July 23, 2021
It's the end of the month. Your mortgage/rent and other bills are paid. You did your grocery shopping, filled up your gas tank — you even had enough money left over to contribute to your retirement fund, cover an unexpected cost, and dine out a few times.
Sound like a dream?
Our personal budgeting guide is full of tips to help you live more comfortably and avoid that end-of-month financial scramble. With just a few of these budgeting rules in place you'll manage your money more effectively to meet your goals and turn that dream into reality.
What is a Budget?
First things first, a budget is a short- or long-term financial game plan for tracking your cashflow and expenses. Whether you do it by hand, in a spreadsheet, or using a convenient app, there are plenty of budgeting approaches to choose from.
Why You Need a Budget
Ultimately, having a budget can help you get — and stay — on track toward your financial goals. You can start by paying attention to how much money you bring in and where your money goes each month.
Being aware of your income, necessary expenses, and spending habits can help you distinguish financial needs from wants. Once you find a strategy that makes sense for your financial situation and, more importantly, seems doable, you'll be more motivated to stick to your plan.
Five Popular Budgeting Strategies
Here's a closer look at five basic budgeting rules.
1. 50/30/20 Budget
The 50/30/20 approach is based on a needs/wants/savings hierarchy. Determining which expenses are needs and wants can be a gray area, but in general, these guidelines suggest ways to divide your after-tax income:
50% Needs / Non-negotiable Essentials
- Housing (mortgage/rent)
- Utility bills
- Minimum loan payments (credit cards, student loans)
30% Wants / Personal Expenses
- Dining out
- Emergency-fund savings
- Retirement savings
- Debt repayment (payments that exceed the minimum required amount)
The 50/30/20 rule aims to give you a well-rounded lifestyle with the right financial balance, covering essential expenses, unforeseens, and even things you enjoy, all while saving for your future.
Pros and cons of a 50/30/20 budget:
|Embracing a balanced lifestyle, including enjoyment, can help you stay the course.||Distinguishing certain needs/wants can be difficult — there may not be a clear definition.|
|This plan considers current and future costs, and factors in an emergency fund.||Focusing on minimum debt payments can extend your time in debt and increase what you pay in interest.|
|The pie chart structure helps you see clearly where your money is going.||Some people might feel their money would be better directed by putting more than 20% toward savings and debt repayment.|
2. Zero-Based Budget
The thought of zero dollars may cause concern, but zero-based budgeting (ZBB) isn't a matter of depleting your bank accounts. With ZBB, you subtract expenses from your monthly income until you have a remainder that goes to fund whatever is most pressing that month, thereby taking you down to zero — in other words, you're working toward a zero-waste situation, with no income unaccounted for.
You can do this by assigning expenses to categories. Basically, the main categories write themselves (food, housing, utilities, transportation). Other common categories include additional bills, debt repayment, savings, entertainment, and miscellaneous costs.
Next, you assign any money left over to the category that needs it most, for example, debt repayment or retirement savings.
Each month, you'll start with a clean slate and have a chance to re-evaluate your approach, make any necessary tweaks, and consider different monthly costs you'll encounter.
Here are the basic pros and cons of a zero-based budget:
|Gives you a more detailed account of where your money goes each month.||Tracking, categorizing, and balancing may be more time-consuming than other methods.|
|You have more flexibility to decide where to direct any extra funds from month to month.||Learning how to get your balance to zero (without going into the red) may take some time, possibly a period of several months.|
3. Envelope Budget
This old-school technique involves dividing up portions of actual cash and putting them in separate envelopes labeled for most of your monthly expenses.
Using debit or credit cards may have an out-of-sight/out-of-mind effect, but literally having cash creates a concrete, hands-on experience each time you spend money. This heightened awareness can help you stay on track toward your money goals because the money in each envelope has to last for the entire month, meaning once it's gone, you can't replenish it.
When applying this method, you'll pay for your fixed costs, those that typically don't change over the months, as you normally would, whether by check, online, or with automatic bill pay. Common fixed costs include rent or mortgage, loan payments, utilities, and insurance.
You'll use the cash envelopes for variable costs that may fluctuate throughout the month, such as:
- Utility bills that fluctuate
- Discretionary spending
Estimate what you typically pay monthly for each of these costs so you'll know how much cash you need to withdraw. Then, simply put the allotted amount into each labeled envelope and dip into them as you spend.
If you find that some envelopes are empty before month's end, you may need to make adjustments accordingly for the next month. That could mean cutting back on certain areas like discretionary spending or increasing spending limits for utility bills.
