Budgets come in all shapes and sizes, from the old-fashioned, “write everything you spend down” kind to ones that use streamlined apps. Somewhere out there, there is likely at least one that can help you gain insight into your finances and take control of your money. Once a budget is up and running smoothly, it can help you manage your spending and reach your savings goals, too.
You can start finding the right one for you by researching different types of budgeting. It’s even possible to pair multiple strategies together or to “mix and match” ideas to find the method that matches your needs and budgetary style.
Everyone’s financial situation is different, and this list is in no way exhaustive. That said, however, here is a deeper look at seven popular budgeting methods that you may want to check out.
1. Line-Item Budget
A line-item budget is what you may first imagine when you think of a “typical” type of budgeting. You know the kind: a spreadsheet that lists out each expense by category. The goal with a 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 this technique to track 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, whether you like to use pencil and paper or any of the online programs available, like doing a budget in Excel. You list 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.
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.
• 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 and can be helpful for those who require more control over their spending.
• Line-item budgets can be a bit rigid. They may not allow the flexibility to track irregular expenses. It will be up to the budgeter to make adjustments.
• Because line-item budgets are 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 (and potentially frustrating) than some of the other methods.
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,” and lastly, and perhaps most importantly, towards savings and other money goals.
• “Needs” are classified as spending that is required to stay alive and employed, such as housing, food, transportation to work, and insurance.
• “Wants” are anything that you buy for personal enjoyment, such as eating out, traveling, and shopping for clothes (beyond basic needs).
• The “savings” category encompasses financial goals like building an emergency fund, retirement, or paying down debt.
It is generally easiest to do this calculation with after-tax figures — also known as your take-home pay. There’s an example of one popular proportional budget below, the 50/30/20 budget, but you can set the amounts per category as you see fit.
• Proportional budgets can help the saver think about the big picture.
• This is a simple type of budgeting that doesn’t get bogged down with minutiae. Thanks to its simplicity, 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 don’t want to count every penny of spending.
• Proportional budgeting provides an end goal, but not necessarily a path to arrive there.
• It might not work for someone who needs more help setting targets and identifying problem areas in their spending and/or saving.
3. Paying Yourself First
This no-nonsense budget revolves around one premise: Pay yourself first, and whatever happens with the rest isn’t as important. “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.
• This budgeting method prioritizes saving, which is the desired end-goal for many people. It can help ensure that you stay on track, and there’s money you have after paying bills that can go toward future goals.
• There’s no need to track all expenses, which can make this budget appealingly fast and easy for some people.
• This strategy probably won’t work for folks who are not yet ready to prioritize saving (such as those with too much debt to stash cash away for the future).
• Some people may need a tracking technique with more insight into spending in order to save, such as a budgeting app.
• There is a risk of overdrafting 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 having a negative bank balance.
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4. Envelope Budget
Here’s a different type of budgeting to consider: The envelope budget, a hands-on way to divvy up money and control spending. With the envelope budget, you have a set amount of cash to spend in each budget category per month. 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 to pay for an expense.
How it works:
• The first step to building an envelope budget is to determine the amount of after-tax 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 “groceries.”
• After that’s done, you’d take cash out from the bank to keep in each envelope. No need to take all your envelopes full of cash with you every day — you can just take what you need or adapt the system to use your debit card, keeping careful track of your spending.
• 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.
• The budget itself does not address saving.
• Going to the bank each month to get cash can require extra time 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:
• Start with your monthly after-tax income.
• Assign dollars to each of your non-negotiable bills, such as rent, insurance, student loan payments, and groceries.
• Assess how much money you have left for discretionary spending and saving.
• Then assign where your remaining money is going to go. Specificity can help: For example, say “dining out” and “Netflix” instead of “entertainment.” Say “retirement savings” and “extra payments towards debt” instead of “saving.”
• This budget requires you to think critically about every dollar you spend.
• Done right, zero-sum budgeting makes room for savings goals.
• 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.
6. 50/30/20 Budget
The book, “All Your Worth” by Sen. Elizabeth Warren and Amelia Warren-Tyagi popularized this variation on proportional budgeting, which calls for a 50/30/20 budget. Here’s the breakdown:
• With your after-tax dollars, allocate 50% to “needs,” or expenses like housing, utilities, and food.
• Put 30% to “wants,” which would include things like dining out, travel, premium streaming services, or some new artwork for your home’s walls.
