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5 Different Types of Budgeting Methods

January 21, 2020 · 8 minute read

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5 Different Types of Budgeting Methods

For some people, lifting weights at the gym is their exercise of choice. Others may prefer yoga, or Pilates. None of these strategies for physical fitness is necessarily superior to the other—they are simply different methods for working towards a healthy lifestyle.

Just as there are many ways to get physically healthy, there are many ways to budget.

For most people, finding what works requires some research and a bit of trial and error. But when it comes to exercise and budgeting, doing nothing is generally not a great recipe for success.

To determine which budgeting method works best for you, it might be helpful to start with your end-goal in mind. What are you mostly interested in? Spending less? Paying down student loans or other debt? Saving more money?

Once you figure out your ultimate goal, you can start researching different budgeting strategies. Upon doing research on the different methods, you can match a strategy to your goals and stylistic preferences.

There are many different budgeting strategies and budgeting methods for you to consider. With some research, you can find the one that works best for you.

It is also helpful to know that it is possible to pair multiple strategies together or to “mix and match” ideas to find the method that matches your given needs and budgetary style.

Everyone’s financial situation is different, and this list is in no way exhaustive of all the options out there, but here is a deeper look at five popular budgeting methods that you might consider working into your strategy.

1. Line-Item Budget

A line-item budget is what you may first imagine when you think of a “typical” budget. You know the kind, in Excel or some other spreadsheet that lists out each expense by category. The goal with the line-item budget is to keep track of monthly expenditures so they don’t exceed spending targets.

Often, you’ll hear the term “line-item budgeting” in terms of business accounting. Businesses use line-item budgeting to track expenditures throughout the year. Specifically, they are looking at cash inflows and outflows. In your own personal budget, it might help you to do the same.

You can set up a line-item budget using a spreadsheet through your software program of choice.

To begin building your own line-item budget, you’d list out each expense, or category of expenses, over a given time period such as a month or a year. As you progress throughout the year, you can compare current expenses to past expenses to make sure you’re on track.

Comparing to past expenditures is helpful, but you may also want to compare current expenses to predetermined spending targets.

Because a line-item budget is mostly used to track spending and not to prioritize saving, don’t forget to build a savings line-item into your list of expenditures.

Pros:
•   For new budgeters, this method is relatively easy to create and intuitive.
•   Because a line-item budget is detailed, it can be a good starting place for tracking expenses or for those who require more control over their spending.

Cons:
•   Line-item budgets are not inherently adaptive. They may not allow the flexibility to track irregular expenses. It will be up to the budgeter to make adjustments.
•   Because a line-item budget is simply a tracking methodology, they do not necessarily help the budgeter to reach savings and other financial goals.
•   Because a line-item budget is relatively detailed, it will be more time-intensive than some of the other methods. A more time-intensive method may cause budgeters to give up.

2. Proportional Budgets

Proportional budgeting is a system where you divide up your monthly income into three categories, based on percentage. One pool of money is allocated towards “needs,” another towards “wants.” Last, and arguably the most important, there is a pool specifically designated for “savings” and other money goals.

“Needs” are classified as spending that is required to stay alive and employed, such as rent and insurance. “Wants” are anything that you buy for personal enjoyment, such as eating out, travel, and shopping for clothes (beyond basic needs).

The “savings” category encompasses financial goals like building an emergency fund, retirement, or paying down consumer debt.

In the book, All Your Worth , by Elizabeth Warren and Amelia Warren-Tyagi, which popularized proportional budgeting, the authors suggest aiming for a 50/30/20 budget. By allocating 50% to needs and 30% to wants, the thinking goes, you are then able to focus 20% of monthly income on savings goals.

It is generally easiest to do this calculation with after-tax figures—also known as your take-home pay.

Pros:
•   Proportional budgets can help the saver think about the big picture.
•   This is a simple budgeting format that doesn’t get bogged down with minutiae. Because it is a simpler format, it may help some budgeters stick with it.
•   Because proportional budgets focus on making room for saving, this budgeting method may work well for those who want to save money but that don’t want to count every penny of spending.

Cons
•   Proportional budgeting provides an end goal, but not necessarily a path to arrive there.
•   It might not work for someone who needs more help identifying problem areas.

3. Paying Yourself First

This no-nonsense budget revolves around one premise: pay yourself first, and whatever happens with the rest isn’t important. And “paying yourself first” simply means allocating money towards savings or other financial goals.

Say that you’ve decided that you want to save 25% of your take-home income. You set up an automatic contribution of 15% of your income to go towards retirement, 5% to a down payment fund, and 5% to a travel fund.

For the remaining 75%, you’d spend as you wish without much concern on exactly where or how the money is being spent.

Pros:
•  This budgeting method prioritizes saving, which is the desired end-goal for most budgeters.
•  No need to track all expenses, which can be difficult and cause people to give up quickly.

Cons:
•  This strategy probably won’t work for folks who are not yet ready to prioritize saving (such as those with too much debt to save).
•  Some people may need a tracking technique with more insight into spending in order to save.
•  There is a risk of over-drafting if too much is allocated towards saving and not enough towards spending. This budgeting strategy should only be used by those who are not at risk of over-drafting.

