5 Budgeting Methods (and the Secrets to Sticking With One)
By: Rita Cunha | October 19th, 2021
You know budgeting is important and that your bank account would thank you for it. So now what? Getting started can be intimidating, especially when there are so many different budgeting methods out there. Fortunately, taking control of your finances isn’t as hard as you probably think, and you don’t have to be a personal finance wizard to start budgeting.
This clear, concise guide will walk you through the pros and cons of each approach, as well as reveal the secrets to sticking to a budget consistently.
5 Different Budgeting Methods: Pros and Cons
Each budgeting system works a little differently, but they all have one thing in common: helping you reach your savings goals and financial wellbeing.
1. The Simple Budget
The first budgeting technique on this list is the simplest of them all. Take your monthly income, subtract your expenses, and decide what to spend the rest on. Hopefully, you’ll have enough money left over at the end of the month to save, but this approach doesn’t tell you how much money to put aside.
This is likely the first thing that comes to your mind when you think “budget.” It’s an easy, approachable, and non-restrictive system. Plus, since this budget doesn’t dictate how much you can spend on each spending category, it’s quite flexible.
But those pros can be a double-edged sword. Because this system doesn’t have much structure, it’s easy to get lost. For example, it doesn’t prioritize saving, which could hurt you in the long run. Additionally, since it doesn’t cap your “fun expenses,” it can lead to overspending.
2. The 50/30/20 Budget
The 50/30/20 budget rule is one of the best-known budgeting methods. It allocates 50% of your income to your “needs,” 30% to your “wants,” and 20% to your savings.
Needs are what you absolutely cannot live without (things like groceries, rent, insurance, and other expenses). Wants are what make your life more enjoyable, or fun money (take-out, clothes, concert tickets, and so on). The last category includes your short-term savings, long-term savings, and debt repayment (for instance, credit card debt and student loans).
What’s great about this method is that it gives you guidance. If you’re just starting out budgeting, having specific amounts to spend or save can be incredibly helpful. Plus, since it was developed by Senator Elizabeth Warren when she taught bankruptcy law, it’s grounded in research and is proven to work.
Its main downside is that it may not work for everyone. If you’re looking to save aggressively and pay off your debt as quickly as possible, only allocating 20% of your income to that may be too low. Of course, that can be solved by tweaking the percentages to match your financial goals.
Additionally, it may lead to some confusion. Sure, your groceries are essentials, but is the caviar in your basket really a necessity rather than a want?
3. The “Pay Yourself First” Budget
The “pay yourself first” approach is another popular budgeting method. In a nutshell, it has you put money into your savings as soon as you get paid. How much money you save depends on your goals (although the minimum recommended is 20%). Those savings are what future-you will dip into, be it for retirement or covering an emergency expense—hence the name. Then, use what’s left in your checking account as you see fit.
As you may have noticed, there is no distinction between “wants” and “needs” with this approach. It’s much more fluid, which calls for you to be conscious on your own with money. Too much fun money and you won’t be able to cover your expenses.
The best thing about this method is that it promotes saving money. Since you set up automatic transfers into your savings, there’s no way to skip a contribution. It also doesn’t feel like you’re taking a pay cut if you can’t see the money in your account in the first place.
Once again, this budgeting method won’t work for everyone. Because it doesn’t separate needs from wants, it can be easy to overspend on non-essentials. Thus, there’s a chance you’ll be counting pennies at the end of the month or over-drafting your accounts.
4. Zero-Based Budget
The zero-based budget system has somewhat of a cult following. The goal is to track every dollar coming into your checking account and making sure it’s leaving it. In a nutshell, your income minus your expenses minus your savings (and debt repayment) should equal zero—which is where this approach gets its name from.
Just because you’re ending on net zero doesn’t mean you’re blowing through your income. Saving is highly encouraged. Some people go so far as to ditch their debit card and only use cash. They withdraw their income and parcel it out through different envelopes, each with a specific purpose (e.g. “eating out,” “school supplies,” and so on). Then, once the cash is gone, they won’t spend any more money on that category.
This system is great for anyone wanting to take full control of their life. As it requires so much planning, you can get a clear picture of where your money is going every month. It’s also a good way to break up with a habit of spending more than you earn—otherwise, you wouldn’t end the month at zero.
There are a few downsides to the zero-based budgeting approach, starting with how time-consuming it is. Planning every expense ahead of time can also lead to “budget burnout” and be more harmful than helpful. On top of that, if you have a variable income, the rigidity of this system may not be for you.
5. Values-Forward Budget
The last budgeting method on this list takes a much more relaxed approach. It tells you to set aside money for your savings and spend according to your values. So if you want to spend money on new tech and don’t value traveling, for example, plan your budget around those categories. It’s the ultimate customizable budget and doesn’t really feel like a budget.
By far, the biggest advantage of this method is its laid-back nature. Although you should still track your expenses, you don’t need to waste hours upon hours planning your spending ahead of time. You can worry about other things. If you’re frugal by nature, this approach will certainly suit you.
Obviously, spending as you want can spell disaster for many people. If you have a tendency to splurge and overindulge, this isn’t the system for you.
How to Stick to a Budget Every Month
The best budgeting system is the one that works for you. They each have their pros and cons, so you will have to figure out what works for your financial goals and lifestyle.
But no matter which budgeting system you choose, one thing is certain: you will always need to track your expenses. How else would you know if you’re doing well and not regularly dipping into your savings because your income doesn’t stretch enough? Do this using a physical planner, online spreadsheet, or budgeting app—whatever works for you.
The real secret to sticking to a budget is cutting down on unnecessary expenses. That will give you breathing room to make better use of your money. No, we’re not talking about that Starbucks you get once in a while or the deals you score at a Verizon Black Friday sale. We’re talking about overpaying for your bills.
The Not-so-Hidden Secret: Lowering Your Monthly Bills
The average American pays too much for their monthly bills. From auto insurance policies that keep going up to outrageously expensive cable bills, they can add up. At the end of one year, you could be throwing thousands of dollars down the drain.
The easy fix for that is calling all your providers and negotiating down those rates. Unless you have dozens of hours to spend comparing pricing options and being left on hold, that’s easier said than done.
Enter Squeeze. This disruptive personal finance company negotiates your rates for you. It works for home, auto, boat, and motorcycle insurance policies; cell, internet, and streaming bills, and mortgages.
All you have to do is enter some basic personal information about you and your bills. The algorithm will pull pricing options from competitors and display them on the Squeeze dashboard. Then, you can see what each alternative plan has to offer and decide whether or not to make the switch. Squeeze will even warn you when your renewal period is coming up so you can consider whether you’re getting the best value for your money.
The best part about Squeeze is that it’s not all about cutting costs. Surely, what good would it do to slash your streaming plan cost in half if you lose access to the shows you love? It’s all about balancing your needs and expectations with your savings.
Luckily for your budget, Squeeze is completely free to use. Unlike similar companies, Squeeze doesn’t take a cut of your savings or charge a monthly fee. Once you’ve gotten a price cut on your bills, you can spend every dollar on your needs, wants, or buff up your savings account. Easy-peasy.
Budgeting Can Change Your Life
Have you decided which budgeting method best helps you manage your money? Once you choose one—and stick to it—you can save money for an emergency fund, cut down on credit card usage, reap the benefits of compounding interest, and start your debt repayment journey.
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