Today, I realized I had to do something big. Something different.

Our budget needed a MAJOR overhaul.

If I’m being completely honest with you, we needed a new way to budget. We are flying by the seat of our pants.

Today, a bank statement, credit card statement, and my second cousin’s wedding invitation came in the mail.

I opened all three and laid them on the table.

I’m overwhelmed by it all.

We need a budget but we have tried this before and fallen off the wagon. The budgets we failed at didn’t work for our lives.

What will be different about this time?

I need to find a budgeting method that works for our family. Fast.

This is Amanda talking above. She is 35 years old, married to James for 10 years and they have 2 young children, Emma (6 years old) and Jacob (3 years old).

They also have a big mortgage, a car payment, investment accounts for retirement and their children’s education, etc.

Family cut outs, budget
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What do they do?

They take to google and search things like “best Budgeting Methods” and “how do you create a personal budget.”

What did they find?

A boatload (and I mean a big boat) of different ways to budget and a gazillion opinions. After hours of reading, they narrow it down to 5 budgeting methods to consider that look worth trying.

Can you relate to this story? I know I sure can.

Budgeting can be hard to stick to so finding simple ways to budget our money that is right for our current circumstances is a must.

As we move through various stages of life, our budgeting methods will evolve.

In this article, I give you a number of popular budgeting methods for you to give a try.

Before we get into the best budgeting methods out there, we need to cover a couple of important points.

What is a budget, anyways?

A budget is simply tracking your income (what you make) and expenses (spending). Your budget is a “money plan” to ensure you don’t spend more than you make.

Pretty simple concept right? Easier said than done.

As I like to say….

Fail to plan, plan to fail.

These words have never been truer when it comes to budgeting.

Understanding Budgeting Differences

Part of James and Amanda’s budget issues was because they have nearly opposite money philosophies and past experiences.

James

Before marriage, James paid his credit card and checked his bank account balance at the end of the month. If he had money left over, great. If he didn’t, he made sure he spent less money the next month to make up the difference.

This worked good when single and living a consistent, normal lifestyle.

James grew up in a financially stable home where money wasn’t discussed.

Now that James established in his career, he likes to buy what he wants when he wants. James likes to eat out regularly which annoys Amanda because she sees it as a waste of money.

Amanda

When young, Amanda’s family went through serious financial hardships.

Her father lost his job and her mother stayed home.

For about a year, they hardly had enough food and almost lost their home.

Finally, her father got a new job and eventually their family recovered.

Amanda went to college and developed her career fast. She wanted to be able to spend money on things she enjoyed to avoid feelings of deprivation. However, she wants to ensure she is never in this situation again.

She often goes back and forth between being an aggressive saver and an aggressive spender.

Amanda tries to put away as much money as she can for retirement and their kids’ education but also likes to spend money on clothes and go to the spa occassionally.

James and Amanda have different money philosophies. What one values the other doesn’t.

James likes to go out to dinner whereas Amanda is happy to each soup.

Amanda likes to get regular pedicures whereas James sees it as a waste of money.

So what should Amanda and James do about their differences?

Understand and Agree on Budget Limits.

Over time, Amanda and James have come to understand and appreciate their differences. They agree to how much each will spend on extras.

James, Amanda, and their 2 cuties.

Appreciate your Partner’s Money Strengths.

Jame’s Money Strengths:

  • Doesn’t stress out so much about money
  • Doesn’t have a tendency to overspend.
  • Keeps perspective. You only live once.

Amanda’s Money Strengths:

  • Reviews their finances to keep them focused on not overspending
  • Ensures they contribute to retirement every month and meet their financial goals.
  • Keeps James accountable.

Commit to your Budget.

Give it at least 3 months when starting a new budgeting technique or strategy.

  • This will give you the time to go through different situations that will test the validity of your budgeting method. You will need to tweak along the way.
  • You will also need this much time to form new habits.

The Best Budgeting Methods: Pick the one that’s right for you.

1. Line-Item Budget

Line-Item Budgeting Method Sticky Note
Photo by Noble Nickel. Budgeting Methods.

This is one of the oldest budgeting techniques around. I’m pretty sure my mom used it or some version of when I was growing up.