4. Envelope Budget

The envelope budget is a hands-on way to budget money and control spending. With the envelope budget, you have a set amount of cash to spend in each budget category. The pools of money are kept separate in different envelopes—hence the name.

The goal is to make the cash last all month. Once the envelope is empty, you’ll either be done for the month or will need to take cash out of a different envelope.

The first step to building an envelope budget is to determine the amount of discretionary income you have each month. Next, you’d determine how much you’d like to allocate to each category of spending, such as “entertainment” and “bars.”

After that’s done, you’d take cash out from the bank to keep in each envelope. No need to take the entire envelope of money out to dine or to bars—you can just take what you need.

Pros:
•   Some studies show that people spend less when they use cash.
•   This budgeting method is a tangible, tactile plan to spend only the money you have available.

Cons:
•   The budget itself does not address saving.
•   Going to the bank each month requires an extra step and effort.

5. Zero-Sum Budgeting

The idea here is to spend every dollar that you have. No, this doesn’t mean spend every dollar on whatever the heck you want. Instead, you would assign a specific purpose to each dollar that you earn, whether it’s for savings or discretionary spending.

It’s called a zero-sum budget because after you’ve picked a job for each dollar, you’ll end with zero leftover dollars.
The theory behind the budgeting strategy is that dollars without a job will be spent carelessly.

To create a zero-sum budget, you’d start with your monthly after-tax income. Next, you’d assign dollars to each of your non-negotiable bills, such as rent, insurance, student loan payments, and groceries. From here, you’ll see how much money you have left behind for both extracurricular spending and saving.

While assigning where your money is going to go, you may find it helpful to be specific about the dollar amount you’ll allot for each category. For example, say “dining out” and “Netflix” instead of “entertainment.” Say “retirement savings” and “extra payments towards debt” instead of “saving.”

Pros:
•   This budget requires you to think critically about every dollar you spend.
•   Done right, zero-sum budgeting makes room for savings goals.

Cons:
•   Because you are breaking spending down into small categories and assigning a dollar value, this budget requires more effort than some of the other budgeting systems.

Sticking to A Budget

Okay so great! You’ve got lots of ideas on budgeting strategies that you can utilize. But now, for the hard part—putting theory into practice. Picking a budget can be easy, sticking to a budget is the hard part. Here are some tips and tricks to consider as you embark on your budgeting journey:

Overcoming Mental Barriers

Staying disciplined to a budget is difficult. If you are struggling with discipline, you might start by acknowledging this. Out loud. You can only fix a problem if it’s been identified.

Next, you can create space for yourself to succeed. For example, put a twenty-minute block on your calendar to look over your budget every week.

If you don’t keep a calendar, you could try anchoring the task of budgeting to another activity that you either enjoy (making coffee on Sunday morning) or are very good about doing regularly (such as watering your plants). This way, you’ll start to associate the two tasks and think about them in tandem.

Setting Realistic Expectations

A common pitfall when setting a budget is to be too restrictive in your spending targets out of the gate.

While it’s great to have big goals, it is unlikely that you’ll make wild changes in your spending just because you set lofty targets. And in fact, missing big targets could be disheartening.

You can try to set yourself up for success by choosing realistic targets for the upcoming months and increasing or decreasing those targets as you are able to amend your behavior. Celebrate these victories as they come, and know that success in budgeting comes from making everyday adjustments to behavior.

Considering Irregular Expenses

No matter what methodology of budgeting you choose, there will always be the issue of irregular expenses. Irregular expenses can be both expected, like annual memberships, and unexpected, like car repairs. It might be helpful for your long term goals to find a place for the irregular expenses in your budget as you do for regular monthly expenses.

You may find it helpful to create a list of possible and expected annual expenses even before you build out your monthly budget. That way, you can spread out the cost of large and irregular budget items across months. It might also be helpful to build up an emergency fund to help cover for unexpected costs.

Staying Out of the Weeds

While everyone’s preferred budgeting style is going to be different, beware of choosing a strategy that is complicated or requires hours of effort. You need a budget you will stick with.

Further, a budget is never going to be perfect. And that’s okay! If you are tracking every last dollar and go over in a category or two, it may feel like failure, when it’s not.

Remember, a good budget is flexible while providing boundaries. The goal is to do the best that you can.

For some, simplicity may be the key to your overall success in sticking to a budget. Therefore, you may want to spend time exploring different budgeting strategies to determine what feels simple for you.

Leveraging Technology

For some folks, a pen and paper method of tracking spending and keeping a budget will work best. Others may find this unrealistic, given how much of our lives have been moved to the computer. You might consider the ways that technology can aid you in creating and sticking to a budget.

If you are looking for an easy way to track your spending, you can check out a SoFi Money® cash management account. You can easily see your weekly spending in your dashboard within the app. With a SoFi Money account you can save, spend, and earn all in one product.

Ready to stay on top of your budget? See how SoFi Money can help.


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