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If you have take-home pay of, say, $3,000 a month, how can you pay for housing, food, insurance, health care, debt repayment and fun without running out of money? That’s a lot to cover with a limited amount, and this is a zero-sum game.
What is a budget? A budget is a plan for every dollar you have. It’s not magic, but it represents more financial freedom and a life with much less stress. Here’s how to set up and then manage your budget.
Setting a budget is a critical step towards taking control of your finances and achieving your money goals But not all budgets are created equal, Choosing the right budgeting method can make sticking to your budget much easier
In this guide, we’ll cover how to select the budgeting style that best fits your lifestyle and needs among the most popular options – incremental zero-based, envelope and 50/30/20 budgets.
Assess Your Current Financial Situation
Before deciding on a budgeting approach, take stock of your current financial circumstances:
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What are your monthly expenses and income amounts? Gather 3 months of bank and credit card statements to see spending patterns
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What debts and financial obligations do you have each month? Include required payments for loans, mortgages, insurance, child support etc.
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What is your current debt-to-income ratio? Divide total monthly debt payments by gross monthly income.
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How disciplined are you in your spending and financial tracking currently? Are you more or less hands-on?
Really understand your income, expenses, debts, and money habits first when choosing a budget.
Identify Your Goals
Your budgeting needs will depend heavily on what financial goals you are working towards.
Do you need to:
- Pay down high-interest debt aggressively?
- Save for a big purchase like a house?
- Build up a robust emergency fund?
- Fund retirement accounts?
Ask yourself what money milestones matter most to you right now and in the near future. This will guide your budgeting approach.
Understand the Main Budgeting Styles
Once aware of your financial realities and objectives, you can narrow in on selecting the best budgeting method for you.
Here is an overview of the most common budgeting techniques:
Incremental Budgets
With incremental budgeting, you start with your previous period’s budget and adjust it incrementally as needed to get next period’s budget. It builds on your past baseline.
Pros
- Familiar and intuitive if coming from traditional budgeting
- Less time-intensive than zero-based budgeting
Cons
- Doesn’t force comprehensive spending evaluation like zero-based budgets
- Risk of budget bloat over time
Zero-Based Budgets
Zero-based budgeting has you build the budget from scratch each period instead of basing it on the prior period. Every dollar spent must be justified.
Pros
- Promotes mindful spending since no expense is a given
- Helps cut wasteful spending by forcing periodic evaluation
Cons
- More complex and time-consuming than incremental budgeting
- Requires frequently determining spending priorities
Envelope Budgets
With envelope-style budgeting, you divide budgeted amounts for all expenses into virtual “envelopes”, then deduct from envelopes when you spend money.
Pros
- Intuitive and hands-on approach
- Makes it easy to see how much left you have budgeted in each category
Cons
- Can be tedious to set up and maintain envelopes each month
- Discourages flexible spending as overspending envelope can be hard
50/30/20 Budgets
The 50/30/20 budget sets hard ratios for your spending – 50% on needs, 30% on wants, and 20% on debt/savings.
Pros
- Simple percentage-based system
- Encourages balance of spending, saving, debt repayment
Cons
- Allocating such fixed ratios may not suit your situation
- Less customizable than other budgeting techniques
Pick the Right Budget Method for You
Choosing your budgeting style is ultimately based on your preferences, discipline, goals, and how much time you’re willing to spend on the process.
Assess your strengths and weaknesses:
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If you’re undisciplined with money, envelope or 50/30/20 budgets add needed structure.
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If you have high-interest debt, a zero-based budget ensures you consciously allocate money to repayment.
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If you hate budgeting, the 50/30/20 system offers an easy shorthand.
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If you love details, incremental or zero-based budgets let you dig in.
We recommend trying one or two budgeting methods for 2-3 months to see what works best. You can always switch it up if the budget style you chose first doesn’t feel like the right long-term fit. The key is picking a technique you’re willing to stick to long-term.
