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5 budgeting methods you can mix and match

Dec. 18, 2020 • 5 min read

What we'll cover

  • The 50/30/20 method

  • What is the envelope method

  • Tools and resources to help you budget

It’s time to reframe the way we think about budgets. They’re not about going without or restriction. They’re a tool that can lead to increased financial freedom and help you have more to spend on the things you care about most. While creating a budget may sound tough, tons of different methods and tools make it simple to stick to a plan for your money and maximize your dollars. Not convinced yet? Take a look at these five budgeting methods to find one that fits your lifestyle and wallet — or feel free to mix and match them.

1. 50/30/20 budgeting method

The 50/30/20 rule is one of the most popular methods for building a budget — and for good reason. It’s super simple and highly flexible, making it a smart way to budget for beginners all the way to finance experts. With this method, your spending is broken up into three main categories: 50% goes to needs (rent, groceries, gas, etc.), 30% to wants (restaurants, subscriptions, etc.), and 20% to savings (retirement fund, debt repayment, etc.). You can divvy up your dollars how you want in each category, as long as you stay within the overall framework.

2. Envelope budgeting method

If you want to take a more hands-on approach (literally), the envelope method could be for you. With this budget style, you work exclusively with cash, separating it into physical envelopes — one for each spending category — every month. Your envelopes can be super specific (like separate envelopes for water, gas, and electricity) or more general (like one envelope for all utilities), depending on your preferences. You can even use the 50/30/20 method with your envelopes. By literally dividing up your cash, you know exactly how much you have to spend, won’t face the danger of accidently going over budget or incurring overdraft fees, and can curb impulse purchases.

Not a fan of cash but still want to try this method? Look for apps or bank accounts, like Ally Bank's Online Savings Account , that offer digital envelopes (or savings buckets ), so you can organize your money in a tech-savvy way.

3. Line item budgeting method

You might think line item budgeting is for businesses, but if you want a more granular look into your spending, you might use this method to track your personal finances. This type of budgeting is usually done using a spreadsheet where you track and analyze your income and expenses.

To start, create a list of your fixed monthly payments, such as your rent or your car payment. Then, break your other expenses up into categories, like “Utilities and Bills,” “Groceries,” and “Entertainment,” for example. Within every category, you create specific line items and allocate a dollar amount to each. You can be as detailed as you want — you may choose to get extra granular in certain categories and keep others more general. Just remember to be realistic and use your past spending to help shape your predicted expenses.

4. Zero-sum budgeting method

You work hard for the money. So, that money should work hard for you. Using zero-sum or zero-based budgeting, it will — because each and every dollar has a purpose with this method. The premise behind this strategy is any dollar that doesn’t have a job is likely to be spent in a less thoughtful way, keeping you from maximizing your income.

With this technique, you use only last month’s income to finance the current month. And at the end of the month, your income minus your expenditures should equal zero. But that doesn’t mean you frivolously spend to get there. Instead, all of your money should be allocated to your wants, needs, and future you.

Say you make $2,500 in January. That means you have that amount to spend in February. If you reach the end of the month and have $300 left over, you don’t roll it over to March. Instead, you might consider putting that money in your emergency fund , socking it away in your vacation savings bucket, or using it to pay back debt.

Zero-sum budgeting can take some time to get right to make sure you aren’t overspending, so don’t be discouraged if it takes a few months to get used to this method. Once you have some budgeting practice under your belt, you’ll be zeroed in on zero-sum success.

5. Pay yourself budgeting method

If you have big savings goals, then make your future self your number one priority using the “Pay Yourself” method. This budget style is pretty straightforward: When you get paid, you immediately put a portion of your check directly into savings. That could mean your retirement fund, an investment account, emergency savings , or any kind of future savings. By moving your money to savings right away, you won’t be tempted to spend it, and you’ll have a clear picture of how much cash you have for the rest of the month.

Remember, you can always combine this method with others. For instance, you could use the 50/30/20 approach to decide how much you’ll save each month. Then, use automation to immediately sock away that 20%.

Keep in mind, paying yourself can also refer to paying back debt. If you have expensive debt, like high-interest debt from credit cards, you might consider using the pay yourself first mentality to prioritize debt reduction.

Having trouble budgeting?

Building and sticking with a budget can take some practice and may even require a bit of trial and error until you find one that works for you. But that doesn’t mean it should always be a point of stress or frustration. Remember, budgets don’t have to be overly restrictive or cause you to miss out on things you love. They should act as a tool to help you make more informed purchases and guide you to spending on the things you really value.

If you find that you are struggling with a budget, don’t be afraid to make necessary tweaks and changes to make it manageable. Leave yourself some wiggle room and know that your spending may fluctuate month-to-month depending on all kinds of circumstances.

Pick the right budget style for you.

Budgeting comes in all shapes and sizes. From zero-sum to envelopes, each method has its own benefits (like maximizing your money) and potential drawbacks (such as the time it takes to plan).  By trying out different styles — and potentially combining aspects from multiple — you can make budgeting a part of your financial life in a way that works best for you.

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