Essentially, you create a monthly budget with a line for every expense you incurred. then

How it works…

  1. Write down every single expense you had for the last month – one expense per line – whether it be on a piece of paper, spreadsheet, or papyrus scroll. This is your base budget.
  2. For the new month, take your last budget and adjust for the new month as necessary taking into consideration any new financial commitments.

Line Item Budget Advantages

  • Accurate. When you account for every expense, reality smacks you in the face for the first while. Look at it as a way to get sorted out.
  • Simple. Even though it takes time to put this budget together, the concept is simple. There’s no need to categorize and calculate percentages.

Line Item Budget Disadvantages

  • Rear-view mirror approach. Because you are looking at the last month, it can create a short term focus. To overcome this, budget in categories like Savings and Debt Repayment.
  • Time-consuming. You will need to go through all your bank and credit statements for the last few months. Once up and running, it only requires monthly review and maintenance.
  • Irregular expenses can be missed if you follow this budgeting method at its simplest form. However, if you create a spreadsheet with all your irregular expenses over the year and then simply add this to your budget each month, issue resolved. Here is what I am talking about:
Budget process for irregular or infrequent monthly expenses
How to budget for irregular expenses each month

Who is a Line-Item Budget Best Suited For?

  • Detail-oriented. If you like to break out a nice legal pad or spreadsheet and dive into the details, this one might be a winner.
  • Beginner. If you are detail-oriented AND are new to budgeting, this is a great budgeting method to start with. It will really highlight where your money is going and give you basic budgeting skills.
  • Stable Income & Expenses. Because the previous month is your template for the next month, this budget can work for you if your income and expenses are consistent.

Final Thoughts on Line-Item Budgeting

As stated above, the Line-Item budgeting technique can work great for those who are willing to put the work into tracking and are new to budgeting. This method has the potential to teach you the basics.

However, once you have mastered this method, it’s probably best to move onto a more robust budgeting system so you prioritize other facets of your overall financial health such as saving, investing, and paying off debt.

2. Zero-Based Budget

Zero-Based Budgeting Method Sticky Note
Photo by Noble Nickel. Budgeting Methods.

The Zero-Based budget was popularized by Dave Ramsey, money Guru.

How it works…

If you have any money left over at the end of a month, you must allocate it somewhere.

At it’s core, zero-based budgeting requires you to allocate every single dollar you earn to an expense category. Whether it be to expenses such as utilities, mortgage payment, food, entertainment, paying off debt, including seasonal expenses such as birthday gifts, oil changes, etc.

Income – Expenses = 0

Here is how Dave Ramsey Summed it up:

The point of a zero-based budget is to make income minus the outgo equal zero. If you cover all your expenses during the month and have $500 left over, you aren’t done with the budget yet. You must tell that 500 bucks where to go. If you don’t, you lose the chance to make it work for you in the areas of getting out of debt, saving for an emergency, investing, paying off the house, or growing wealth. Tell every dollar where to go.

Source

Sit down and think about what Dave is saying here. If you look at your bank account after paying your bills and credit card(s) at the end of the month and have $500 left, what is the tendency of most people to do with this extra money? SPEND IT on silly stuff.

5 Best budgeting methods there is.
Cool pic found on 123rf.com

Let’s imagine this is James and Amanda who have $500 left over. James would want to go to dinner one more time and Amanda might be tempted to buy the outfit she saw pop up on her insta feed.

What’s the actual damage? Some might say it’s no big deal. They deserve it.

But in reality, this could lead to impulse buying and falling off the budgeting wagon because now they are deviating from their plan.

Although the Zero-Based budget may sound a lot like the Line-Item Budget, they are different.

Line-Item budgets use the previous period (ie, month) as a template for the next period. However, Zero-Based Budgets start fresh each month based on your current financial position.

Here are the steps to the Zero-Based Budget reduced to it’s simplest form from the Dave Ramsey website:

  1. Write out your monthly income.
  2. Write out your monthly expenses.
  3. Write out your seasonal (irregular) expenses.
  4. Subtract your income from your expenses to equal zero.
  5. Track as you go.

Zero-Based Budget Advantages.

