Understand the 5 methods of budgeting, how to set them up, & how to create a customized budget strategy.
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Just like you won’t stick with a workout routine that only includes exercises you despise, you won’t abide by a budget system that doesn’t align with your priorities and lifestyle. This is why it’s important to understand the ins and outs of all methods of budgeting before implementing a process.
So you can pick the one that works, and will continue to work, for you.
That enables you to save more, spend less, or pay off debt with ease.
To help you find your budget match, I’ve detailed 5 methods of budgeting below, including one no one talks about. By the end of this article, you’ll understand the intent of each method, how to set a system up, and, most importantly, how to create a customized budget.
Ready to find your perfect fit?
5 different methods of budgeting
For good measure, I’ll say it again: to create a sustainable and effective budget, you have to pick a method based on your personal needs.
Because if you try to implement the first method you see on TikTok, and it doesn’t address your personal goals or weaknesses, you’re more likely to fall off the horse. To return to overspending. Or burn out and quit monitoring your money at all.
So before you read through the methods of budgeting inventory, jot down your answers to the following questions:
- My biggest financial goal right now is:
- My biggest weakness financially is:
- I can spend _____ hours per ______ on my finances
If a method doesn’t address what you write down, it’s not right for you.
Got clarity? Let’s begin.
1. For beginners: 50/30/20 budget
- Big picture view of money habits
- May be difficult if you live in a region with a high cost of living
- Not flexible
What is a 50/30/20 budget?
Created by U.S. Senator Elizabeth Warren, the 50/30/20 budgeting method stipulates that you divvy your income into three categories:
- 50% on needs, think housing, food, and basic clothing
- 30% on wants, like home decor, streaming services, and travel
- 20% on savings and debt repayment
This structure gives you the certainty that you are covering non-negotiable expenses, saving for your future, and paying off debts, so you can spend the leftover money stress-free without tracking every penny.
However, the 50/30/20 budget may be difficult for those that live in high-cost-of-living areas, like the West Coast, where keeping your rent and other fixed expenses below 50% could be impossible.
Further, it may be a challenge if your financial priorities change month-over-month. For example, you may book a trip one month that throws your wants over “30%.” If you don’t adjust your necessities or savings/debt categories accordingly, you may overspend and incur credit card debt you can’t afford.
Check out Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan for more details.
Related reading: Understand Need vs Wants For An Accurate (& Honest) Budget
How to set up a 50/30/20 budget
Here’s how it works:
- Write down your average monthly income over the past three months
- Write down your “necessities” and their costs
- Compare to your income
- If more than 50%, you will need to find ways to reduce costs
- Multiply the remaining income by 20%. This will go towards savings or paying off debt
- The rest, 30%, is for everything else
Customizing a 50/30/20 budget
Like the overall concept of the 50/30/20 budget, but it doesn’t feel 100% aligned with your needs?
Try the following alternatives:
- 60/10/10/10/10: 60% to needs. 10% to retirement. 10% to an emergency fund. 10% for specific a savings goal (like a down payment for a horse) or to pay off debt. 10% to wants
- 70/20/10: 70% to needs and wants. 20% to savings or paying off debt. 10% to charitable donations
2. For shopaholics: envelope system
- Because it’s tangible, you can’t overspend
- Less work because you’re not tracking every penny every day
- Lose out on rewards points and building credit
- Must physically go to a bank or ATM
What is an envelope budget?
First used centuries ago, the envelope budgeting method is quite simple:
You put physical cash in an envelope. When the cash runs out, you can’t spend any more money until your funds are replenished.
As a result, you’ll learn to be more mindful with every purchase because what you spend today will impact what you can spend tomorrow.
How to set up an envelope budget
Here’s how it works:
- Set your spending limits (perhaps leveraging the 50/30/20 budget or one of the alternatives I provided)
- Go to the bank or an ATM and withdraw your weekly, bi-weekly, or monthly cash needs
- Buy an envelope for each of your categories
- Divide the cash into the pe-determined proportions and put it in the respective envelopes
- Once an envelope runs out of money, there’s no more spending in that budget category until the next time you top off your envelopes
Customizing an envelope budget
If you don’t want to use cold hard cash, try a “digital spending envelope.”
Put your spending money in a checking account with a debit card. Then, buy everything with that card, not a credit card. This way, you’re not tempted to dip into your needs or savings funds, can’t spend unless there’s cash in your account, and won’t rack up more debt.
