuming method, so it’s also good for people who don’t mind tedious tasks.
I know, I made that sound so appealing. But the truth is, this is the classic example of budgeting for a reason – it works (for most people).
To get started, list out all of your expenses, both necessary and discretionary. That means everything from your rent/mortgage, utilities, insurance premiums, copayments, cell phone bill, groceries, gas, pet supplies, hair cuts, clothing, and debt get recorded.
You can get really detailed with your categories and have “household,” “debt,” “transportation,” “food,” etc. listed out, with all the separate expenses underneath. That’s why it’s a “line-item” budget – you break everything out so you can see exactly where your money is going.
You should also have three columns: estimated spending, actual spending, and what’s leftover. This way, you can see how well you did, and compare your total spending with your income.
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2) Proportional Budgets
You might have heard of the 80/20 budget, or the 50/30/20 budget. These budgets give you loose guidelines on how to spend and save your money.
For example, in the 80/20 budget, you spend 80% of your income, and save 20%. In the 50/30/20 budget, you spend 50% on necessary items (needs), 30% on discretionary expenses (wants), and put 20% toward debt and savings.
This budgeting method is good for those who don’t want to follow a super strict line-item budget, or spend tons of time updating their spending. This method allows you to figure out how much to put away, and how much to spend, in simple terms.
The only potential issue here is that you need to discern between wants and needs. Unfortunately, a lot of people blur the lines, causing them to justify their spending on wants. Be careful of this if you choose this budgeting method.
You may be wondering, what if your debt repayments total more than 20% of your income? Or your necessary expenses are more than half your income?
You can think outside the guidelines and modify them. Maybe you want to follow a 30/10/60 model and save more money, or maybe you need to do 40/10/50 to pay off your debt and save quicker.
The lesson here is that budgets are supposed to be flexible so you can modify them when your life situation changes.
3) The Pay Yourself First Model
Paying yourself first puts the focus on your savings. That’s because you put money away at the beginning of the month, before you have a chance to spend it on anything.
It requires you to figure out the difference between your income and expenses upfront, but after that, it’s smooth sailing until you need to change it up.
This budgeting method is good for those who are left wondering where all their money went at the end of the month, and don’t want to follow a strict budget.
Total up your monthly net income (take an average of the last six months if your income fluctuates), total up all of your monthly expenses, and then subtract to find out what’s left. Ideally, you want to be sending this amount to your savings. You can use a spreadsheet or budgeting app to help calculate this.
A good rule of thumb to follow for how much you should be saving is to aim for at least 5% of your income. 10% is great, and 20% is amazing, but I know as young adults, we sometimes don’t have a ton of money to work with (especially with student loan debt to deal with).
If you’re in the red each month, then you need to figure out ways to reduce your expenses or earn more so that you have money to spare for savings.
4) The Envelope Budget
This budgeting method is similar to a line-item budget, but simplified, and usually based around using cash only.
You figure out the major expense categories you need cash for, such as groceries, gas, dining out, entertainment, fun, etc., grab envelopes for your categories, and then figure out how much money you can allocate for each.
Then, take a trip to the ATM and withdraw the amount of money you’ll need for the month. Divide your cash up between the envelopes.
When your cash is gone, you can’t spend more. It’s that simple, and it forces you to get creative if you’re running low.
At the very least, it makes you more aware of your spending. For example, you might head to the grocery store toward the end of the month, and realize you only have $50 left to spend. You’ll be motivated to get the most out of your money!
This budgeting method is good for those who have problems controlling their spending with credit or debit cards, and don’t realize how much they’re spending and where. It also works well for those getting out of debt and those who don’t feel comfortable using plastic.
5) Zero-Sum Budget
This is exactly what it sounds like. At the end of the month, your budget should equal zero. That means that if you have $300 left at the end of the month, you need to give that $300 a job. Every dollar needs to be accounted for.
This budgeting method is good for those who often have money left at the end of the month, but end up thinking of it as money they’re free to spend.
While this might seem like the opposite of the pay yourself first method, it can be used similarly if you budget based on last month’s income. It forces you to plan ahead and think strategically about how you want to spend your money.
Check out the book Zero Down Your Debt for a more comprehensive overview of this budgeting method.
6) The Opposite of a Budget, Budget
This last one is something I follow. It’s not exactly a budget, it’s more of a philosophy, but it still involves tracking your spending.
