There is no single right way to budget, which is why so many people try one, hate it, and decide budgeting isn’t for them.
The truth is that the method matters as much as the effort. A budget built around ninety categories will bury someone who hates details. A three-bucket budget will frustrate someone who needs to see every dollar.
Below are six budgeting methods, what each one actually asks of you, and who each one tends to work for.
Read through them and pick the one that sounds like the least painful. That’s usually the one you’ll still be using in March.
Table of Contents
The Advantages and Disadvantages of a Budget
Before we jump into the different types of personal budgeting systems, let’s take a quick look at what a budget does for you and what it costs you.
Advantages of a Budget
Budgeting gives you control over your money. Money is a tool. A budget is the instruction manual on how to use it.
Helps you plan out your financial goals. A budget can help you plan for your financial goals, big or small.
Buying a house. Planning for retirement. Those plans begin with your budget.
Gives you a clear financial picture. Want to know if you can afford those drawing lessons or that ski vacation?
Your budget will tell you what income you have coming in and what expenses you can expect for the month. If it doesn’t, you’re doing it wrong and need to get yourself a budget spreadsheet STAT.
Organizes your finances. Budgeting gives you a list of every expense you can expect through the month.
How much you owe, when it’s due, how much is due, and depending on the level of detail in your budget, your debt and savings balances.
Track your spending. If you don’t know where your money is going every month, then you have a serious money management problem.
How do you know how you’re doing with reaching your financial goals if there is no accounting for every penny?
Disadvantages of Budgeting
Can be time consuming. Planning out where every dollar is supposed to go, or tracking where they went, can take real time if you don’t have a solid spreadsheet and system in place.
Needs to be modified and evaluated monthly. Budgets are not set it and forget it.
Every month will be different, making your money plans different. For example, every December I know my gift fund needs to be considerably larger than in other months due to Christmas.
Requires discipline. If planning out how to spend your money is the easy part, sticking to the plan is the hardest.
For most people it can be difficult to say no to impulse purchases, eating out, or their morning coffee habit.
Six Types of Personal Budgeting Systems
Now that we know some of the most common advantages and disadvantages of budgeting, let’s jump into the different types of budgeting techniques.
The Traditional Method to Budgeting
The traditional method, or line item budgeting, is probably what you’d consider the classic form of budgeting.
With line item budgeting, you categorize all your spending and really get down into the weeds of where your money goes.
This is probably the most tedious method because it’s so detailed. Some people really need that in their budget.
Who Does Traditional Budgeting Work Best for?
Traditional budgeting works best for over-spenders, people trying to pay down debt, or anyone trying to grow their savings.
It also requires that you don’t mind getting into the nitty-gritty details by categorizing everything.
How to Make a Traditional Budget
Start with your income. List out any money that you have coming in. Paychecks, rental income, alimony, child support, and anything else.
List out all your expenses, both fixed and variable. Be specific.
You wouldn’t just have a category for food. You’d have groceries, fast food, restaurants, coffee runs, and so on.
The point is to see exactly where you’re spending money so you can make adjustments as needed.
Include savings and debt payments in your budget as well.
Track your spending. There is no point in budgeting if you aren’t tracking where the money goes.
My preference is using a weekly budget in combination with your monthly budget.
Include estimated spending, actual spending, and the difference as columns on your budgeting spreadsheet as you move through the month.
If you’re looking to organize your budget and finances, check out the Budgeting Bill Pay Calendar.
Downsides to the Traditional Budget
If you aren’t one for details, or you find it hard to make time for your budget, this method may not be for you.
With so many categories and so much detail, it’s easy to get discouraged and quit tracking.
A workaround is to use budgeting software that syncs with your bank and imports and categorizes transactions automatically.
YNAB and Monarch both do this well, and most banks now have spending categorization built into their own apps for free.
