Setting (and sticking to) a budget can be challenging, especially when you're not exactly sure what's the best method for your personality and lifestyle. According to Experian, there are four popular types of budgeting plans, each with its own benefits and approach for helping you allocate your funds, whether you're looking to save, pay off any debt or want to rework current spending. Come along as we explore these four methods so you can pinpoint your own budgeting style.
THE ENVELOPE METHOD
This method, which was popularized by David Ramsey, has been around for decades and works by using physical cash for specific categories that you decide. These categories can include things like groceries, gas, car maintenance, self-care, travel, etc. After determining your monthly budget for each category, place the appropriate amount from each paycheck in the envelopes. What's there in the envelopes are what you're "allowed" to spend for that given month. What can't be paid in cash (such as some bills) can still be tracked and planned for on paper.
YOU MIGHT LIKE THIS METHOD IF ...
You're the kind of person who enjoys physically touching things. Much like many people handwrite certain bits of information they want to retain or touch textures while shopping, physically putting your money in separate envelopes—and seeing how much you're saving or have remaining for spending—can provide a sense of great satisfaction and awareness.
ZERO-BASED BUDGET
With the zero-based budgeting method, every single dollar of your income is allocated to a specific place so that you're always left with $0. This includes dividing your income into categories encompassing necessary spending, potential wants, in addition to savings and debt payments. Similar to the envelope method in some ways, zero-based budgeting doesn't require you to stash away just cash and helps you avoid spending what you don't have. If you go over budget in one category, you'll need to pull from another in order to keep your budget balanced. Under budget in one category? Either shift it to savings or roll it over to the same category for the following month.
YOU MIGHT LIKE THIS METHOD IF ...
You have a pretty consistent level of monthly income and you don't mind spending a little bit of time in the weeds. Zero-based budgeting can be tough for those with fluctuating incomes and can require more time to ensure you stick to your respective budgets once you set them.
THE 50/30/20 METHOD
The 50/30/20 method is one that still divides up your take-home income for various purposes, just in a more simple and consistent way. The 50/30/20 numbers represent the percentages of your income that gets split up: 50% for necessities, 30% for wants, and 20% for savings and debt repayment. (You can get a quick glimpse at what your own 50/30/20 budget would look like using this calculator from NerdWallet: bit.ly/3UooNi0).
YOU MIGHT LIKE THIS METHOD IF ...
Consistency and routine are your jam. The 50/30/20 method takes a lot of the guesswork out of personal budgeting, as the percentages for each respective category can stay the same—even if your income fluctuates.
PAY-YOUR-SELF-FIRST BUDGETING
When it comes to the Pay-Yourself-First method of budgeting, you'll do exactly what it sounds like: pay yourself first. What this means is you'll prioritize setting aside funds for your longer-term interests, such as retirement or saving for an emergency fund, before allocating money for more shorter-term spending such as groceries, travel, etc. To assess if this method will be a good fit for you, begin by determining your monthly income and spending. Next, decide what your long-term goals are and what level of savings you'll need to commit to in order to meet those goals down the line. From there, all of your shorter-term spending should fall in line to help you meet these bigger eventual goals.
YOU MIGHT LIKE THIS METHOD IF ...
You're always thinking of the bigger picture and find comfort in knowing your bases are always covered. This method is also favored by those who gravitate towards simplicity in budgeting, enjoy using a variety of vehicles for saving (such as a high-yield savings account), and don't necessarily like to break out their expenses into too many subcategories.
Written by Sarah Suydam, Managing Editor for West Michigan Woman.
This article originally appeared in the Jun/Jul '23 issue of West Michigan Woman.