Instead of worrying about how much I’m spending per category, I spend based on my values, and cut everything else out.
This sounds a lot easier than it is.
This “budgeting” method is good for those who are already frugal, very aware of and disciplined with their spending, and those who naturally enjoy saving.
I wouldn’t recommend this method for someone completely new to money management because, well, they probably need to learn the basics of managing their money well first.
But for those of us who think saving money is fun, it can sometimes be a relief to not track every single penny. When you’re spending on needs and minimal wants, and still heading in the right financial direction, there might not be a need for a strict budget.
How this works is I have a basic outline for what I’m allowed to spend on, my core values, and anything that falls outside of that doesn’t get priority.
For example, I barely spend money on restaurants and entertainment because I’d rather eat at home and have a fun night in with friends. However, I will spend money on travel, especially if family is involved. I treat myself occasionally, especially if it’s centered around a new experience. I like coffee, having pets, and I will invest money in myself and my business when appropriate.
That doesn’t mean I go all out and spend like crazy. I still find ways to save; I research prices, find digital coupons, travel hack, and look for specials. The key is knowing how to keep your spending in check.
Are you ready to start budgeting yet? You now have six methods to choose from, and there are still more out there.
Remember that you can modify any of these methods to suit your needs. Don’t pigeonhole your finances into something that won’t work. A budget should be flexible and forgiving.
What budgeting method do you like to use? Are there any that you don’t like? What do you do to make budgeting easier?
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Great overview of some of the different methods Erin. We’re closest to #6. We’ve lived on some sort of a budget for so long it works best for us and it helps us spend/save in line with what we value. We use Personal Capital and a spreadsheet or two to help us manage things and it works for us.
That’s great, John! I use Mint and update it around twice a week to make sure I’m on track with things. It’s definitely easier to transition to this method when you’ve been budgeting previously and it becomes second nature.
Great overview of the various ways to budget!
We use a version of #6. I still track my expenses (to the penny) to make sure my spending is continuing to align with my values. Plus, I am a saver and frugal by nature so this method works well for me. (And, I’ve never had my nails done :) !)
I’m glad I’m not alone – on both counts! I track my spending as well, but I try not to focus too much on the numbers (if I spent $10 over my original grocery budget I used to beat myself up for it). My main goal is making sure I’m still progressing on debt payoff and saving for my various goals, so as long as that’s done, I know my spending isn’t going crazy.
I’m more of a ‘pay yourself first’ budgetor, because this method forces me to live within my means, no matter how much or how little money I earn that particular month. It’s a pretty easy way to ensure your savings go up regularly, and the easiest way to deal with that is to setup an automatic savings mechanism through an online banking platform so as soon as the salary arrives, a small portion of it is sent into another account, to be ‘forgotten’.
Yes if you are in debt you need abudget and you need have also when you paid it off, I am debt free but I am focusing on savings so budget is really important…everyone has a personal method but thanks for sharing all these strategies!!!
We mostly follow the line-item budget method. We do think of some things (savings and retirement) as percentages, but only after we set predetermined dollar amounts.
After all we pay $XXX.XX in credit card payments or electric bills, not 100% or 95%. Why? Because the amount usually varies each month. We set aside a normal amount like $100 as that is the monthly bill but sometimes it $101 & $92 the next month, etc.
You’re so right that different approaches work for different people. We are in the last camp–tracking and values-based spending rather than a traditional budget. But this is after several years of traditional budgeting, and you’re right–it works for those who are already frugal. Thanks for laying all these options and whom it might work best for!
We love the zero sum budget, but I don’t think it always pays to be so rigorous. As long as you’re making headway and you and your spouse agree, I think the budgeting method works.
I like seeing all these laid out together, thank you.
I kind of mix mine all up. I like to have everything planned and laid out, with X amount going to savings, X amount going to travel fund, etc. then I usually follow the envelope method for my groceries, gas, etc. But I play a game each month to see how much I can save while doing that, whether it’s buying groceries at the discount grocery store, or driving less. Then I take the leftover money and put it in saving too.
Wow, Erin!
More great stuff. As I’m not a Line-item kind of guy, I like the other alternatives.
I basically budget all the set bills, including property taxes, and what’s left over gets saved and spent. Been working for a couple of years now.
Thanks for the awesome info!