  • Accuracy: Every expense no matter how small is accounted for. No money will be “lost.”
  • Control: Your money will be put to work more efficiently because it makes you decide exactly what you are doing with each dollar.
  • Clarity: In no time, it will be obvious where and how you are spending your money. It makes you think before you spend. No more mindless spending.

Zero-Based Budget Disadvantages.

  • Time-consuming: Life isn’t static so managing all the little costs can be challenging. You also need to create a new budget every month (or whatever time period you select).
  • Need money saved before starting: This budget method works on the premise of having one month of living expenses saved to use for the following month. This can be a challenge for people to get this budget off the ground. However, don’t let this hold you back. If you want to give this method a try, focus on drastically cutting expenses for a while to build up your bank account.
  • Exhaustion. Counting, allocating and scrutinizing every dollar spent or saved can lead to burning out.

Who is a Zero-Based Budget Best Suited For?

Zero-based budgets are best suited for people who are:

  • Detail-oriented. If you like detailed (even complex) excel or google spreadsheet like me, this method might be right up your alley since you will need to categorize all your spending.
  • Routine-oriented. It’s helpful if you like a good routine to reduce the need to remember to track each expense. For example, if you meal plan and do your grocery shopping on the same day of the week, you can easily build in one extra step of tracking your grocery bill when you get home
  • Over-spender. If you often find yourself asking “where did all our money go” start with this budgeting method to get clear.
  • Self-employed. Since a self-employed person’s income can change from one month to the next, a zero-based budget works well as it forces you to re-evaluate every new period.

Final Thoughts on Zero-Based Budgeting.

Zero-based budgeting is a process. Particularly when it comes to anticipating and accounting for irregular expenses.

You know those expenses? Oil changes, kids birthdays, etc. They are expenses we don’t necessarily think of on a monthly basis but yet we tend to have several different irregular expenses each month.

Therefore, don’t beat yourself up if you forget about an irregular expense. Track it to remember it for next time.

It could take a year to fine tune this budgeting method.

3. Cash Envelope System Budget.

Cash Envelope Budget Method Sticky Note
Photo by Noble Nickel. Budgeting Methods.

How it works…

  • Do the Math. Determine how much to spend on everything you have the option to pay cash for such as groceries, entertainment, etc.
  • Withdraw the Cash. Take that money out of the bank at a predetermined interval (ie, weekly)
  • Divvy the money up according to how much you have budgeted into an envelope for each category. For example, if you have budgeted $600 for groceries, take $600 and put it until an envelope and write “grocery money” on it.
  • Don’t spend more than you have in the envelope for each category. (ie, Don’t go over $500 for groceries.)
  • Keep adjustments to your budget to a minimum. If you realize you messed up, make adjustments but don’t make a habit of it. Set a rule for yourself you will only make changes once a month and only up to a certain amount.

Amanda generally goes to the grocery store on Sundays to stock up for the week.

Towards the end of the month, James decides he needs to make a quick stop at the grocery store mid-week to pick up a few things Amanda forgot to buy.

Naughty James sees a few other things he wants but weren’t on the list.

And he forgot the “Grocery money” envelope at home so he charges it to their credit card. He forgets to tell Amanda because he needed to take their daughter to gymnastics; he clean forgot.

At the end of the month, Amanda realizes what happened and determines they went $43 over their grocery money.

This method takes discipline and organization on the parts of everyone in the house that spends money.

All is not lost in this situation and if Amanda and James can get organized and communicate, this will stop happening.

To combat this, Amanda and James both agree to leave their credit cards at home for two weeks so they stop reaching for it in their wallets.

Despite my depiction above, this method can be powerful because you are physically handing money over.

So what if you run out of cash in one of your envelopes?

First, learn from your mistake.

Second, decide if you are going to make yourself stick to the plan and not allow yourself to borrow from another envelope.

Another option is to have a miscellaneous envelope for the first month in case you miscalculated a budget category. I wouldn’t recommend making this a habit though.

Cash Envelope System Advantages

  • Accountability. This budgeting method has a real in-your-face way of holding you accountable. If you reach into the envelope and don’t have enough money, you might have to put something back. Eek.
  • Less risk of incurring fees/interest charges. Since you are paying in cash, you won’t incur interest charges because you aren’t using your credit card. Also, you should be able to easily avoid interest charges going forward.
  • Control. With this budgeting method, you physically have complete control over your spending.
  • No more mindless spending. With your cash ripped from your hands, you will think before you open that cash envelope.

