How to Choose a Budget System That’s Right for You
It’s no exaggeration to say that budgeting is probably one of the most important life skills you can learn. A budget is an essential part of financial empowerment: a tool that helps you to understand and evaluate your relationship with money and gain control over your financial situation. Surprisingly, however, even though most Americans know how important it is to keep a budget, far fewer actually do. According to a US Bank study from 2016, only 41% of American adults said that they use a budget to keep track of their finances.
Financial experts speculate that one of the reasons why so many people are making the major financial mistake of not budgeting is that they haven’t found the right budgeting system or approach for their situation. You might not realize it, but budgeting is not a one-size-fits-all practice: on the contrary, there are many different types of budgets and different ways to create and maintain a budget, and not every option will be right for every person. If you’re thinking about getting started on budgeting, therefore, the first thing to do is review some different budgeting styles and determine which is the best fit for your personal financial situation.
Some of the most common budgeting approaches include:
The 50/30/20 budget.
This widely used, percentage-based budgeting system is frequently recommended by financial advisors because it’s easy to understand, effective, and adaptable to many different types of financial situations. Essentially, the 50/30/20 budget divides your income into three major categories. Fifty percent of your income is allocated to necessities and fixed expenses: this includes standard monthly costs such as rent or mortgage payments, car payments, utility bills, insurance, and groceries. Thirty percent is allocated to variable expenses, which are also sometimes classified as “wants”: this category can cover things like travel, entertainment, a gym membership, or items for the household. The final 20 percent is allocated to savings, debt repayment, and other longer-term financial goals.
The 50/30/20 budget is a great option if you’re just getting started with budgeting because it’s simple to set up and fairly flexible to work with as you go along. Because it’s percentage-based, for example, it can be easily adjusted as your income changes. You can also change the percentages allocated to each category if you find that one is always falling short while another is carrying a surplus.
The zero-sum budget.
This budgeting approach is all about using every single dollar you earn in a deliberate, planned way. Essentially, it involves taking all your income and assigning specific amounts to different categories until you’re left with zero dollars. The aim of this type of budget is to help you clarify exactly how much you have to spend in different areas, to never leave you wondering where your money has gone, and to ensure that you’re making the most of each and every dollar you earn.
The zero-sum budget doesn’t suit everyone. It requires you to track your expenses fairly carefully, so if you’re not a detailed planner or you don’t have a lot of time to spend on your budget, it may not be the best choice for you. However, this approach is a great choice if you want a budget that accurately reflects your financial reality and spending habits, if you have a regular income and fairly regular expenses, and if you want to limit financial uncertainty in your life.
The envelope system.
The envelope system is a bit like an old-fashioned or more concrete version of the zero-sum budget: it’s a rigid approach that allows you to control overspending without having to keep a detailed account of every single purchase you make. Setting up an envelope system couldn’t be more simple: each month, set a spending limit for each of your expense categories (such as groceries, transportation, etc.), then place that amount, in cash, in an envelope. Once all the cash is gone, your spending in that category is over until next month.
It might seem strange to create a cash-based budget in this day and age, but experts do agree that spending cash often feels more “real” than using a credit or debit card, and various studies have shown that people are more likely to overspend when using forms of payment other than cash. The envelope system can therefore be a very helpful way to cut down on frivolous spending if that’s an issue for you.
The pay-yourself-first budget.
Depending on your financial situation, you may be more focused on long-term savings goals and less concerned about immediate expenses. In this case, you might want to consider the pay-yourself-first budget. With this system — essentially a traditional budget in reverse — you first decide how much of your monthly income you want to use for savings goals, such as creating an emergency fund or putting money aside for retirement. Then, you use what’s left for your standard monthly costs. This system is designed to help you align your spending and your values, and it can be a good option for long-term planners.