3. For savers: pay-yourself-first
- Prioritizes long-term saving
- Low maintenance
- Potential for overdrafting
- Leaves little room for paying off debt
What is a pay-yourself-first budget?
Rumored to have been introduced by George Samuel Clason in the 1920s, the pay-yourself-first budgeting method has one rule: allocate income to your retirement and emergency funds first.
After that, the rest is up to you.
However, because this budget system does not have structured rules around specific categories or restricting spending like some of the other budgets in this list, it could be easy to spend beyond your means. Because of this, the pay-yourself-first budget may not be best for beginners or people that tend to overspend.
Check out Clason’s book, The Richest Man in Babylon, for more details.
How to set up a pay-yourself-first budget
Here’s how it works:
- Calculate how much you can reasonably save
- Set up your bank account to automatically take your savings target out of your paychecks
- All remaining cash covers your needs, wants, and short-term savings goals
Customizing a pay-yourself-first budget
Want to prioritize debt instead of saving? Easy. Instead of paying yourself first, pay your debt first.
And then, to avoid going into even more debt, apply the digital spending envelope strategy I mentioned above, so there are guardrails around any tendencies you may have to spend willy-nilly.
4. For being in charge: zero-based
- Know exactly where your money is going
- Easy to save and hit specific goals
- Requires more time to maintain than other methods
- May be too restrictive
What is a zero-based budget?
The concept of zero-based budgeting method was developed in the 1970s by Pete Pyhrr, a former accounting manager for Texas Instruments.
The zero-based budget system requires that you give every dollar a specific job. In other words, income minus expense equals zero.
To maintain this budget, you track every dollar spent, allocating it to a deliberate category. So instead of having a general “food” category, you may have groceries as one bucket and eating out as another.
The result is a highly structured budget that aligns with your individual goals and priorities and allows you to immediately notice when you’re overspending on things that don’t add value to your life.
How to set up a zero-based budget
Here’s how it works:
- Collect data on your income and expenses from the past 3 months
- Create the budget categories you want to track
- Put the expenses you collected into those categories to see your spending habits in each
- Determine how much to put towards each category going forward based on historical spending habits, income, and personal goals
- Check in weekly to monthly to verify that you’re spending as intended and correct course if needed
Hot Tip: Consider using a budgeting application like YNAB, which can automatically categorize your expenses into the buckets you set.
Customizing a zero-based budget
If you like the specificity of the zero-based budget but don’t want the burden of frequent check-ins, try a hybrid of the envelope system and the zero-based budget.
With this hybrid approach, you set your detailed budget but don’t need to monitor your spending because you’ll put physical money in envelopes, ensuring that you stick to your targets.
5. Introducing the go with the flow budget for mindful spending
- Fully adaptable to ongoing changes in life
- Easy to set up in alignment with your unique goals
- Not great for beginners as it takes self-awareness
- High maintenance
What is a go with the flow budget?
This is my personal, customized method of budgeting!
The go with the flow budget mixes the 50/30/20 budget with the zero-based budget. However, it recognizes that not every month is the same. That your plans may change mid-month. And so your budget buckets should too.
But the go with the flow budget is also set up to ensure that you are spending in alignment with your values rather than just spending to spend.
This leaves space for going after your goals, staying in tune with your authenticity, and enjoying the present.
To be responsibly spontaneous.
How to set up a go with the flow budget
Here’s how it works:
- 50% to needs
- 20% to savings
- For the remaining 30%, look at the month ahead and note what’s coming up that requires money (booking a trip, a wedding gift, a nice dinner with friends, etc.)
- Set initial estimates of where you expect to spend that month
- Check in weekly to see if you’re spending is on track, if specific categories need to be adjusted for an unexpected expense or shifted priorities, or if you need to have a frugal week
Customizing a go with the flow budget
If you need more structure to keep yourself on track, consider giving yourself a weekly spending allowance, which you put in a separate account.
You can use the digital spending envelope budgeting strategy to set a literal limit: only use a debit card. Once your account hits zero, you’re done.
Or use your credit card to take advantage of rewards and points, but keep an eye on your card balance. If your balance is higher than your weekly allowance (i.e., you can’t pay it off in full), that’s your cue to cut back and be more mindful of your spending.
Of the 5 methods of budgeting, which one suits you best?
Did you find the budget for you? Try it on for a month or two.
If it helps you save more and spend less without making you overwhelmed or resentful – it’s a good fit!
If not, no worries. Budgets aren’t permanent! Try another one. Mix and match methods of budgeting until you find what works.
Once you find the one, share with the community which method you use and how you customized it to meet your needs!