Despite what some people think, budgeting is not a dirty word! Having a budget is key to having financial success, however, budgeting is definitely not one size fits all.

Trying to figure out which home budgeting technique is right for your family can be challenging with a good bit of trial and error.

Did you know that there are over a handful of different ways to make a budget? Below I’ve put together a summary and explanation to help you decide what is the best budgeting method for you and your family!

Are you ready to start taking control of your finances? Let’s get started!

The Advantages and Disadvantages of a Budget

Before we jump into the different type of personal budgeting systems, let’s take a quick look at the advantages and disadvantages of Budget.

Advantages of a Budget

1. Budgeting gives you control over your money. Money is a tool. A budget is the instruction manual on how to use it.
2. Helps you plan out your financial goals. A budget can help you plan for your financial goals (big or small). Buying a house. Buying a car. Planning for retirement. All of those plans begin with your budget.
3. Gives you a clear financial picture. Want to know if you can afford those drawing lessons or that ski vacation? Your budget will be able to tell you (if it doesn’t you’re doing it wrong and need to get yourself a budget spreadsheet STAT!) what income you having coming in and what expenses you can expect for the month.
4. 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) debt and savings balances.
5. 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 are doing with reaching your financial goals if there is no accounting for every penny?!

Disadvantages of Budgeting

1. Can be time consuming. Planning out where every dollar is supposed to go, or tracking where they went can be very time consuming if you don’t have a solid spreadsheet and system in place.
2. Needs to be modified/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.
3. 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.

Five Types of Personal Budgeting Systems

Now that we know some of the most common advantages and disadvantages of budgeting, let’s jump into discussing the different types of budgeting techniques.

The Traditional Method to Budgeting

The traditional method to budgeting, or line item budgeting, is probably what you would consider as the “classic” form of budgeting– or most basic budgeting method.

With line item budgeting, you are going to categorize all your spending and really get down into the weeds (very detailed) of your spending.

This is probably the most tedious (because it’s so detailed), but some people really need that in their budget.

Who Does Traditional Budgeting Work Best for?

Traditional budgeting (aka line-item budgeting) works best for people who are over-spenders, trying to pay down debt, or up their savings AND don’t mind getting into the nitty-gritty details by categorizing everything.

How to Make a Traditional Budget?

1. Start with your Income. List out any money that you have coming in. Paychecks, rental income, alimony, child support, etc.
2. 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, Starbucks runs, etc. The point is to see EXACTLY where you are spending money so you can make adjustments as needed.
3. Include savings and debt payments in your budget as well.
4. Track your spending. There is no point in budgeting if you aren’t tracking where you are spending your money. So make sure you are keeping track of it — my preference is utilizing a weekly budget in combination with your monthly budget.
5. Include estimated spending, actual spending and the difference as columns on your budgeting spreadsheet as you move along through the month.

If you are looking to organize your budget and finances, check out the Budgeting Bill Pay Calendar!

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Downsides to the Traditional Budget

If you are not one for details or find it hard to make time to spend on your budget, this budget may not be for you. With so many categories and so much detail, it can get easy to become discouraged from tracking your money.

A workaround for this problem is to utilize budgeting websites or software like Mint (it’s free!) or YNAB (free for 34 days and then $6.99/month after).

The great thing about these is you can sync these with your bank you can have the transactions automatically imported and categorized!

The 50/30/20 Method to Budgeting

Are you looking for a simpler approach to budgeting? Harvard bankruptcy expert and U.S. Senator from Massachusetts, Elizabeth Warren may have the answer you have been searching for– the 50/30/20 budget!

The premise is simple: You set  50% of your after-tax income on your needs, 30% on wants, and 20%  goes towards savings or debt repayment.

Who Does the 50/30/20 Budgeting Method Work for?

The 50-30-20 method is super simple to maintain, making it one of my favorite budgeting methods. The big selling point of this method is that instead of having 90 budgeting categories like with a traditional budget, you have just three.

If you are a person who just can’t with the details, but still need to see what you are spending and where then this budget may be your answer!

Downsides to the 50/30/20 Budgeting Method

A common problem with this budgeting method can be 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 to pay your quarterly insurance premiums.

A workaround for this is to pad some categories to give you a little more room for 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, work, etc. and 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 + Internet
• Gym Membership
• Starbucks
• Entertainment (Movies, books, music)
• Personal care (haircuts, pedicures, etc)
• 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. Budgeting categories for savings and debts could look something like this:

• 401 K Contributions
• Emergency Fund
• Sinking Fund
• Extra Debt Payments

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/category is gone. That’s all, folks!

This method makes it virtually impossible for you to overspend PROVIDED you don’t then break out your credit card or debit card when the cash is gone.