• The remaining 20% of monthly income has an important job: It goes toward savings goals.
Here’s how the benefits and drawbacks of this budgeting method stack up.
• This budget gives clear but flexible spending guidelines.
• The 50/30/20 rule definitely emphasizes saving, which can be important to achieving short- and long-term goals.
• This budgeting system may not be detailed enough for some people, since it allocates money in broad strokes.
• The 50/30/20 rule may not help identify areas of overspending, which can be an important aim for some budgeters.
7. 60 40 Budget
This is a different type of budgeting that also uses a proportional approach. The 60 40 budget is a very general way of managing your money. Here are this budgeting system’s principles:
• The 60 represents 60% of your after-tax income, which is allocated towards the “musts” in life: food, shelter, utilities, debt, and other basic needs.
• The 40 represents the rest of your income, to be allocated as you see fit. Some people like to subdivide this quantity into smaller buckets, such as 20% for non-essential spending (entertainment, dining out, etc.) and 20% for savings.
Here are the upsides and downsides of this plan:
• This budget provides a good deal of freedom and flexibility.
• The simplicity of the plan can be a positive for people who don’t like complicated, time-consuming budgets.
• This budget rule may not provide enough guidance for those who really need to take control of their finances. For instance, it doesn’t offer a detailed way to track and rein in overspending.
• The 60 40 plan leaves savings allocation up to the individual. That means some people could say they can’t afford to save and thereby sidestep this important path to achieving financial security.
Sticking to a Budget
You now have lots of ideas on different types of budgeting strategies that you can utilize. But next is the hard part — putting theory into practice. Here are some tips to consider as you embark on your budgeting journey:
Overcoming Mental Barriers
Having financial discipline and sticking to a budget is difficult. If you are struggling with discipline, you might try these tactics:
• Start by acknowledging the issue. Out loud. You can only fix a problem if it’s been identified.
• Create space for yourself to succeed. For example, put a 20-minute block on your calendar to look over your budget every week.
• Try anchoring the task of budgeting to another activity that you either enjoy (making coffee on Sunday morning). 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 right out of the gate.
While it’s great to have big goals, it is unlikely that you’ll make sweeping changes in your spending just because you set lofty targets. And in fact, missing big targets could be disheartening.
• Instead, try to set yourself up for success by choosing realistic targets for the upcoming months. Increase or decrease those targets as you are able to amend your behavior.
• Celebrate victories as they come. Pat yourself on the back for meeting a goal, 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 or holiday gifts, and unexpected, like car repairs. Some ideas:
• Find a place for the irregular expenses in your budget as you do for regular monthly expenses.
• 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
Don’t get overwhelmed by the details when budgeting. Some advice:
• Avoid strategies that feel complicated or require hours of effort. You need a budget you will stick with, and that is likely one that suits your style and feels simple.
• Test-drive a couple of budgets to see which suits you best.
• Recognize that 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 a failure when it’s not.
For some folks, a pen and paper method of tracking spending and keeping a budget will work best. Others may find this challenging, given how much of our lives have been moved to the computer. If so, you might consider the ways that technology can aid you in creating and sticking to a budget.
There are plenty of apps that can help you with budgeting and make tracking spending and saving easier. There’s a good chance that your financial institution offers one.
As you review different types of budget plans and hunt for an easy way to track your spending, take a look at what a SoFi Checking and Savings account can offer. You can easily see your spending on our app’s dashboard, plus there are Vaults and Roundups to help you save. You’ll also enjoy a competitive annual percentage yield (APY) and no account fees, which can boost your finances, too.
What’s the best budget plan?
The best budget plan is one that works for you. In order to choose the best fit, consider your goals and needs. Some people want to control their spending and like a really detailed budget, such as a line-item budget. Other people are more focused on making sure they allocate funds towards savings, in which case a 50/30/20 rule could be a good option.
What are the simplest way to budget?
A basic budget typically requires the following: knowing your take-home pay, evaluating your “musts” (spending on basics like housing, food, and debt), tracking your spending on “wants” (dining out, clothes, travel), and allocating for savings.
What is the 50/30/20 rule budget?
In this popular proportional budget strategy, you divide your take-home pay into three buckets: 50% for the “needs” in your life (housing, utilities, food, debt); 30% for the “wants” (dining out, shopping for clothes and other items, entertainment); and 20% for savings (for, say, your emergency fund or retirement).
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