The four budgeting methods
Cash Envelope System
The envelope system is a hands-on approach to budgeting that involves physically allocating your monthly income in categorized envelopes. Since this method deals with cash, it’s a high-effort technique for those who could benefit from more visibility on their spending.
How it works: Categorize your various expenses and label an envelope for each category. For example, you might have a “rent” envelope, a “car payment” envelope, one for “dining out”, another for “groceries” and so on. Next, you will cash your paycheck and divide the money into your various envelopes. The amounts are up to you, but generally, you want to prioritize your basic needs while leaving a little bit for your savings, debt repayment and fun categories. When you need to pay for something, you use money only from the corresponding envelope. When you get paid again, you can refill your envelopes. This system helps you avoid further debt and overdraft fees while building awareness of your spending habits. However, an all-cash system is difficult to maintain in the long term, and is less secure than keeping your money at your bank or credit union. If the cash envelope system doesn’t appeal to you, try a digital approach by using a budgeting app like Mint, YNAB or Goodbudget.
Works best for: People with a significant amount of debt to repay or those who need to push the “reset” button on their budget and spending.
The 50/30/20 budget is a simple method that helps you plan for the future while leaving room for unexpected expenses and the occasional indulgence. This is a great long-term budget method that can be paired with a budget tracking spreadsheet or app.
How it works: In the 50/30/20 plan, you spend 50% of your after-tax income on necessities, 30% on wants, and 20% on your savings and debt repayment. Start by dividing your monthly income into the three main categories. If your monthly necessities exceed the 50% allotment, then you will need to dip into your wants category. While planning ahead and categorizing your wants can be difficult, it’s important to give yourself some room to spend the money you earn. And finally, the 20% category should be used to first ensure you have established an emergency fund, while tackling your debt and saving for retirement. To learn more about this approach, check out this video from our budgeting course.
Works best for: Those who want to plan for the future with a simple but effective budget.
The zero-based budget method requires you to use every cent of your monthly income; the goal is to allocate all of your money to your expenses, savings, debt and other spending so in effect you are putting all your dollars to work.
How it works: Your monthly income minus your spending should equal zero. It helps to use a budget app and track your spending for a few months to gain a better understanding of your spending categories. Once you create your categories, then you can work on adding any “extra” dollars to your debt, savings, or a vacation fund. While this method of budgeting can be detailed and time-consuming, you will gain more control over your cash with the flexibility to modify your categories as you see fit. You can also use this method in tandem with the 50/30/20 budget.
Works best for: Detail-oriented people who want to maximize their savings.
Pay Yourself First Budget
The pay yourself first method prioritizes saving and is low maintenance and flexible. With this method, you will “pay yourself” by first allocating funds to the savings categories of your choosing, like an emergency savings, house fund, vacation fund, etc.
How it works: Determine a realistic amount to allocate to your savings each month. If you are unsure of how much to allocate, you can use the 50/30/20 budget calculation to determine the 20% of your income that should go to savings/debt repayment. From there, you can establish an automatic transfer from your checking to your savings account after each pay cycle.
Works best for: Those who prefer a hands-off approach to budgeting, ideally those with low to no debt.