Cash Envelope System Disadvantages

  • Everyone needs to be organized. If you and your partner buy things from the same category, you will need to be organized and on the same page every day.
  • You have to carry large sums of cash. This can be a bit scary if you lose your purse or it gets stolen. Hypervigilance is required. You might want to consider wearing a money belt to keep your cash safe.
  • Takes a concerted effort to get started. Although the premise is simple, you will need to go to the bank, get the right amount of cash, divvy it up and then determine who is going to buy what and when so that person has the right amount of cash with them.
  • Can be tough to get your partner on board. If you are leading this charge, talk through the process in detail. Make sure they understand the “rules.” Be clear who is responsible for what spending.
  • Loss of credit card rewards & benefits. Since you aren’t putting much on your credit card, you lose those rewards. However, if you are overspending, this sacrifice is worth it. There’s no point in slipping into debt for the sake of rewards you won’t use. For large purchases, you might want to use a credit card if your card has an extended warranty.
  • Lack of transaction records. Keep track of receipts. There will be no way of tracing your transaction if it isn’t on a credit or debit card.

Who is the Cash Envelope System Best Suited For?

Cash envelope systems are best suited for people who are:

  • Highly disciplined and organized. If you are someone who can’t stay organized to save your life, start small. Start by paying cash for only a couple of budget categories such as groceries and entertainment.
  • Credit Card Debtor. If you have a lot of credit card debt, this budgeting method should be considered to break the cycle and habit of charging to plastic. The hassles of this budgeting technique are worth the inconvenience as opposed to sinking into more debt.

Final Thoughts on the Cash Envelope System

It takes a lot of pre-planning which is okay and can actually be a good thing because it can force you into better habits. But, you have to be committed.

Overall, it can be a life changing budgeting method. If you are committed to the process, the advantages outweigh the disadvantages.

4. 50 / 30 / 20 Budgeting Rule.

50/30/20 Budgeting Rule Budgeting Method Sticky Note
Photo by Noble Nickel. Budgeting Methods.

How it works…

Written by Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan on the premise where you divide your after-tax income into three categories: 50% on needs, 30% on wants, and 20% goes to savings. A.K.A the Balanced Money Formula or the Proportional Budget Method.

20% savings is a super high priority.

So what is the 50 30 20 budget rule all about?

Here are the steps in implementing this budget.

  1. Calculate your total net (after-tax) income.
  2. List all your monthly expenses. Remember to also estimate your irregular expenses as a budget line item. Comb through your last few months of statements to make sure you don’t miss anything.
  3. Make sure your net income is greater than your total expenses.
  4. Determine which budget items are Needs, Wants, and Savings.
  5. Add up all the Needs, Wants, and Savings separately.
  6. Divide each category by your total income. This will give you the percent for each category.

Needs 50%

Necessities for Survival. Here are the most common:

  • Utility costs (heat, power, water)
  • Mortgage payment
  • Transportation (car payment, bus pass)
  • Health care/insurance
  • Insurance (Car/house/rental)
  • Minimum debt payments
  • Groceries
  • Child care costs
  • Basic clothing (no designer)

The important thing to remember is to not go over 50% for your “needs.”

This can be a challenge because we often have a lot of “needs” that are fixed costs.

If you are over 50% for “needs, you are living beyond your means.

The reason you can’t go over 50% for needs there won’t be anything left for fun. Life is too short to sit at home and sock away every penny.

Sticking to a budget that doesn’t allow you to live a little is a budget that isn’t going to last for long.

Also, if your needs are too high, it will make savings or paying off debt difficult if you are not disciplined.

You will need to re-evaluate if each budget line item is truly a “need” and get creative as to where you can cut back or make sacrifices.

Wants versus needs

Here are some things to consider if you need to get your “needs” costs down:

  • Do you spend too much on clothing? Admit it. It’s okay. I am guilty of this one too from time to time. I mean, we all need threads but maybe you need to cut that budget way down.
  • Maybe you can find savings in your heating costs by turning your heat down a couple of degrees or not using your air conditioning near as often.
  • You may even realize you need to sell a vehicle and purchase a less expensive one or go without.
  • Focus on food. Food is such a huge expense for nearly everyone. Eating is fun and enjoyable but with some simple meal planning, you can slash that budget down.

