Seven Different Ways to Budget (and How to Choose the Best One for You)
There are some basic, unavoidable facts about adulthood . You need to clean up your house . You need to pay attention to what you eat . And you absolutely need to have a budget . Whether you’re using a fancy app or just doing math on a piece of paper , you need to take control of your finances to avoid poverty and the mental stress that debt and financial chaos can cause.
In other words, you need a budgeting system (and a reserve budget in case of financial disaster). But people have different attitudes to money, so there is no one-size-fits-all system for managing personal income and budgets. While using any system will be better than just YOLOing your way through your financial life, choosing a budgeting system that fits both your life goals and your personality will not only increase your chances of success, but also increase the likelihood that you stick with the system long enough to see results. Here’s a rundown of seven popular budgeting systems and who they’re best suited for.
Budget 50/30/20
How it works: This is one of the simplest and most common budgeting systems, especially for those new to the concept. It divides your entire list of expenses into three categories : needs, wants and savings. You invest 50% of your monthly income into things you need (rent, groceries), 30% into things you want (travel, cocktails with friends), and 20% into savings (or debt reduction). You can increase or decrease these ratios as needed (or use a variation on this theme, such as “60/40 Budget” ). For example, if you live in a high cost of living (HCOL) area, you may need to put more into the “needs” category in order to afford the rent, for example.
Who’s It For: If you’ve never lived on a budget before, this is a great option to start with. Its simplicity allows you to see at a glance what you can afford. For example, if you earn $5,000 monthly, your “needs” category has a budget of $2,500. When you subtract food, commuting, utilities, insurance, minimum payments on things like credit cards, and any other expenses you can’t eliminate, what’s left is what you can afford for housing. Once you get used to thinking about how you spend your money (and you have a steady stream of money going into your savings), you can start planning your budgets more carefully.
Envelope system
How it works: An envelope system, sometimes called a “cash tracker,” is a way to physically track your money. For example, it’s easy to say that you’re only going to spend a certain amount of money on takeout, but it’s very difficult to track every move on your credit or debit card. Using the envelope system, you first calculate your monthly budget as usual. Then you mark each item on a stack of envelopes: groceries, delivery, eating out, clothing, rent—everything. Then you literally stuff money into these envelopes. If you decide that you are going to spend $200 on groceries this month, then you put $200 in cash in a grocery envelope. When a particular envelope is empty, you cannot spend any more in that category.
Who’s It For: If you’re someone who spends mindlessly , goes into a sort of trance when you’re in a store or browsing Amazon online, an envelope system can help you maintain conscious control. Handling cash makes us more aware of our spending because when we give away physical money, we experience physical changes. And the empty envelope is a powerful visual that reminds us that we’re on budget, rather than having a vague and inaccurate idea of how much we spent.
Pay yourself
How it works: Also called the 80/20 budget , this simplified budget focuses on just two categories: your savings (20% of your income) and literally everything else (80%). In other words, every payday you put 20% into your savings and then use the rest on all your other expenses, from rent to bubble tea.
Who is it for: People who suffer from lifestyle inflation. If you tend to spend every penny you get your hands on, this method allows you to immediately turn one-fifth of your money into savings, so no matter how many vacations you take this year, you’ll still have an emergency fund to fall back on. resort when your boss notices how many vacations you’ve taken this year.
It’s also a good choice for people who find detailed work tiring because you don’t have to keep track of much. If you can’t handle two large, vague segments of your budget, you probably need someone else to manage your money.
zero-base
How it works: A zero-based budget focuses solely on income and expenses. The goal here is to ensure that every dollar that comes in goes towards a specific purpose, and the end result is that you will have zero unclassified dollars at the end of the month.
First, calculate your monthly after-tax income. Then list all the expenses you’ll have this month (including savings and retirement contributions if they’re not already deducted from your paycheck), add them up, and compare them. If they’re not exactly equal, it’s time to adjust the budget. If you have a surplus, find a place where that money could be used (for example, paying off debt or saving more). If you have a deficit, reduce your spending until you have zero dollars left.
Who’s it for: People who easily lose control of their spending or who can’t create a percentage-based budget, such as a 50/30/20 or 60/40 budget. This could be because you live in an HCOL area and your ‘needs’ basket is well over 50% of your budget, or because you simply don’t have any money left to save at the end of each month. By consciously saving every dollar, you will be in complete control of your money—and there will be no surprises.
PERK method
How it works: The PERK method, developed by financial advisor Robert Pagliarini, can be a budgeting system in itself or used to periodically review your budget to make sure it’s still on track. The way it works is simple: list all your current expenses. Then place each expense into one of four categories:
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Postpone: If expenses can be postponed for a while, do so. For example, if you want a new phone but your current one is working fine, defer that expense.
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Eliminate: Sometimes our expenses just become background noise, but the PERK method forces us to think about each of them. Things placed in this category can be eliminated entirely, whether it’s an extra streaming service or a nice treat you’re used to paying for every single day.
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Reduce: Where can you trim fat? If you see certain expenses rising steadily over several months, this is the category where they fall, so you can think about how you can cut them.
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Save: These are expenses that you either can’t change or simply don’t want to change because they’re important to you for some reason.
Who’s It For: If you’re someone who gets excited about launching new budgeting systems and then slowly lets them devolve into chaos, the PERK method will force you to regularly review your finances, allowing you to see disruptive patterns and do something about them. . This is also a useful exercise even if you have another system that works for you.
Kakeibo method
How it works: Kakeibo is a very old Japanese budgeting system. This method encourages a more thoughtful approach to money, which starts with asking how much money you have and how much you’d like to have, and identifying the obstacles you put in your way. He then uses a simple system with just four categories: Survival (essential bills), Extras (one-time expenses), Extras (good things), and Culture (things that feed your soul).
The essence of Kakeibo is to be mindful of your money and thus get your financial house in order without feeling left out. By categorizing things as “optional,” you give yourself permission to skip them, and having an entire category for things that make you happy helps reduce the feeling of being in a “money prison” that comes with many budgeting systems.
Who’s It For: If you’re frustrated by the dour, no-nonsense approach to other budgets and hate keeping track of dozens of line items, this more philosophical approach can make you feel empowered rather than limited.
values-based
How it works: A values-based budget is more flexible than other budgets. First you determine your priorities – what is important to you. You then allocate money proportionately to those priorities and adjust those proportions as your priorities change over time.
For example, maybe you have a lot of debt right now, but your main priority is to travel and see the world while you’re young and have few responsibilities to tie you down. In a values-based system, you would put more money into your travel fund by now. Then, when you accumulate so much debt on your credit cards that you lose sleep at night, your values change and you reallocate your budget accordingly.
Who’s it for: Anyone who finds other budgeting systems too rigid. A values-based budget doesn’t ignore your other debts and bills, but allows you the flexibility to direct money toward something other than the fundamentals when you need it. If you’ve tried budgeting before and keep stopping the experiment to fund things they don’t cover, a values-based approach may be the answer.