Do you know where your money goes? If not, you could benefit from a budget. Even if you’ve struggled with several budgeting strategies in the past, taking a fresh look at your spending habits and building a spending plan can be extremely helpful in improving your finances. No matter how much money you make or spend, budgeting is a wise decision.
There is no perfect budgeting method that works for everyone. However, there is likely a budgeting system that will work for you. Here’s a look at how budgeting works and various budgeting strategies that can help you succeed with your personal finances.
Budgeting Process: What You Should Understand About Budgeting
Some people don’t want to know how much money they spend on vices or hobbies. But it’s imperative to approach your spending with your eyes wide open. Remember, a budget doesn’t restrict your spending or tell you what to do. You pick your budget categories. And you set your own spending guidelines. A budget doesn’t say where you can’t spend. It helps you understand where you can spend.
In fact, some people do better with extremely detailed budgets while others thrive with simpler planning. If you want to know how to budget successfully, read through these budgeting techniques to find the one that works best for your preferences and lifestyle.
Best Budgeting Techniques
- Incremental Budgeting
- Zero-based Budgeting
- 50/30/20 Budgeting
- Envelope Budgeting
- Business-Style Budgeting
Who it’s best for: Anyone who wants better control over their spending and get a better picture of where their money goes each month.
When you think of a traditional budget, you may think of the incremental budgeting method. With incremental budgeting, you adjust your budget every month based on what you spent the prior month. You track your spending by category.
For example, you could have categories for where you spend the most, such as housing, groceries, insurance, gas, personal care, medical costs, debt payments, and travel. And you can get as detailed as you want, or choose higher-level categories. One person might lump all food purchases into one category while another may break it down into groceries, fast food, and fine dining. What’s most important is to choose categories that help you track and control your spending.
Budgets are generally fine-tuned between periods. For example, if you found you could actually spend $500 on groceries despite a $600 budget, you would adjust your budget to $500 the next month. As long as your total budget isn’t more than your income, you can spend up to the amount allocated without breaking the bank or going into debt.
- Customized budgeting categories
- Improved visibility over your spending
- Make month-to-month adjustments to your budget as needed
- Time-intensive to create and maintain
- Doesn’t always provide motivation to save or invest
Who it’s best for: People who want detailed control over their spending and anyone in debt.
With zero-based budgeting, every dollar you earn gets a job. Specifically, your total income is broken up into expenses, debt payments, savings, and investments. If you want to follow the personal finance strategy of paying your advice first or have trouble managing debt or spending, zero-based budgeting may be the right choice.
Funds allocated to savings and investments count as an “expense” for budgeting purposes even though you’re keeping the money. At the end of the month, your income minus your expenses should equal zero.
When every dollar is accounted for, you’re in the driver’s seat of your finances. Zero-based budgets encourage thoughtful spending as no dollar goes unaccounted for. Read more about zero-based budgeting here.
- Get detailed insights into every dollar you spend
- Encourages allocating income toward debt payoff, savings, and investments
- One of the most detailed and time-intensive budgeting methods to follow
- Possibly too many details for those who already have control over their finances
Who it’s best for: People who want to budget without spending too much time on the details.
The 50/30/20 budgeting rule has become more and more popular over the last few years. This budgeting strategy uses just three categories to direct your spending based on your income: needs, wants, and savings/investments. Because you don’t have to get into extremely detailed budget categories, following this type of spending plan takes less time and energy to maintain.
With a 50/30/20 budget:
- 50% of your income is allocated to needs like housing, food, and transportation
- 30% goes to wants like dining out, entertainment, and hobbies.
- The last 20% goes to savings and investments.
Instead of looking at every dollar closely, as you do with zero-based budgets, 50/30/20 budgeting’s larger spending buckets tell you how much you’re spending but without quite as much insight into your spending habits. If you don’t have any debt and your finances are generally on the right track, you should consider 50/30/20 budgeting. Read more about this strategy here.
