Types of Budget Methods

Every person’s preferences, goals, and financial situation will vary. Because of this, you’ll never find the perfect budgeting model that fits everyone. You may need to try a few to see what fits best with the way you work, your earning and saving potential, and your financial goals.

You may find that making a budget using a very basic method does the trick and allows you to effectively monitor and manage your spending, saving, and investing. Or you may need to try several and take the best components from each to fit your needs.

Try as many budget styles as it takes and customize it to suit you and your finances. You may find that percentage-based budgets work well for you, or maybe you prefer another method. Budgeting can be fun, and borderline addictive, once you get into it and see how powerful effective financial planning can be.

Let’s take a look at some common budgeting techniques that would be great to explore.

A zero-based or zero-sum budget is where you account for the distribution of all of your income in advance. You can think of it as assigning a purpose to every penny you earn.

This doesn’t mean that you’re not saving or investing. In this method, you assign “categories” to the different expenses you want or need to contribute to. This will include everything from recurring fixed expenses like a mortgage or car payment, to variable expenses like credit card payments, to contributions to savings or investing accounts.

People who want full control over their income, dictating where every dollar goes should try a zero-based budget. Especially if you are just starting to learn more about budgeting and/or have a tendency to spend recklessly, give the zero-based budget a try.

Spending too much time on budget planning – Zero-based budgets can be rather time consuming due to the tracking of your spending, monthly planning, and discipline involved in making this budget model successful.

To mitigate this, explore taking advantage of auto-pay options for some expenses and use a dynamic spreadsheet template or app to reduce tedious and redundant work month to month.

This budget rule means that you divide your income into three groups, each for a different purpose.

These numbers are simply guidelines. Remember that you have the freedom to make adjustments to the distribution to accommodate your income, or adjustments to your expenses to accommodate the distribution.

For example, if you can afford for only 40% of your income to be put towards needs and 25% towards wants, you’ll significantly increase your savings potential and this becomes the 40 / 25 / 35 rule!

More experienced budgeters that have the discipline to allow for a bit more flexibility in the “buckets” or “categories” that income is distributed to are great candidates for the 50/30/20 budget. Having only 3 broad categories rather than many very specific ones reduces the time needed to compile each monthly budget.

It’s important to beware of oversimplification interfering with your savings goals or creating surprise shortages if categories are underestimated. You can accommodate this by using subcategories in your needs, wants, and saving buckets to be a little more intentional with your income distribution.

Additionally, you can add a little padding to your expenses to prevent overspending from becoming an issue. We recommend reducing your “wants” allowance before your savings.

This budget technique is very similar to the 50/30/20 budget, but even more simplified. In this method, you save 20% of your income and use 80% to cover everything else.

Similar to other split-budgeting styles, feel free to adjust the percentages. If you can afford to save more than 20%, we strongly recommend you do. However, especially in the early stages of your career, 20% may be a stretch. 

If you have to reduce this to accommodate your current financial situation and cannot cut any unnecessary expenses, that is perfectly okay! The important part is that you’re saving and investing. Just be sure to come back to this distribution and up your savings contribution when you can.

The 80/20 budget model is great for those with experience in budgeting that are disciplined enough to handle such a free-form style without falling victim to reckless spending temptation or losing track of their spending.

Beware of overspending on wants or limiting your saving potential due to this technique having less of a strict structure and rules than other budgets. To combat this, you should keep track of all of your spending or at least do periodic spending reviews so you’re aware of your spending habits and can adjust where necessary.

The “pay yourself first” budgeting rule can be used across several types of budgets. The idea is that you take your savings out of your income right away, before any expenses or spending takes place. The 80/20 rule can be thought of as a type of “pay yourself first” budget.

This same technique can apply to a zero-based budget as well or any type of customized budget you follow.

People who have a tendency to cut into their savings contributions for casual spending should consider adopting a “pay yourself first” rule to their budgeting. This will ensure that you’re always saving and building wealth over time.

Be cautious of saving beyond what your income allows at the expense of your debts. Repaying existing debt should take priority, as this can severely impact your financial wellbeing through late fees, damage to your credit, and prompt long-term financial difficulty. 

Budgeting in general can help remedy this issue. Being more aware of your finances will prompt you to make smarter financial decisions including the amount of debt you’re able to take on.

When using the envelope method for budgeting, you divide your income by its purpose in advance of any spending or saving. This is another way to ensure that every dollar is intentional. 

If you’re paid in cash, you can use actual envelopes and physically separate your money. If you’re paid in check or direct deposit, fear not – you can easily simulate this through creating categories that can be used the same way the envelopes would.

Envelope budget rules are great for people who want to be very intentional and specific with the distribution of their money. It provides a great picture of exactly what your money is doing and can be a great way to identify areas of improvement in your budgeting practices.

This method can also be rather tedious month to month. Using a spreadsheet template and pre-planning for recurring expenses can help improve the efficiency of this technique.

Another split-budget technique, the 60% solution is more aggressive in saving and far more stringent on casual spending (AKA, your “wants”). There are several variations of the 60% rule that can be adjusted to fit unique situations. In this method, the remaining 40% is split between various saving and investing channels as well as fun spending.

Here’s one common breakdown of the 60% solution.

Being that this method is a bit more geared towards aggressive saving, these budgeting rules are great for people who are dedicated to building wealth quickly. This is sometimes more manageable if you have a higher income.

Don’t be too hard on yourself or sacrifice your payment history on debts to hit your saving and investing contribution goals. This is a great method to compare with other split-budgets in order to find the breakdown that works best for you!

As you can see, there are many great budgeting rules, methods, and adaptations of each to help you along your financial journey. It’s important to stay persistent, motivated, and find what works for you. 

We believe that the best way to budget is to try various techniques, discover what works for your financial situation, and take the best from each.