If you're looking for a better way to manage your money or if you've struggled with budgeting in the past, here are 10 budget methods to try. I'm sure you'll find at least one on this list that you can start and stick to.
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I’ve always been a meticulous planner.
I don’t brush my teeth without a backup plan.
But for a long time, I didn’t have a budget in place. I planned my vacations, I planned my wedding, and I planned all my meals for the week.
Yet I neglected to budget.
Everyone can benefit from having a budget. Even if you don’t have any money problems, setting and sticking to a budget will help you reach your financial goals faster. You’ll avoid overspending and you’ll be able to put more money away towards longer-term goals like education, home ownership, and retirement.
But if you’ve never budgeted before, how do you get started?
Unfortunately, the answer is not so simple. There are several budgeting techniques available to help you track your income, manage your expenses, and reach your financial goals.
While there is no one size fits all budgeting system that works for everyone, the good news is there doesn’t have to be. You can reach your financial goals using any of the budgeting techniques below. Here are ten popular budget methods you can choose from when creating your first budget:
The traditional budget is one where you record all your income and all your expenses, then decide where to reduce your spending. You’ll set goals based on how much you want to spend in each expense category. When people think of budgeting or budget methods, this is usually what they have in mind.
For expenses like utilities or car maintenance that fluctuate, go through your past six to twelve months of bills and come up with an average.
If your income varies from month to month, calculate your average monthly income for the past year. Since your income is the basis for your budget, it’s better to make conservative projections.
The traditional budget tracks every dime, incoming and outgoing. You’ll see at a glance where all your money goes.
That’s great if you need to eliminate unnecessary expenses or cut down your spending. It takes a lot of time, however. If you’ve never created a budget before, it’s a good place to start, but you might long for something easier and less time consuming.
The envelope budgeting system is a straightforward way to pay bills and save money. Create a category for each of your expenses (housing, groceries, gas, etc.) then figure out how much money you need to set aside for each expense category. Take out an envelope for every budget category and place the amount you allocated to each category into the appropriate envelope.
Once you have your envelopes created, you can only spend what’s in the envelope for each expense category. For example, if you have an envelope for clothing expenses, you’re done spending money on clothes for the month as soon as the envelope is empty.
Since we don’t pay all our bills in cash these days, envelope budgeting might sound impractical or outdated. The principle is sound, though, and you can use a spreadsheet or a budgeting app in place of actual envelopes.
If you follow a zero-based budget, at the end of every month your budget will equal zero. That doesn’t mean you spend everything you earn or blow any surplus cash on toys. It just means you need to account for every dollar and treat your savings like any other expense category.
People who follow this type of budget refer to it as “giving every dollar a job.” To do that, put every dollar you make toward a predetermined expense.
You set aside money every month for bills you don’t pay monthly like car registration fees, pet vaccinations, and other annual fees. That way, when the bill comes due, you just pay it since you have the money. There’s no panic or scrambling to come up with the money.
Zero-sum budgeting or giving every dollar a job is the guiding principle behind the popular budgeting software You Need a Budget (YNAB for short).
YNAB is an easy to use budgeting app that helps you build up one full month’s income in your checking account. Once you reach that point, you pay the current month’s expenses using last month’s income. Your checking account balance will never hit zero plus you’ll have a built in cushion in case you need it.
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With the 50-30-20 budget, you assign a certain percentage of your income to a broad expense category. The proportions you use with 50-30-20 are:
So if your household income is $4,000 a month, $2000 would go toward your essentials, $1,200 would go to things you want, and you’d sock $800 away.
Three’s a lot of flexibility built in to proportional budgeting systems like 50-30-20. That might not be a good thing if you’re starting a budget because you’re in financial danger or if you have trouble distinguishing between wants and needs.
If proportional budget methods make sense for you in terms of ease of use and time commitment, but 50% of your income won’t cover all of your necessary expenses, you can do something like 75% – 15% – 10% or 80% – 10% – 10% to ensure you have everything covered while saving as much as you can.