- A high-level budget that takes less time to set up and maintain
- Encourages saving and investing
- May not provide enough details into where your money goes
Who it’s best for: Anyone who prefers using cash or has trouble with overspending. Also good for young people learning how to manage money.
When you can’t seem to get your spending under control, envelope budgeting may be the best solution. With envelope budgeting, you withdraw your budget in cash from your bank or an ATM and divide it up into envelopes for each budgeting category. Once your envelope is empty for a category for the month, you’re done spending on that type of purchase until the next month.
If you prefer cash, envelope budgeting could be the best budgeting strategy for you. Once you’ve spent your entire “clothing” envelope, for example, you’re done spending on that category until your next budgeting period begins. This method enforces a hard spending cutoff, though you can borrow from another category if needed.
For parents teaching kids about money, envelope budgeting could be a fun way to divide up allowance to teach good habits. Even if you don’t like cash, there are apps available designed to help you follow a digital envelope budget.
- Enforces limits to help you avoid overspending
- Easy to follow once you are set up for the month
- Hard spending limits may be difficult for some people
- Often tempting to “borrow” from other categories
- Added risks of carrying and spending with cash
Who it’s best for: Small businesses, freelancers, or anyone who wants to use business strategies for their personal finances.
Most people will find their budgeting needs met through the budgeting styles above. If you want to treat your money more like a business, you may want to follow one of these less-common budget setting techniques.
Cash Limited Budgeting
Often used by businesses but still helpful for some individuals, cash limited budgeting puts all of your money into one pot. Once you’ve spent it all, you’re done until the next budgeting period.
- Very clear parameters
- Encourages saving
- No flexibility for unexpected expenses
Another budgeting technique that’s more popular for businesses, contingency budgeting involves creating a primary budget and leaving aside funds as a contingency in case any other category runs out. In a detailed budget, an “other” category could be used for a contingency budget.
- Quick and easy to set up
- Very flexible
- Not always accurate
- Difficult to monitor
Manage Your Budget With Budgeting Apps
Some budgeting techniques are built into handy, convenient, and often free budgeting apps. Popular examples include Mint, YNAB, Personal Capital, and others. Depending on the type of budget you want to follow, one app may be a better choice for your needs:
- If you want to follow the incremental budgeting technique, you could use Mint. Mint is a free app that comes with flexible budgeting categories. It’s an easy online and app-based budgeting management system.
- For those who want to follow a higher-level incremental budget or the 50/30/20 budget, we recommend checking out Personal Capital. This app is more focused on cash flow than line-item details, which works well for people who have their money under control. And as an added bonus, Personal Capital comes with investment analysis tools that can help you design the perfect portfolio for you.
- If you want a very detailed budget, You Need a Budget (YNAB) supports zero-based budgeting while Mvelopes offers a digital version of the envelope budgeting method.
- If you want to work with a dedicated financial planner, we recommend checking out Facet Wealth. With Facet Wealth, you’re matched with a certified CFP who will work to help you reach your personal financial goals.
Learn more: Best Personal Finance Apps and Software
Real-life Example Budget
You can put your budget together using budgeting software, a spreadsheet, or paper and pencil. There’s no right or wrong way to budget. The key is picking a budgeting method you can stick with.
Here’s an example of a real-life budget for a young professional. In this budget, about 15% of the monthly total income is left over for savings and investments.
With this simple budget, based roughly on the incremental budgeting method, money is allocated to the most important needs. For example, there is no spending on childcare or pets. Spending less on those categories means there is more to spend elsewhere and save. This budget also has an “other spending” category, as sometimes things come up outside of your main categories.
Remember, this is just an example. Every household and every budget is unique.
There’s a Budgeting Strategy for Everyone
Your money is too important to blindly spend without a budget. When you have the right budgeting app or budgeting techniques in place, you can spend comfortably without worrying about overdrafts, overspending or going into debt.
Once you have your budget in order, you may find you have even more money than you realized left over for investing. And that would be a huge win for your finances.
Written by Eric Rosenberg.
View the original article at here.