5 Popular Budgeting Methods – Which is Right for You?
Using a budget is one of the best things you can do to get – or stay – in control of your finances. What many people don’t realize is that there are lots of different budgeting methods to choose from. The method that works best for you will depend on your lifestyle and your personal needs. When it comes to building a budget, it’s important to choose a method that fits your style and your goals.
Here are a few of the most popular and effective budgeting methods. No matter which one you use, you’ll be doing yourself and your wallet a favor! The thing all of these budgets have in common is that they’ll give you a sense of control over your finances and help you achieve your financial goals.
The 50-20-30 Method
This budget method is built on the concept that 50% of your income should be spent on needs, 20% on saving, and 30% on your wants. Needs are things you can’t live without, like housing, transportation, utilities, and healthcare. Savings includes any type of savings, like debt repayment, retirement, and your emergency fund. And wants are everything else – eating out, cable and internet, vacations, and technology.
The 50-20-30 budget is great for big-picture people. Anyone who doesn’t want to be bogged down with the details of tracking every little thing. With only three categories, it is also a great first-time budget for people who have never done any type of budgeting before. Just watch out – because this method isn’t super detailed, it can make it easy to overspend.
The Envelope Method
The Envelope Method, also commonly called Cash-Only Budgeting, is where you use actual cash for all your spending money. When you get paid, you distribute cash to labeled envelopes for each category in your budget. Then when the cash is gone, you’re done spending! For example, if you have a $100 per month budget for eating out, you would withdraw $100 in cash from your bank account each month. If you’re paid bi-weekly it might be $50 twice a month. You would then place that money into your envelope labeled “Eating Out”. When you run out of cash, you’re done eating out for the month.
The Envelope Method is the perfect budget for people who struggle with overspending and want to avoid credit card debt. It’s not so great for folks who are good at using their credit cards for rewards and paying them off each month.
The 60% Solution Method
This balanced budgeting method is similar to the 50-20-30 budget, because they both use percentages to guide your spending. Think of the 60% Solution method as a 60-10-10-10-10 breakdown.
- 60% of your income goes to your “committed expenses,” which include housing, food, clothing, insurance, transportation, debt repayment, utilities, and any other types of predictable expenses.
- 10% of your income goes to retirement, such as a 401K or Roth IRA.
- Another 10% of your income goes to long-term savings, like your emergency fund.
- The next 10% of your income goes to short-term savings, for things like vacations, irregular expenses, or any time you need a little extra wiggle room for spending.
- The final 10% of your income is for entertainment – fun things like dining out, going to concerts, or your Netflix subscription.
This budget is perfect for someone who wants to build up their savings without making the rest of their budget overly complicated. If you are trying to save for a down payment, car, or other large goal, this is the budget that will help you get there as quickly as possible. However, it’s not a great choice for people who aren’t able to automate most of their expenses; in that scenario, this type of budget will be a pain.
Zero-Based Method
In the Zero-Based Method, your budget is designed to make your income match exactly what is going out of your account. This budget is where the phrase “give every dollar a job” originated. In this method, you account for every single dollar – from your groceries to your retirement contributions and everything in between.
This is the best type of budget for detail-oriented people. It’s also great for anyone who wants the assurance that they are always totally in control of their money. It’s a positive type of financial micromanagement. However, it can be time-consuming due to how much tracking is involved.
The “No Budget” Method
This method is nearly the exact opposite of the zero-based budget. This method is built around automating as many of your monthly bills as possible. You can then pay attention to your bank account balance without making a hard-and-fast set of rules for spending. It might be hard to believe, but this method really does work. It’s great for people who have good financial habits, but may need more flexibility than other budgets can provide.
Because this budget doesn’t require any tracking, it’s perfect for people who aren’t super detail-oriented. However, if you have goals like getting out of debt or saving for a big goal, like a down payment or a car, this method may not give you quite enough structure to get there.
