6 Common Budgeting Methods to Know Where Your Money Goes

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Last Updated:May 02, 2024

6 Common Budgeting Methods to Know Where Your Money Goes

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If I ask how many of you love the concept of budgeting, I imagine I will hear crickets chirping. But one reason why budgeting conjures up mixed reviews is perhaps that you haven’t found the budgeting method that works for you.

You may hear different personal finance experts recommend one specific budget method, but truthfully, a budget is not a one-size-fits-all approach. Budgeting is personal and based on your financial goals and dreams. So it stands to reason that one particular budgeting technique may work well for one person and a different one for someone else.

Let’s explore several of the most common budgeting methods and discuss the pros and cons of each.

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Why a budgeting method is so important

But before we dig into the details of each method, it’s good to understand why budgeting is an essential component of your personal finances.

If money were no object, living within a budget's means wouldn’t matter. But for the rest of us, money is a real concern. Over 78% of Americans admit they live paycheck to paycheck.

important: 78% of Americans are living paycheck to paycheck.

This means most of us do not have extra money to willingly waste. Yet, without a budget, it’s too easy to allow this to happen.

Budgets are designed to tell your money where to go. While it may not seem like it some days, you are in control of every dollar and have to tell each one where to go. Whether this means saving, spending, or repaying someone.

A Debt.com consumer survey revealed that 8 out of 10 respondents were using some sort of budgeting method, and the idea of one was gaining more popularity. But where do you start if you’ve never budgeted before or have tried and failed to stick with one?

Types of budgets

There are various budgeting methods to consider, such as whether this is your first budget or if you have found your budgeting process is not quite working. When considering your budgeting system, these different budgeting methods have great track records for helping you control your finances and reach your savings goals.

1. Zero-based budget

A zero-based budget method, also known as the zero-sum budget, is pretty straightforward: your goal is to land at $0 each month, once you’ve subtracted your expenses from your monthly income.

Zero-based budgeting works best for those with a predictable income and fairly predictable expenses. To begin, you list your income at the beginning of the month (or whatever period works for your payment schedule). Then, you list each monthly expense you have during the period and subtract it from your income. Whatever excess money you have is then allocated into another spending category until you reach $0, which is how this budgeting method received its name.

While the zero-based budget is a smart way to control expenses on a fixed income, it’s not without challenges. If you’re not careful, one large, unexpected expense can throw your budget completely out of whack. The best way to counteract this is to build up your emergency fund and set it aside in a savings account, even if it’s only $500 or $1,000. You can also keep a cushion in your checking account if you’re disciplined enough not to dip below it.

Overall, the zero-based method allows you to track every expense and be aware of where every dollar is going at all times.

Here’s an example of what a zero-based budget may look like for you:

Expense Category	Net Income: $3,500
Mortgage/Rent	-$1,000
Utilities	-$450
Debt (Car) Payment	-$450
Savings	-$250
Insurance	-$100
Groceries	-$600
Transportation/Fuel	-$300
Medical	-$100
Eating Out	-$100
Entertainment	-$75
Clothing	-$75
TOTAL EXPENSES:	-$3,500
	$3,500 income - $3,500 expenses=$0

This example shows how one large expense can throw your numbers off. If you decide one month to spend $400 on clothing instead of the allotted $75, you will have to pull money from another category or savings.

Pros

Forces you to track each dollar
Works if you have a predictable income and steady expenses

Cons

One (or more) unplanned expense throws off the math
Your expenses can’t vary too drastically

2. The envelope method

Another budgeting method similar to the concept of zero-based is the envelope system. The goal is the same — your income is the starting point and you subtract each of your expenses until every dollar is allocated. The main difference between these two methods is you keep the amount of money in certain categories in cash, and literally inside an envelope.

Although walking around with cash in an envelope sounds cumbersome and somewhat unsafe to most people, proponents of this method find it curbs overspending. This is especially true in categories such as groceries, fuel, and entertainment, where it’s easy to lose track of money.

For example, if you allocate $650 per month towards groceries, you would withdraw $650 in cash and put it in an envelope designated “groceries.” Anytime you need to run to the grocery store, you reach for cash from your designated envelope. When you pay, you can only pay for it by withdrawing money from your grocery envelope. Once you run out of cash for groceries, that’s it — you have to wait to add to your envelope when you receive more income.

If you have money left over in a category, you roll it into the next month or put it towards a goal (like paying off a credit card or building savings). If you have an emergency and need the cash, instead of taking it from an envelope like groceries, you use your emergency fund or designated savings.

The idea behind this system is it forces you to be disciplined. But realistically, carrying around envelopes full of cash presents practical challenges.

Pros

Teaches you to live within your means
You track every single dollar

Cons

Problematic if you prefer not to pay with cash or carry cash
Best for categories you physically walk into a store to purchase (groceries, fuel, clothing)

3. The 50/30/20 budget

Perhaps the details involved in the envelope system and zero-sum budget have zero appeal to you. But you also know you need some way to track and allocate your money. The 50/30/20 method might be what you’re looking for. This budget is based on the percentage of your income and how much you allocate to necessities, discretionary spending, and savings.