Wants 30%

At first thought 20% on wants might seem like a lot. Off to the spa you go. Time to book that trip.

Hold up. It’s not what it seems.

Before getting all giddy, you need to know “wants” aren’t about affording luxuries. It includes things you may not think of as wants at first.

Wants are the items or expenditures you don’t absolutely need but you get joy from such as:

  • Cable
  • Internet
  • Netflix
  • Spotify
  • Meals out
  • Attending weddings
  • Vacations
  • Concerts

Wants also includes the decisions to spend money on upgrades such as lobster over a chicken, a Lexus over a Toyota, or gold embossed toilet paper (it’s a real thing) over store brand oilet paper.

If you can cut an expense without major disruption to your life, it’s a want.

Savings 20%

Savings includes:

  • Contributions to your emergency fund
  • Retirement investment accounts
  • Children’s education savings accounts
  • Other investments such as mutual funds, index funds, stocks, etc
  • Debt repayment over the minimum

If you have a ton of debt, paying it off should be prioritized over savings. The reason is debt interest rates tend to be a LOT higher than interest rates you are going to make off savings and investments.

50 / 30 / 20 Rule Advantages.

  • It’s simple. Compared to many other budgeting methods, this one is easy to get off the ground. The hardest part is probably determining what expenses go where – Needs or Wants. Keep the rules above in mind and you shouldn’t have too much trouble.
  • Great for beginners. If your finances are fairly stable, meaning your income and expenses are fairly consistent, this is a great way to introduce yourself to the concept of budgeting.
  • Flexible. Because the method focuses on proportions, you don’t need to get into the nitty-gritty of every dollar spent.
  • Freedom. Because the process is generally flexible, you won’t feel trapped if you have a hard time following a rigid budget.

50 / 30 / 20 Rule Disadvantages.

  • Subjective. The decision to put a certain amount of money in your needs for something like clothes can be tough to pinpoint. I can go to a local thrift shop and spend $5 on a pair of pants. But is this taking the concept too fair? It’s a matter of opinion.
  • Knit Picky. Although the overall concept is pretty simple, to truly put it until practice, you would need to track every little expense. For instance, when I go grocery shopping and buy three kinds of fruit, do I need to? Could I get away with one or two? How would you even go about tracking this?
  • Overspending. Let’s say for some reason you bring in an extra $500. $150 of that would go to your wants ($500 x 30%). But do you need to do this? Could you have saved that money instead or put it towards debt? OR let’s say you make lots of money. Let’s say you net $10,000 a month. This would give you $3000 a month to spend on wants. That’s a lot of money.
  • High Needs Percentage and Debt. If your actual needs percent ends up being more than 50% and you have debt, this method is not going to be specific enough. This is true for people who have kids in daycare or have high student loans, etc.

Who is the 50 / 30 / 20 Rule Best Suited For?

  • Average earners. The 50 / 30 / 20 budget method is best for people who are average earners and have pretty stable expenses and spending habits. People who fall in this category won’t have too much trouble implementing this personal budgeting strategy.
  • Non-detail oriented. People who want more of a rough idea and not have to allocate and track every dollar.

Final Thoughts on the 50 / 30 / 20 Rule.

The 50 30 20 rule is great to get your feet wet with budgeting. For those who can’t handle detail and won’t feel the urge to get down to the minutiae level, this budget can help.

However, if you are not an average earner or have a lot of debt payments, this budget is probably not right for you. It’s not specific enough.

With that said, if you fall outside the ideal for the 50 30 20 rule because of debt, who’s to say you have to stick to the 50 30 20 rule exactly. You can come up with your own proportions and set goals to get closer to the 50 30 20 rule over time.

Make it your own.

5. 60% Solution Budgeting Method.

60% Solution Budgeting Method Sticky Note
Photo by Noble Nickel. Budgeting Methods.

Created by Richard Jenkins, former MSN Money’s Editor-in-Chief.

After decades of painstakingly tracking all his expenses, it didn’t work.

He found working with percentages, like the 50 30 20 budget rule, gave him the best security in managing his money. However, his percentages are different. The best way to keep his finances in control was to keep his “committed” expenses to 60% of his gross income.

