Yahoo Finance The 5 Most Effective Budgeting Methods — and How to Use Them
There’s more than one way to budget. A strategy that works for one person might be a terrible match for another — and that’s OK.
It’s not your specific budgeting style that’s important. What matters is that you’re taking control of your finances.
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Budgeting is a crucial part of your financial health. If you don’t do it, you’ll be in the dark about your money, which is never a good idea. You need to know exactly how much money you’re bringing in each month — and where it’s going.
Here’s a look at some tried-and-true budgeting techniques to consider. Maybe you’ll find the right fit on the first attempt, but if not, keep testing them out until you find one that sticks.
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1. The 50/30/20 Method
Popularized by Senator Elizabeth Warren, the 50/30/20 budget focuses on paying for necessities, while also saving for emergencies and retirement. Using this tactic, you’ll split your after-tax income into three spending categories — needs (50%), wants (30%) and savings (20%).
Needs are categorized as bills and obligations you must have for survival. For example, rent or mortgage payments, groceries, car payments, utility bills, healthcare and minimum debt payments.
Wants are defined as things you desire to spend money on, but don’t actually need. For example, a gym membership, dining out or a trip to the nail salon.
The savings category is pretty self-explanatory. You set aside 20% of your after-tax income for savings and investments to help safeguard your financial future. This includes everything from building an emergency fund to contributing to a retirement account.
This is a good budgeting method for people who feel overwhelmed at the thought of a strict budget that doesn’t allow much room for personal spending. It’s a great way to avoid burnout, and you can modify the percentages to put more toward savings as you go.
2. Zero-Based Budgeting
Simply put, a zero-based budget accounts for every dollar of your income. With this method, when you subtract your expenses from your income, it should equal zero. For example, if you earn $5,000 per month, all of your spending and savings should total $5,000.
Of course, this doesn’t mean your bank account balance is actually zero. It just means every dollar from your paycheck is accounted for, whether it’s going toward paying a bill, paying off debt, buying groceries, or going into your emergency fund.
For this method, it’s helpful to use a free budgeting tool like the one from Empower. It’s a great resource for this method. Use it to track your spending, set savings goals and stay on budget.
You can automatically organize your spending and savings by date, category or merchant. It’s also easy to make adjustments, so you can change your budget as needed. It’s free to get started here.
3. The Pay-Yourself-First Method
Different budgeting strategies have different priorities. Using the pay-yourself-first approach, you’ll put money toward categories like retirement, savings and debt before many variable expenses, such as clothing, entertainment, utilities, home repairs or gas.
Of course, this doesn’t mean you don’t need to pay other debts, because you certainly do. The focus of this budgeting approach is simply making savings a priority and keeping spending to a minimum.
This can be a great choice for anyone struggling with overspending. If your income is high enough that you shouldn’t technically have trouble saving money, but you somehow never have much — or anything –left to put aside, this strategy could be monumentally helpful.
Since you’re prioritizing savings over spending, you’re eliminating the temptation to spend money you should be putting aside. Start by deciding how much you’ll save — consider setting up an automatic transfer — then create a budget for your remaining funds.
4. The Envelope System
If you want to completely ditch the plastic, the envelope budgeting system could be the right choice for you. Using this approach, you’ll keep cash in labeled envelopes.
To get started, you’ll make a budget, then determine which categories need a cash envelope — i.e., those in which you’re most likely to overspend. For example, you might choose groceries, dining out, entertainment and personal expenditures.
Next, you’ll decide exactly how much money to put inside each envelope per month. If you get paid weekly or bi-weekly, you will likely want to break this down by pay period, refreshing the cash with each paycheck.
The rest of the work will probably take some willpower, but you can do it. You’ll only have a set amount of cash to spend in each category each month, so when it’s gone, that’s it for the rest of the month.
This is a great method to help you tangibly see where your money is going every month. For many people, using cash makes their spending feel much more “real,” which can help prevent frivolous spending.
5. No-Budget Budget
A notably simplified approach, the no-budget budget focuses on just two areas. You’ll only track your savings and fixed expenses.
This could be a great choice if you’re not new to budgeting and have a decent income. Assuming you already know where your money is going and you don’t need to tackle any major issues like overspending or not saving enough, you might enjoy the flexibility this approach offers.
To get started, make sure at least 10% of your take-home pay is automatically sent to savings each pay period. It’s also wise to set all your fixed expenses, such as rent or mortgage, utilities, insurance and loan payments, to autopay.
Any leftover money is yours to spend as you please. It’s really that simple. This type of budgeting will allow you to save time, as it requires very minimal effort. However, it’s worth emphasizing again that it’s not for a budgeting novice.
There’s a lot of room for error, so if you don’t know where your money is going, hone your skills on a different budgeting method first.
The Bottom Line
Everyone needs a budget. No matter the size of your paycheck, it’s important to allocate your money wisely.
If you haven’t been following any type of financial plan, this can be a major adjustment. You might have to try out a few different budgeting methods before you find one that feels right, and there’s nothing wrong with that.
What’s important is that you commit to the act of having a budget. After finding the right approach, you’ll get in a rhythm where managing your money feels like second nature.
Try using a free budgeting tool, like the one from Empower. It’s much easier to stick to your budget when you’re able to easily keep things organized. It’s free to get started here.
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