Another benefit to this method is it gives people a very tangible way to see where their money is going, not to mention, it’s much harder for most people to part with cash than paying with your card.

It feels more real when you have to hand over the cold hard cash.

Downsides to the 50/30/20 Budgeting Method

You are 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 reason I think most people crinkle their nose up at this method– so many of our bills now are 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 simply move over money from whatever category I’m spending from an put it into this envelope and deposit it to cover the expense.

The second envelope is for my automated online payments. I start at the beginning of every month and write on the envelope all of my automated payments to account for the cash that is 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 even know if you are able to cover your monthly bills (mortgage/rent, utilities, etc.) it’s not going to do you much good.

STEP TWO: ORGANIZE YOUR SPENDING BETWEEN CASH ENVELOPES

 Sample cash envelope categories:

• Groceries
• Hair/Beauty
• Eating Out/Coffee
• Entertainment (Movies, Books, Concerts)
• Gas
• Household items
• Fun Money (an allowance for you to blow on whatever)
• Clothing
• Bus/Train/Parking expenses
• Dry Cleaning
• Medicine/ 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 are having to exert this much control over your spending habits to adopt a cash budget, then it’s going to be hard for you to keep a month’s worth of cash from disappearing before the month is out.

In my house, I have the envelope for the month tucked away in my house, but I only carry the weeks 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.

With that being said, that doesn’t mean there isn’t room for improvement in your budget. When you look back over your month and wonder, “Where did my money go?” You can look back and see exactly where you’re money went!

Pro Tip: As you spend, make sure to tuck the receipts inside the proper envelope makes it easy to look over details (if needed) at the end of the month!

STEP FIVE: EVALUATE YOUR SPENDING AT THE END OF EVERY MONTH.

Once you know where you’re money went, that can then be the jumping off place to see where you can start tightening the belt.

The end of the money is also where we decide how we are going to allocate any unspent cash.  Are we throwing it at debt? Are we adding to our vacation fund? Saving for a new car? Sinking fund? Emergency fund?

Zero-based Budget

A zero-based budget, simply put, is when your income minus expenses equal zero. The big difference between this budgeting method and other methods, however, is that you budget based on last months 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 that you have 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 who are looking to cut the “waste” out of their budget. By not leaving money on the table and being deliberate with where your money is going, you can really get control of your finances.

Downsides to the Zero Based Budgeting Method

This downside to this budgeting method is that since you are accounting for every dollar you need to account for every dollar.  Ya feel me?

You have to track every dollar spent so you’ll know if you are staying on track. If tracking spending is your kryptonite, this may not be for you.

A potential workaround here would be to automate the tracking by using either software (like Quicken) or budgeting websites like Mint or YNAB.

How to Set Up the Cash Envelope Budget

Step One: Add up your income for the month. Whether you get paid daily, weekly, biweekly, or monthly doesn’t matter– you’re bills (the majority at least) 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 (rent or mortgage), utilities, food, gas, phone, etc. Write down everything that you need to set aside money to pay.

Step Three: Account for Sinking Funds, Emergency Fund, Paying Down Debt 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 you have set aside for emergencies. Emergencies being things like your furnace spontaneously combusting…. things like that.

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, ya’ll– just do it!

Paying down debt. If you have debt that you are trying to shed like an itchy sweater you should account for that money here.

Savings. If you are contributing to your 401K, Roth IRA, traditional IRA, a 529, mutual funds– whatever. Write that down here as well.

Step Four: Write Down or Revisit Your Financial Priorities

Are you trying to shed debt? Are you saving up for a new house? Need a new car soon? Kid going off to college?

You need to have an idea of where you need to focus the bulk of your time, effort, energy and money to accomplish your goals… also, you need it for step five (below) so 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 are coming out in the red, go back and readjust. If you are still flush, check out your financial priorities and readjust where your money is going.

Step 6: Start tracking.

It’s great that you planned a plan. Now you need to do the plan.

Please regularly check in on your progress. It is too late at the end of the month for you to reign any spending in– it’s all been spent at that point.

Bonus step: Write a New Budget Every Month

Chances are your month’s budget can and will change. Budgeting isn’t necessarily set it and forget it. Every month you need to make a new budget based on what’s happening in that month. 

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DIY Budgeting Method

None of the budgeting methods sound like a perfect fit? Why not take the parts that work and put them together to make them work for you?

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 with 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 and having a plan for your money goes a long way in getting you to where you want to go!

How about you? Have you tried any or all of these? What’s been your experiences with budgeting, I’d love to hear from you in the comments below!

5 Budgeting Methods to Manage Your Money