The categories break down like this:

50% necessities (housing, utilities, groceries, vehicle expenses, etc.)
30% discretionary (eating out, entertainment, clothing, etc.)
20% for savings and debt repayment

Defining a need versus a want is key to making the 50/30/20 budget work. As long as you define these expenses early on and stay consistent, this budget can work. Additionally, you still need to track expenses at a high level to make sure you’re not way over your categories.

This budget is more flexible, too; you can change the percentage of the categories to better reflect your current financial situation or goal. For instance, if you have a large credit card payment you want to aggressively pay off in 10 months, you could increase the 20% for debt repayment to 30% to meet this goal while decreasing from another category.

4. Pay Yourself First or 80/20 budget

If your number one financial goal is to build your savings, then the Pay Yourself First (also referred to as the 80/20 budget) is worth reviewing. The premise of this budget is whenever you receive income, you pay yourself first by putting a designated amount toward your savings or retirement accounts.

But this isn’t only for those who have savings as a goal. You can also apply this same method if your goal is debt repayment.

This budget is based on 20% going towards your savings (or debt) goal and the remaining 80% covering all other items.

You pay for your necessities and discretionary items with your remaining money, but you don’t have to track every dollar. Since you’ve already paid your most important category first - your savings - you don’t have to track the remaining amount. This is a great option for those who want to aggressively contribute to their savings funds or retirement or pay off debt. It’s even better for those who don’t like to track every single expense daily.

Pros

Helps you aggressively work towards a savings or debt payoff goal
You don’t have to track expenses

Cons

Overspending is easy since you’re not tracking
Adjust your lifestyle to live on 20% less

5. Reverse budgeting

If you like the idea of the Pay Yourself First budgeting but need even more flexibility, then reverse budgeting is another version. The difference with reverse budgeting is you focus on one major money goal each month and typically update your goal each month. You still use the 80/20 rule, but the 20% you designate goes toward a different monthly goal.

Your goal for 20% could be paying off a credit card, saving for a vacation, padding your retirement, or saving for your child’s education.

Examples of your goals might look like one of these:

Add $500 to your child’s 529 Plan
Pay off a $400 store credit card balance
Add $500 to a Roth IRA

Once you put the designated amount towards your goal, your remaining income covers the rest of the expenses. Like the 80/20 budget, once you’ve paid yourself the 20%, you don’t have to track expenses daily.

This is an ideal option for those who don’t want to mess with tracking every expense but still have firm, aggressive goals in place you need to tackle.

Pros

Easy to use
Work towards big, numerous goals

Cons

Easy to overspend because you’re not tracking
Must learn to live on 20% less

6. Digital budgeting

While you don’t need anything fancy or complicated to run your budget each month — a pen and paper will work — several digital budgeting tools are out there to help you keep track of expenses. This is often what budget haters despise the most: the time-consuming effort it takes to track.

One method for digital budgeting is simply using a basic spreadsheet. This is an upgraded version of the napkin some people write their budgets on each month. But it’s simple, straightforward, and if it works for you then keep using it!

But if you are looking for something you can keep at your fingertips, then apps such as YNAB (You Need a Budget) are a great option for digital budgeting. Not only can you easily track your expenses daily, but you input your financial goals too, and you’ll see the progress towards each one. YNAB syncs with your bank account for easy tracking too.

Pros

Multiple choices for apps
Perfect for a busy, on-the-go lifestyle

Cons

Possible monthly fees

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How to determine the right budgeting method

Perhaps you know you need a budget, but are unsure which one to choose. The best place to start is to be realistic about your spending and habits. You know what your strengths and weaknesses are.

For instance, if you’re the type of person who loses their wallet and keys weekly, then an envelope system is not practical for you. If you are self-employed and your money fluctuates weekly, then the zero-sum method doesn’t provide the flexibility you need, and you might be better off with the Pay Yourself First method.

Another question to ask yourself is, what are your money goals? Do you have student loans staring at you each month that you know you must tackle? Are you debt-free but have no substantial savings? Whatever your goals are can also factor into choosing a budgeting technique.

If you find a method isn’t working for you, switching gears’s okay. Eventually, you will figure out the right one, and know it’s right when you start achieving your personal finance goals.

The bottom line

Choosing a budgeting method is a personal choice. There is no right or wrong answer. The positive impact on your finances once you have a manageable budget is worth the effort it takes.

Popular methods such as the zero-sum budget, the envelope system, or paying yourself first have one goal: get your money allocated correctly and used as a tool to achieve your financial goals.

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Sara Coleman is a former corporate gal turned creative entrepreneur. She began writing professionally several years ago and now contributes to multiple websites, blogs, and magazines. She’s also an avid reader and can’t resist a great historical fiction novel. Sara holds a BA in journalism from the University of Georgia and can be found supporting her Bulldogs every chance she has. She resides in Charlotte, North Carolina, with her wonderfully supportive husband and three children. When she’s not ushering her kids to sports and dance lessons, she can be found creating content for her own website, TheProperPen.com.

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