The 60% Solution is another proportional budgeting technique developed by Richard Jenkins, the former editor-in-chief at MSN Money. This method of budgeting is called The 60% Solution because Jenkins advocates spending 60% of your pre-tax income on fixed expenses, which are your basic needs.
Divide the remaining 40% equally into four categories. Put 10% of your income toward:
If you look at the 60% solution strictly from a needs, wants, and savings perspective, you’ll see there isn’t much room for wants. That’s fine if you need to get your financial life in order, but it might feel restrictive for others.
Values based budgeting is one of the more interesting budget methods I’ve come across. I read about it in the New York Times.
The values based budget doesn’t require you to use any tools, spreadsheets, or software, but it requires more thought. Basically, you examine your expenses and ask yourself these three questions when reviewing each transaction:
If the answer to the first question is no, you just identified an expense to cut or replace with a cheaper substitute if possible. If you don’t have a definitive answer to the second question, that’s another expense you should rethink. The third question might be yes or it might be no, but either way it will force you to look for ways to trim expenses.
If this budget system appeals to you, you can check out the original article for more details: Setting Up a Budget Based on Your Values.
With reverse budgeting, every month you pick one financial goal to achieve for that month. Example goals you can set include:
Reverse budgeting is great if you stress about money. A reverse budget will generate small wins which add up to big wins over time. You’ll sleep better at night knowing you’re making progress.
On the surface, it seems simple: pick a goal and focus on it for the month. But it can be tricky. Make sure you can hit your goal after covering all your expenses.
The pay yourself first method is very effective if you never seem to have money to put away at the end of the month.
The way it works is simple. Every time you get paid, you transfer a portion of your income to savings. That can mean a savings account, an investment account, or a retirement account. You can do this without having to think about it by setting up automatic transfers.
After you pay yourself first, you use the rest of your paycheck to take care of your expenses.
It’s too easy to justify not saving by telling yourself you’ll get to it when you have extra money. By paying yourself first, you make your savings your top priority.
The half payment budgeting method works well if you get paid twice a month. You divide your fixed expenses by two then set aside that amount from your first paycheck of the month. Use your second paycheck of the month for the other half.
A lot of us are faced with more and higher bills at the beginning of the month. You feel broke for one half of the month and flush for the other half. The half payment budget system smooths out that roller coaster ride.
In order for the half payment method to work, you really need to be half a month ahead. You also need the discipline to keep track of and not spend your half payment money. All that said, it’s a straightforward way to relieve the stress of the bill heavy half of the month.
This is where Jerry and I are at these days. We’ve taken principles from a few of the budget methods above and have created a hybrid budget system that works for us.
Jerry and I pay ourselves first and we give every dollar a job. We also incorporate elements of values based budgeting.
Two months out of the year, I get three paychecks instead of two. During these months, we’ve always budgeted as normal based on two paychecks per month. Over the years, we’ve used the “extra” money to pay down debt, pay for repairs we put off, pad our savings, and once we took a much needed vacation.
We tried a reverse budget and the 50-30-20 system, but they were actually too flexible for us. A set of rules works better for us rather than loose guidelines. The less decisions we have to make the better.
You can stabilize and improve your finances with any budget system. There is no one size fits all budgeting technique that works for everyone, unfortunately.
Different budget methods have different strengths and weaknesses. Some budgeting systems are great at addressing a specific money issue.
If you ignore your retirement account and you want to stop, try paying yourself first. When overspending is a problem, the envelope system might be best for you. If you don’t know where all your money goes, start with a traditional or zero-sum budget where you log and categorize everything.
Some budgeting methods are also more time consuming than others. That can make it harder to stick with. Reverse budgets and proportional budgeting systems take less time to manage, which is part of their appeal.
The best budgeting method is the one you’ll stick to until you reach your financial goals. Whether that means you need rigid rules or just some general guidelines, pick a system and start budgeting today. You can be successful with any of these budgeting techniques, but you have to get started and stick with it.
Hi I'm Sara! My husband Jerry and I are on a mission to earn more, spend less, get out of debt, retire early, and enjoy life to the fullest. We want to help you do the same. Learn more →