The 50/30/20 Method to Budgeting
Are you looking for a simpler approach to budgeting? Harvard bankruptcy expert and U.S. Senator Elizabeth Warren may have the answer you’ve been searching for.
The premise is simple. You put 50% of your after-tax income toward needs, 30% toward wants, and 20% toward savings or debt repayment.
Who Does the 50/30/20 Budgeting Method Work for?
The 50/30/20 method is simple to maintain, which makes it one of my favorites.
The big selling point is that instead of ninety budgeting categories, you have three.
If you’re a person who just can’t with the details, but you still need to see what you’re spending and where, this budget may be your answer.
Downsides to the 50/30/20 Budgeting Method
The common problem with this method is overspending.
Since you aren’t budgeting for every category, it’s all too easy to go over a little on something like eating out and then forget that you have quarterly insurance premiums coming.
A workaround is to pad some categories to give yourself a little more flex in your budget.
How to Set Up the 50/30/20 Budget
CATEGORY 1: 50% FOR NEEDS
Half of your after-tax income goes to your basic needs.
Needs are things you have to pay no matter where you live or work. The things you need for your absolute existence.
Budget categories for needs would look something like this:
- Shelter (rent or mortgage)
- Utilities
- Food (groceries)
- Debt minimum payments
- Transportation to work
CATEGORY 2: 30% FOR WANTS
Thirty percent of your after-tax income goes to things you want.
Budget categories for wants could look something like this:
- Dining out
- Cell phone
- Clothing
- Cable and internet
- Gym membership
- Coffee shop runs
- Entertainment (movies, books, music)
- Personal care (haircuts, pedicures)
- Art classes
CATEGORY 3: 20% FOR SAVINGS AND DEBT
How much should you be saving per paycheck? According to this method, twenty percent of your after-tax income goes toward savings or paying down debt.
Budget categories for savings and debt could look something like this:
- 401k contributions
- Emergency fund
- Sinking funds
- Extra debt payments
The 70/20/10 Method to Budgeting
If 50/30/20 feels too tight on the needs side, the 70/20/10 budget gives you more room.
The split is simple. Seventy percent of your after-tax income covers living expenses, twenty percent goes to savings, and ten percent goes to debt payoff or giving.
It’s the same idea as 50/30/20 with the categories redrawn. Three buckets instead of ninety, and one page to track.
Who Does the 70/20/10 Budgeting Method Work for?
This one fits families whose fixed costs eat more than half their income, which is most of us in a high rent or high mortgage area.
If you’ve ever tried 50/30/20 and watched your needs land at 65% before you even got to groceries, you already know why that method didn’t stick. The math wasn’t wrong, your housing market was.
It also works well if you aren’t carrying much debt, since the ten percent bucket can go to giving, extra savings, or a sinking fund instead.
Downsides to the 70/20/10 Budgeting Method
Seventy percent is a wide bucket, and wide buckets hide things.
With needs and wants lumped together, you can drift on eating out for three months without noticing, because it never shows up as its own line.
The workaround is to pull one or two problem categories out of the seventy and track them separately. Groceries and restaurants are the usual suspects.
The other downside is that ten percent toward debt is slow if you’re carrying a real balance. If debt payoff is your priority right now, 50/30/20 puts twice as much toward it.
How to Set Up the 70/20/10 Budget
CATEGORY 1: 70% FOR LIVING EXPENSES
This is everything you spend to run your life, needs and wants together.
Housing, utilities, groceries, transportation, insurance, phone, and minimum debt payments. Then the wants: eating out, subscriptions, clothing, haircuts, entertainment.
The freedom here is also the risk. Nobody is telling you how much of the seventy goes to takeout.
CATEGORY 2: 20% FOR SAVINGS
Twenty percent goes toward building something.
Emergency fund, sinking funds, retirement contributions, a down payment, the kids’ college accounts.
If you don’t have an emergency fund yet, send the whole twenty there until you do. Everything else can wait.
