Creating a budget is one of the most fundamental things you can do to take control of your money, but it’s not always easy to know where to start.
In fact, there are many different types of budgeting styles and the best one for you boils down to your money management skills and preferences, as well as your finance goals. To help you get started
with creating a budget and finding the right method for you, we’ve compiled the top 4 budgeting styles.
1. The 50/30/20 Budget
Managing your money isn’t always easy, especially if you’re new to the game. So, if you’re looking for a simple budget model, you might want to try the 50/30/20 budget. This money management tool breaks down your monthly spending into three categories:
- Necessities: Should make up 50 percent of your take-home pay.
- Wants: Should make up 30 percent of your take-home pay.
- Savings and debt repayment: Should make up 20 percent of your take-home pay.
This budgeting style also allows you to break down categories into digestible chunks. The most difficult part of succeeding with the 50/20/20 your wants or needs. Once you have that part down, it won’t take long to categorize each purchase into one of the three groups.
In some ways, however, the simplicity of this budgeting style can also have a negative impact on your financial goals. For example, if you are drowning in credit card debt or have no emergency savings, you might want to consider putting more than 20 percent of your take-home pay toward debt and savings. Before committing to this budget, give your finances an honest assessment to see where you may need to shift focus.
Verdict: It’s a great starting point, but might need some tweaking to customize it to your situation.
2. The Zero-Based Budget
With this budgeting method, every dollar has a purpose. At the beginning of the month, you project your income and then plan how you’ll spend it all. The goal is to have no money left to budget at the end of the month.
Of course, this doesn’t mean living paycheck to paycheck. Be sure to assign some of your dollars to your savings account so you can reach your financial goals. This is especially easy if your bank offers an automatic savings feature like Chime’s.
Zero-based budgeting is an effective way to know exactly where your money will go and where you can cut back if needed. This style is great for people who are meticulous and don’t mind spending extra time to manage their money efficiently.
Because of the time and effort necessary for a zero-based budget, it can be easy to lose steam after a few months. It can also get frustrating when unexpected costs crop up, forcing you to make adjustments mid-month.
Verdict: This budgeting style is comprehensive but requires ongoing maintenance.
3. The Envelope Budget
Made popular by money expert Dave Ramsey, the envelope budgeting style is a cash-based system meant to keep you from overspending with your debit card.
For this to work, withdraw all the cash you need at the start of your spending period. Then, you’ll separate it into envelopes that are labeled for different spending categories.
For example, if you put $200 in your “groceries” envelope, you can use that money for groceries only. Because this system is meant to help you maintain discipline, it’s important to resist moving money from one envelope to another.
Once the cash in an envelope is gone, it’s gone.
The envelope system is great for recovering shopaholics. Unlike using credit cards to make purchases, this budgeting method forces you to set limits and use only the cash you have.
The envelope budget does have one pitfall. Without an online bank account or credit card statement to view past transactions, it can be difficult to remember exactly where you spent money without rummaging through all your receipts.
Verdict: Great for people who want to avoid overspending, but not as useful if you don’t need the forced discipline.
4. The ‘Pay Yourself First’ Budget
It’s not often that you hear the words “budgeting” and “fun” in the same sentence. With this budgeting style, however, that might actually happen.
As the name suggests, you’ll set aside all of your savings at the beginning of the month. For example, say you earn $5,000 per month in take-home pay, and you have the following savings goals:
- $400 into your individual retirement account.
- $300 into your emergency fund.
- $200 for your kids’ college education.
- $100 for your next vacation.
This means you’ll set aside $1,000 at the beginning of the month and earmark the funds into their respective accounts. The other $4,000 is yours to spend however you want.
The “pay yourself first” budgeting style is a good option for people who dislike the traditional budgeting styles. It takes less time to set up, and you have more flexibility with how you spend your money. Plus, this helps ensure that you’ll achieve your goals.
If you’re not careful, though, you could end up spending more than you earn, especially if you use a credit card.
Verdict: A good choice for disciplined spenders who don’t want or need to spend extra time planning out their monthly spending.
Which Budgeting Style is Right for You?
As you can tell, there’s no one-size-fits-all approach to budgeting. The right style for you depends on your current relationship with money and your goals for managing it. While it might be easy for some to determine the right option, others might find more than one appealing.
If this is the case for you, try one out for a few months, then try another, and so on. Depending on your experience with each method, you’ll be able to determine the best course of action. Whatever you choose, be consistent. The best budget is the one the one that you’re able to stick to so you reach your goals.