How it works…

Categorize your spending into the following:

  • 60% “Committed” Expenses: Unlike the 50% needs category of the 50 30 20 rule, the committed category includes both needs and some wants. These wants might be kids activities, Costco membership, Netflix, etc. All your expenses you have committed to including taxes*.
  • 10% Retirement. This is what you are contributing to your 401K, Roth IRA for U.S. folks and RRSPs for Canadians.
  • 10% Long-Term Savings. This is your emergency fund, TFSA contributions (Canada), 529 (U.S.), RESP (Canada) education savings accounts.
  • 10% Short-Term Savings. This is the funds you set aside in a high-interest savings account to be used for large and/or irregular expenses such as vacations, home repairs, new tiara.
  • 10% Fun Money. To be used for those nights and dinners out, movies, concerts, etc.

*For taxes, if you are employed, check your pay stub to see how much tax is being taken off and include it in your committed expenses.

60% Solution Budget Advantages.

  • Simple to implement & maintain. Because you don’t have to track each expense every month, getting the 60% solution is pretty easy to get up and running.
  • Controls large and/or irregular expenses such as vehicle purchases, vacations, or expensive home repairs. Many people find they do well in managing their day-to-day spending but often succumb to flashy big ticket items or they didn’t plan to have a new roof put on their home.

60% Solution Budget Disadvantages.

  • May lose track of expenses. Because the 60% solution doesn’t require you to diligently track all expenses, it can be easy to lose track and let things slip through the cracks. Expenses naturally creep up over time.
  • 10% for retirement may not be enough. This completely depends on your current retirement account and age. If you are behind on saving for retirement, 10% is not going to be enough.

Who is the 60% Solution Budget Best Suited For?

  • Decent financial position. If you are generally not an overspender, have little to no debt, have some savings, etc., this budgeting method will work for you.
  • Stable day-to-day spending. If you are good about not making small impulse buys day-to-day like lunches out or new outfits.

Final Thoughts on the 60% Solution Budget.

hese category percentages are not going to work for everyone. If you are interested in trying this method, I recommend you see where your category percentages land with your current spending.

If your committed expenses are way over 60% this should be a clue that maybe something has to give.

You can determine your committed expenses are higher than 60% but that means this additional amount will need to come from one of the other categories.

You only have 100% to allocate.

If you take it from retirement savings, you are robbing your future self.

If you take it from long term savings, you won’t have the money to reshingle your house when it needs it.

When you take it from your short term savings, say goodbye to that vacation.

If you take it from your fun money you will turn into a miserable ol bat.

Sorry for the drama but it’s true.

Customized Budget.

If you have already gone through some or all of these budgeting methods and found that certain aspects of them worked for you, then take those aspects and make your own unique budget that fits your circumstances.

hese budgeting methods were born out of someone’s personal situation.

This is what I did. But I did start off with a Zero-Based Budget in the beginning. This was the only one I was aware of at the time so I went with it.

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Back to James and Amanda.

Which budgeting method do you think they picked?

I can’t give you that answer because they could all work for them.

But I will say they are no longer flying by the seat of their pants and attending Amanda’s second cousin’s wedding.

What I will say is that they picked themselves up and started.

What Now?

I recommend you go through my post called How To Make A Budget – 11 Straight-Forward Steps. This post will set you up to get started with any budgeting method.

Then, pick the one that most closely aligns with your current circumstances and overall experience in budgeting.

Budgeting Method: What Budgeting Method did you choose?
Photo by Noble Nickel. Budgeting Methods.

If you are in a bad financial spot, one of the more detailed budgets like the Zero-Based budget is a good idea because it gives you that clarity you are likely needing.

If you do that for a while and get a handle on things, but don’t want to track All. The. Things. switch to one of the percentage-based budges like the 50 / 30 / 20 rule or the 60% Solution.

You might need to try a bunch of budgeting methods before landing on one that is right for you or coming up with your own method.

Remember, it’s about progress not perfect.

Tell me how it went and any additional tips for our readers.

I sincerely hope you found this post to be helpful and I deeply appreciate you reading it.

If you like this post, I would greatly appreciate it if you shared it!