CATEGORY 3: 10% FOR DEBT OR GIVING
The last ten percent is extra debt payments beyond your minimums, or tithing and charitable giving, or both split however you want.
Once the debt is gone, this bucket doesn’t disappear. Roll it into savings or giving and keep the habit.
70/20/10 vs 50/30/20: Which One?
Run your actual numbers before you pick.
Add up your true fixed costs, the ones you can’t change this month, and divide by your take-home pay.
If that number is over 50%, 50/30/20 is going to fail you on day one and 70/20/10 is the better starting point.
If you land under 50% and you’re carrying debt, take 50/30/20. That twenty percent toward savings and debt moves faster.
Neither one is a rule. They’re starting points, and adjusting the numbers to fit your household is the whole point.
The Cash Envelope Budget
Cash envelope budgeting is just what it sounds like.
Popularized by personal finance guru Dave Ramsey, you adopt cash only spending.
You still have budgeting categories, but these categories are set up in envelopes with the corresponding amount of cash inside.
Who Does the Cash Envelope Budgeting Method Work for?
Over-spenders. This is totally going to be your jam.
When the cash in the envelope is gone, that’s all, folks.
This method makes it virtually impossible to overspend, provided you don’t break out your credit card or debit card when the cash runs out.
Another benefit is that it gives you a very tangible way to see where your money is going.
It’s much harder for most people to part with cash than to pay with a card. It feels more real when you have to hand over the cold hard cash.
Downsides to the Cash Envelope Method
You’re carrying cash. Cash can be lost, and your bank is not waiting in the wings to reimburse you.
So there’s that. Hence the reason I only carry a week at a time.
The second reason, and the one I think makes most people crinkle their nose at this method, is that so many of our bills are now automated or paid online.
The workaround? Use a hybrid version of this system. I assure you I do not walk my mortgage into the bank in cash.
I have two bonus envelopes.
One is for online purchases. I move over money from whatever category I’m spending from, put it into this envelope, and deposit it to cover the expense.
The second envelope is for my automated online payments. At the beginning of every month I write all of my automated payments on the envelope to account for the cash sitting in my checking account.
This shouldn’t be a problem for overspenders, because all the rest of your spending is happening from the cash in your envelopes.
If I have any other money left over, I push it to savings or debt payoff.
How to Set Up the Cash Envelope Budget
STEP ONE: HAVE YOUR BUDGET IN PLACE WITH YOUR LIST OF EXPENSES.
The envelope system isn’t a budget so much as a vehicle to carry out said budget.
You can stuff money in twenty-five different envelopes, but if you don’t know whether you can cover your monthly bills, it’s not going to do you much good.
STEP TWO: ORGANIZE YOUR SPENDING BETWEEN CASH ENVELOPES
Sample cash envelope categories:
- Groceries
- Hair and beauty
- Eating out and coffee
- Entertainment (movies, books, concerts)
- Gas
- Household items
- Fun money (an allowance for you to blow on whatever)
- Clothing
- Bus, train, and parking expenses
- Dry cleaning
- Medicine and medical (prescriptions or co-pays)
- Kids
STEP THREE (OPTIONAL): DIVIDE YOUR CASH INTO WEEKLY ENVELOPES FOR THE MONTH.
I am a huge fan of having a weekly budget.
Chances are if you’re exerting this much control over your spending habits to adopt a cash budget, then it’s going to be hard to keep a month’s worth of cash from disappearing before the month is out.
In my house, the envelope for the month is tucked away, and I only carry the week’s budget for each category in my wallet.
STEP FOUR: KEEP TRACK OF YOUR SPENDING.
The beauty of this cash-only system is that it helps you eliminate overspending. When the money is gone, it’s gone.
That said, it doesn’t mean there isn’t room for improvement in your budget.
When you look back over your month and wonder where your money went, you can look back and see exactly where your money went.
Pro tip: as you spend, tuck the receipts inside the proper envelope. It makes it easy to look over the details at the end of the month.