Budgeting Tips to Optimize Success
Whichever budgeting style you land on, incorporate these practices to set yourself up for success:
- Involve any financial partners in budget decisions for buy-in
- Build some wiggle room into budget categories for flexibility
- Track every expense to get clarity on where money goes
- Revisit the budget monthly and adjust as needed
- Automate savings contributions for important goals
Being adaptable and reviewing the numbers often prevents budget frustration. Stay focused on your motivations and money goals.
Key Takeaways on Choosing a Budget
Picking the right budget ultimately comes down to self-awareness. Know your financial personality and behaviors when opting for a system to follow.
Zero-based budgets provide the most oversight for spenders who need accountability. Incremental budgets work for those who prefer tweaking rather than starting from scratch.
Envelope-style budgets are great if you like visually dividing up cash. 50/30/20 budgets appeal to fans of rules of thumb.
Focus on needs, spend mindfully, reassess regularly, and have grace when you go off budget. The budget style matters far less than your dedication to following it.
How to budget money
- Calculate your monthly income, pick a budgeting method and monitor your progress.
- Try the 50/30/20 rule as a simple budgeting framework.
- Allow up to 50% of your income for needs, including debt minimums.
- Leave 30% of your income for wants.
- Commit 20% of your income to savings and debt repayment beyond minimums.
- Track and manage your budget through regular check-ins.
It’s easy to get overwhelmed by the many details included in the budgeting process. Here are five steps to follow.
Step 1: Figure out your after-tax income: If you get a regular paycheck, the amount you receive is probably it, but if you have automatic deductions for a 401(k), savings, and health and life insurance, add those back in to give yourself a true picture of your savings and expenditures. If you have other types of income — perhaps you make money from side gigs — subtract anything that reduces it, such as taxes and business expenses.
Step 2: Choose a budgeting system: A budgeting system is a framework for how you budget. Everyone has different habits, personality types and approaches to managing money, and there are systems that can fit your lifestyle. Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future. Budgeting plan examples include the envelope system and the zero-based budget, and the 50/30/20 budget, which we’ll discuss more below.
Step 3: Track your progress: Record your spending or use online budgeting and savings tools.
Step 4: Automate your savings: Automate as much as possible so the money you’ve allocated for a specific purpose gets there with minimal effort on your part. If your employer permits, set up automatic payments from your paycheck to your emergency savings, investment and retirement accounts. An accountability partner or online support group can help, so that youre held accountable for choices that blow the budget.
Step 5: Practice budget management: Your income, expenses and priorities will change over time, so actively manage your budget by revisiting it regularly, perhaps once a quarter. If youre struggling to stick with your plan, try these budgeting tips.
Leave 30% of your income for wants
Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. Typical wants include dinners out, gifts, travel and entertainment.
It’s not always easy to decide. Are restorative spa visits (including tips for a massage) a want or a need? How about organic groceries? Decisions vary from person to person.
If youre eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldnt be so austere that you can never buy anything just for fun.
Every budget needs wiggle room — maybe you forgot about an expense or one was bigger than you anticipated — and some money to spend as you wish. If theres no money for fun, youll be less likely to stick with your budget.
Types of Budgets – What type of Budget is Right for You (Choosing a Budget Method)
What are the different types of budgeting methods?
There are several types of budgeting methods available to choose from, depending on your needs and spending habits. Here are the six primary types of budgets: A 50-30-20 budget allows you to allocate a certain percentage of your money to expenses, saving and spending.
How do I choose a budget type?
Your financial goals can help determine which budget type to use. For example, if you want to set aside $500 per month for a retirement account, you might use a 50-30-20 budget to allocate 20% of your income toward savings. If your financial goals are more value-based, you might prefer a more detailed type of budget.
How do you budget a budget?
Calculate your monthly income, pick a budgeting method and monitor your progress. Try the 50/30/20 rule as a simple budgeting framework. Allow up to 50% of your income for needs, including debt minimums. Leave 30% of your income for wants. Commit 20% of your income to savings and debt repayment beyond minimums.
What should you consider before starting a budgeting system?
Consider how much time and maintenance a budgeting system involves before you get on board. Some have strict requirements, while others are more flexible. For example Excel spreadsheets and the zero-based budget demand frequent and detailed expense tracking.