Pros and cons of envelope budgeting:
|Reduced overspending — you may be less likely to withdraw more money to refill your envelope than you would be to swipe your card in a moment of weakness.||Estimating monthly expenses can be tricky and may require making adjustments.|
|Having a limited amount of cash on hand may motivate you to be more proactive about spending.||Having more cash than usual on hand comes with the risk of misplacing it.|
|Seeing cash leftover at the end of the month is empowering.||Cash might not be accepted as a payment option for certain expenses.|
4. Values-Based Budget
Instead of feeling frazzled about your finances, would you rather make a difference with your dollars? Beyond meeting your financial necessities, such as food, housing, utility, and transportation cost, values-based budgeting means making an intentional effort to spend any money left over on purchases or causes that are in line with your values.
One way to evaluate how you're currently spending your money and how you'd like to is by reviewing your bank statements from the last three months and thinking about your values.
For example, perhaps after looking at your spending records, you realize you spend most of your extra money on just dining out. And while you value having time to go out and try different restaurants, you also like donating to charities or organizations in need as well as tending to your own health and wellness. Here are some ways you could re-allocate your spending money:
- Keep 40% of your extra money for hitting favorite dining spots or new places that pop up.
- Devote 30% of your leftover funds toward social programs, organizations, and local businesses whose work aligns with your values (bonus points if you also offer your time to volunteer).
- Use the remaining 30% of your money to register for a self-improvement course or a well-being workshop.
You can incorporate core-values-focused spending into all of your budgeting, not just your extra income. Looking to leave a greener footprint and save on your A/C bill? Try opening your windows and using fans throughout the milder months instead of constantly running your air conditioning. Want to save on your water bill and cultivate your homestead? Invest in a rain barrel. There are literally endless opportunities to reduce your carbon footprint with intentional budgeting.
Pros and cons of a values-based budget:
|You'll feel more in tune with your purpose in life, which actually goes a long way in terms of your health.||Not ideal for those with lower incomes who can't spare the funds.|
|Gives you more of a voice — sometimes you can make more headway with how you spend than how you vote.||Certain values-based alternatives may be hard to source up front, like rain barrels and alternative fuel vehicles.|
|Fosters reciprocity and builds connection within your community, whatever form your community takes.||A lot of research may be involved in vetting charities and locating brands who align with your values.|
|There may be certain tax benefits that come with donating to charity.|
5. Pay Yourself First Budget
From the name alone, the pay-yourself-first budgeting approach sounds like it breaks all the rules, yet it doesn't. Instead, this method simply prioritizes your savings.
Just like with any budget, you start by noting your monthly net income. Next, instead of listing monthly expenses or dividing your income into categories or percentages, you'll list your monthly savings goals, each with a dollar amount. Then subtract your savings total from your monthly net income. Whatever is left can go toward paying bills and other expenses.
Here's how a savings-forward budget like this one might look:
- Monthly net income: $3,600
- Monthly savings goals: retirement fund ($300), 529 plan ($250), emergency fund ($200), vacation fund ($200), landscaping backyard upgrade ($200) = $1,150
- Money to spend: $3,600 (net income) - $1,150 (savings) = $2,450
- Use $2,450 to cover the rest of your monthly expenses
If you want to protect your future and keep tabs on your monthly finances, but you don't want to feel tied to the constraints of traditional budgeting, this approach may be for you.
Pros and cons of a pay-yourself-first-budget:
|Minimal prep work and more flexibility for fluctuating monthly expenses.||Lack of structure can make it harder to keep track of spending.|
|Your savings goals will always be met.||If your monthly expenses exceed your income or you have high-interest debt, this rule likely won't suit your financial needs.|
More Tips for Budgeting Success
Finding the right budgeting plan will give you a greater sense of control, boosting your mood and strengthening your financial health.
Top 10 Budgeting Tips
- Set specific short- and long-term financial goals.
- Choose a strategy that's realistic for your lifestyle and means.
- Take advantage of tools, from spreadsheets to mobile apps, to track spending.
- Make sure credit card charges won't amount to more than you can pay off in a month.
- Find ways to keep learning and expanding your financial literacy.
- Maintain a cushion so you have money for unexpected expenses and fun activities.
- Commit to building up your emergency and retirement funds.
- Be patient with yourself as you learn and find out what meets your needs.
Find Your Balance
No matter which budgeting strategy works best for you, simply having a budget in place can provide the framework you need to reach your financial goals.
Perspective comes into play, too. Budgets may seem restrictive, but that added structure can give you the power to make your money work for you. Once you see this for yourself, you'll realize your budget is the key to your dream-come-true reality.