STEP FIVE: EVALUATE YOUR SPENDING AT THE END OF EVERY MONTH.
Once you know where your money went, that becomes the jumping off place to see where you can start tightening the belt.
The end of the month is also where we decide how to allocate any unspent cash.
Are we throwing it at debt? Adding to the vacation fund? Saving for a new car? A sinking fund? The emergency fund?
Zero-Based Budget
A zero-based budget, simply put, is when your income minus expenses equals zero.
The big difference between this method and the others is that you budget based on last month’s income.
One important distinction: zero-based budgets don’t mean you have zero dollars in the bank at the end of every month.
It means you’ve given every dollar a job. You aren’t leaving money on the table.
Having prioritized financial goals in place is a great starting point to look to for money jobs.
Who Does the Zero-Based Budgeting Method Work for?
Zero-based budgeting is great for people looking to cut the waste out of their budget.
By not leaving money on the table and being deliberate about where your money goes, you can really get control of your finances.
Downsides to the Zero-Based Budgeting Method
The downside is that since you’re accounting for every dollar, you need to account for every dollar. Ya feel me?
You have to track every dollar spent so you know if you’re staying on track.
If tracking spending is your kryptonite, this may not be for you.
A potential workaround is to automate the tracking with budgeting software that imports and categorizes your transactions for you.
How to Set Up a Zero-Based Budget
Step One: Add up your income for the month.
Whether you get paid daily, weekly, biweekly, or monthly doesn’t matter. Your bills come monthly, so even if you have to take an average, you need a starting point with your income.
Step Two: Add up your expenses.
Housing, utilities, food, gas, phone, and everything else. Write down every single thing you need to set aside money to pay.
Step Three: Account for sinking funds, emergency fund, debt payoff, and savings.
Sinking funds: if you don’t know what I’m talking about when you see the words sinking funds, run, don’t walk, over to my post on sinking funds and see why you need them in your life, like yesterday.
Emergency fund: this is a pot of money set aside for emergencies. Emergencies being things like your furnace spontaneously combusting.
A sale at Macy’s isn’t an emergency. Crazy good sales would be something you could set up a sinking fund for.
Sinking funds, y’all. Just do it.
Paying down debt: if you have debt you’re trying to shed like an itchy sweater, account for that money here.
Savings: if you’re contributing to a 401k, Roth IRA, traditional IRA, a 529, or mutual funds, write that down here as well.
Step Four: Write down or revisit your financial priorities.
Are you trying to shed debt? Saving up for a new house? Need a new car soon? Kid going off to college?
You need an idea of where to focus the bulk of your time, effort, energy, and money to accomplish your goals.
You also need it for step five, so there’s that too.
Step Five: Income minus expenses equals zero.
From here, you start subtracting all your expenses from your income and the result should be zero.
If you’re coming out in the red, go back and readjust. If you’re still flush, check your financial priorities and readjust where your money is going.
Step Six: Start tracking.
It’s great that you planned a plan. Now you need to do the plan.
Please check in on your progress regularly. It’s too late at the end of the month to rein any spending in, because it’s all been spent at that point.
Bonus step: Write a new budget every month.
Chances are your budget can and will change month to month.
Budgeting isn’t set it and forget it. Every month you make a new budget based on what’s happening in that month.
DIY Budgeting Method
None of these budgeting methods sound like a perfect fit? Take the parts that work and put them together.
When I first started budgeting, I didn’t know what in the Sam Hill I was doing, so I started with a combination of the 50/30/20 budget and the traditional line-item budget.
It gave me the foundation I needed to make better decisions about what to prioritize.
Now I use a combination of the zero-based budget and the envelope method to keep myself from overspending and laser-focused on my financial priorities.
Whether all, some, or none of these work for you, the point is to be deliberate with your money.
Having a plan for your money goes a long way in getting you where you want to go.