Budgeting is an important part of managing your personal finances.
While many people look at a budget as something that limits their spending, the opposite is true! A budget is a blueprint that tells you how much you can spend in various categories. A budget helps you understand where your money is going and puts you in the driver’s seat. Don’t follow your money and work to pay the bills. Instead, make active choices on where your money should go and how you want to use it.
The single best budgeting strategy, however, is the one you’ll stick to. That’s different for everyone, so you’ll probably want to try out a few different strategies to see which works best for you. Below, learn more about three of the most popular strategies that have helped many people manage their money.
The zero-sum budget gives every dollar a job
A zero-sum, or zero-based, budget is the most detailed budgeting method you can use, and one many budgeting experts swear by. The basic idea is to give every dollar you earn a job. Whether it is going to bills, monthly expenses, debt payments, or savings, every dollar that comes in gets assigned to a budget category.
This type of budget is best for people who live paycheck to paycheck, which according to one study is nearly four in five Americans. It is also helpful for people who enjoy having a very granular view of their money and want to put the biggest focus and effort into reaching financial goals.
If you have significant savings and are generally comfortable with your money, a zero-based budget may be overkill. The most popular app that uses this budgeting method is You Need a Budget, though you can create a similarly detailed budget with tools like Mint.
The envelope budgeting method is cash-based
Long before smartphones and budgeting apps, people used cash for every transaction. One way to force yourself to live in a budget is the envelope method. With this budgeting style, you withdraw cash for your monthly budget at the start of each month. You allocate the dollars to different envelopes for different purposes. Once the cash is gone, you stop spending on that category or have to take it from another.
This forces you to stop overspending by limiting you to just what’s in the envelope. If you really follow it, envelope budgeting can help you stop wasting money on frivolous purchases and focus your money into the places that are the most important.
The app Mvelopes was designed specifically for this type of budgeting if you want to go digital, but a stop by an office store or even your local supermarket will probably give you everything you need to get started: a few envelopes and a few minutes to map out your spending plan.
The 50/20/30 budget provides basic guidelines
The 50/20/30 budgeting method is best for people who are generally comfortable and in a good financial position and want some basic guidelines for spending. The idea here is to split up your income into three categories: 50% to needs, 30% to wants, and 20% to savings.
Most finance experts suggest saving at least 10% to 15% of your income at a minimum to maintain the same quality of living in retirement. Saving 20% can help you do that while putting away extra for an emergency fund and other future goals.
There are no specific apps for this type of budgeting, but people in this financial situation often enjoy apps like Personal Capital, Clarity Money, and market leader Mint. Like the other budget methods in this list, it only works if you really use it, so take some time to understand your income and expenses to get started.