Budgeting is about as much fun as going to the dentist for some. But finding a budget that works for your lifestyle and personality can make this important task easier.
The idea of living according to a budget can make plenty of eyes roll. The word itself has a way of conjuring feelings of deprivation and gloom. That’s not, however, the way it has to be—or even the way it should be.
“When creating a budget, remember that it’s not meant to prevent you from enjoying your life; rather, it helps you prioritize where you’re spending so you don’t put yourself in the red,” says Colleen McCreary, chief people officer and financial advocate for credit karma “A budget can be a north star for those who want to hold themselves accountable as they work toward a specific financial goal.”
Whether that financial goal is climbing out of debt, saving for retirement, or reining in spending, the point of a budget is to help keep you on track. Furthermore, a good budget will help you find the balance between money coming in and money going out, adds McCreary. And finally, budgeting can help uncover potentially unhealthy habits like overspending on unnecessary items.
So now that we’ve all acknowledged the various benefits of budgeting (right?), let’s talk about identifying a budget that works for you and your unique lifestyle and spending habits. There are, of course, various options including 50-30-20 budgeting, zero-sum budgeting, line-item budgeting, and the envelope system. Here’s a closer look at each approach and why it may or may not be right for you.
1. 50-30-20 budget method
The 50-30-20 approach to budgeting is one of the simplest and most straightforward money management options, ideal for those who want to create a budget but don’t have the time or the patience to track their spending in detailed categories.
“The gist is that you spend 50 percent of your after-tax pay on needs, 30 percent on wants, and 20 percent on savings or paying off debts,” explains McCreary.
The benefits of the 50-30-20 budget include that it can be a good budget format for beginners, especially for those who are looking to save time or aren’t quite sure where to start. Having just three categories to track may also help you focus on fine-tuning your finances instead of getting bogged down in the process of categorizing each individual expense, says McCreary.
“By dividing your expenses into three categories—50 percent toward needs, 30 percent toward wants, and 20 percent toward savings or debts—you’re reducing the amount of time you spend detailing your finances, allowing you to focus more on the big picture instead.”
As an added bonus, the 50-30-20 approach to budgeting can help you feel more comfortable spending money on yourself now and then.
“This system is designed to decrease the financial guilt you may feel when you order delivery or add another streaming service—so long as you’re not spending more than 30% of your monthly income on ‘wants’ like these, you’re fine,” says Bryan Stiger, a certified financial planner at Betterment.
On the other hand, a 50-30-20 budget may not necessarily be ideal amid the current economic climate, when many of us are still recovering from the financial fallout of the COVID-19 pandemic, or for those whose economic situation is in flux.
“As income changes and priorities shift, having 30 percent allocated toward your wants may not be realistic for many people,” continues McCreary. “Now more than ever, Americans need to be extremely diligent with their money, prioritizing the things that matter most, like rent and other necessities.”
Depending on your unique lifestyle, it may make more sense to put more of your income toward needs and savings, versus any wants.
2. Zero-sum budgeting
The idea behind zero-sum budgeting is to spend every dollar you earn. To be clear however, this does not mean go out and fritter away every single cent. Rather, it means assigning a specific purpose to each dollar you bring in, whether it’s savings, expenses, or discretionary spending. Says Brian Walsh, certified financial planner for the personal finance company SoFi.
“It’s called a zero-sum budget because after you’ve picked a job for each dollar, you’ll end up with zero dollars left over,” explains Walsh.
But be forewarned, says Walsh: This is an extremely detailed and time-intensive approach to budgeting, so if you’re extremely hands-on or need a lot of help controlling your spending, this could be a great option. The downside, however, is that it takes quite a bit of work on an ongoing basis. Meaning, it may not be the best approach for those who are not committed to spending a fair amount of time maintaining their budget.
3. Line-item budget
A line-item budget is what you may first imagine when thinking of a typical budget or the budgeting process itself.
“You know the kind, in Excel or some other spreadsheet that lists out each expense by category,” says Walsh.
To begin building your own line-item budget, list out each of your expenses, or better yet categories of expenses, for a given time period—such as a month. Line-item budgets function by grouping related costs together.
Next, come up with a target spending amount for each line-item expense or expense category in your budget. Ideally you will do this based on reviewing your prior spending in such categories, explains Walsh. A good starting point could be reviewing your last three months’ worth of spending and assigning each transaction you made to a spending category in your new line-item budget.
Often used by businesses, line-item budgets allow for a year-to-year analysis or comparison of your spending in specific categories. They also allow for easily tracking both income and expenses.
The benefits and downsides of this approach to budgeting are practically one and the same, depending on your personality and needs.
“Because a line-item budget is detailed, this could be a great option if you require more control over spending or are a detail-oriented person,” explains Walsh. However, the level of detail involved, which requires a great deal of set-up and maintenance, can be a drawback for some.
4. Envelope system
The envelope budget is a hands-on way to manage your money and control spending. When using this approach, you have a set amount of cash to spend in various categories, and those pools of money are kept in different envelopes—hence the name, says Walsh.
“If you prefer digital payments, the same approach can be taken with separate accounts or vaults,” Walsh explains.
As part of this budgeting technique, your envelopes might be earmarked for such things as groceries, gas, back-to-school supplies, and more, adds Stiger, of Betterment.
“The rigidity of this system prevents you from overspending in any one category,” Stiger explains. Because the envelope budget is detailed and feels tangible, it can be a great option for those who feel the need to be hands-on and closely monitor spending—or if overspending has been an issue.
“If using a credit card has led to overspending in the past, not only can paying with cash help you spend only a certain amount, but it may also help the transaction feel more real. Visualizing the money going into an envelope right in front of you may help you stick to your goals and avoid impulse spending,” says McCreary. On the other hand, keeping all of your money in envelopes full of cash can be risky and prevents you from growing your savings in a high-yield saving account.
5. Hybrid budget
Each of these budgets may have elements that appeal to you. And that’s okay, says Evan Gorenflo, a financial advice expert with the banking, saving and investment app Albert. It’s entirely possible to create a hybrid budget, combing tactics from each of the approaches discussed.
“For example, you could start with a 50/20/30 plan, where the goal is to save 20 percent of your income,” says Gorenflo. And then, within your spending allowance, you could set up detailed categories of spending and even use cash envelopes to allocate money for different types of spending.
Ultimately, the most important thing to remember is that creating a budget is a very personal thing. There is no one right way for everyone to budget. Identify an approach that works for you, your goals, and your personality type.