5 Budgeting Methods That Actually Work (and Are Easy to Stick To)

Budgeting is one of the most important skills for managing your money. It helps you plan your income and expenses, track your spending habits, save for your goals, and avoid debt. But budgeting can also be challenging and frustrating, especially if you don’t have a system that works for you.

That’s why in this article, I will share with you five budgeting methods that actually work and are easy to stick to. These methods are proven to help you take control of your finances and achieve your financial dreams. You don’t need any fancy tools or software to use them, just some basic math and discipline.

But before we dive into the budgeting methods, let’s first understand what a budget is and why you need one.

What is a budget and why do you need one?

A budget is a plan that shows how much money you have, how much money you need, and how much money you want to spend or save. A budget helps you:

Live within your means: A budget helps you avoid overspending and living paycheck to paycheck. It also helps you prioritize your needs over your wants and make smart financial decisions.
Reach your goals: A budget helps you set and achieve your short-term and long-term financial goals, such as paying off debt, saving for emergencies, buying a house, or retiring early.
Reduce stress: A budget helps you reduce financial stress and anxiety by giving you a clear picture of your financial situation and a roadmap to follow. It also helps you prepare for unexpected expenses and cope with financial emergencies.

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How to create a budget

Creating a budget is not complicated, but it does require some time and effort. Here are the basic steps to create a budget:

Calculate your income: Your income is the money that you earn or receive on a regular basis, such as your salary, wages, tips, bonuses, commissions, interest, dividends, etc. Add up all your sources of income and get your total monthly income.
Calculate your expenses: Your expenses are the money that you spend or owe on a regular basis, such as your rent, mortgage, utilities, groceries, transportation, insurance, debt payments, etc. Add up all your fixed and variable expenses and get your total monthly expenses.
Compare your income and expenses: Subtract your total monthly expenses from your total monthly income and get your net income. Your net income is the money that you have left after paying all your bills. If your net income is positive, it means you have a surplus and you can save or invest it. If your net income is negative, it means you have a deficit and you need to cut your spending or increase your income.
Adjust your budget: Based on your net income, you may need to adjust your budget to balance it. You can do this by reducing your expenses, increasing your income, or both. You can also allocate your surplus to your savings or investment goals, such as building an emergency fund, saving for a vacation, or investing for retirement.
Review and update your budget: Your budget is not a one-time thing, but a living document that you need to review and update regularly. You should check your budget at least once a month and compare it with your actual income and expenses. You should also update your budget whenever there are changes in your financial situation, such as getting a raise, losing a job, having a baby, etc.

Now that you know how to create a budget, let’s look at the five budgeting methods that you can use to manage your money.

5 budgeting methods that actually work and are easy to stick to

There are many budgeting methods out there, but not all of them are suitable for everyone. The best budgeting method for you depends on your personality, preferences, goals, and lifestyle. Here are five of the most popular and effective budgeting methods that you can try:

1. The 50/30/20 budget

The 50/30/20 budget is a simple and flexible budgeting method that divides your income into three categories: needs, wants, and savings. The idea is to allocate 50% of your income to your needs, 30% to your wants, and 20% to your savings. Here is how it works:

Needs: These are the essential expenses that you need to survive and function, such as your housing, food, transportation, utilities, insurance, health care, and minimum debt payments. You should spend no more than 50% of your income on your needs.
Wants: These are the discretionary expenses that you want to enjoy and enhance your life, such as your entertainment, hobbies, dining out, travel, shopping, etc. You should spend no more than 30% of your income on your wants.
Savings: These are the money that you save or invest for your future, such as your emergency fund, retirement fund, education fund, etc. You should save or invest at least 20% of your income for your savings.

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The 50/30/20 budget is a good budgeting method for beginners and people who want a simple and flexible way to manage their money. It allows you to cover your basic needs, enjoy your life, and save for your goals without being too restrictive or complicated. However, it also requires some discipline and adjustment, especially if your income is low or your expenses are high. You may need to cut your spending, increase your income, or change your lifestyle to fit into the 50/30/20 rule. Click here to know more about the 50/30/20 Budget Rule Explained With Examples.

2. The zero-based budget

The zero-based budget is a detailed and precise budgeting method that assigns every dollar of your income to a specific category or purpose. The idea is to make your income minus your expenses equal zero, meaning you have no money left over at the end of the month. Here is how it works:

Income: This is the same as the first step of creating a budget. You need to calculate your total monthly income from all sources.
Expenses: This is where the zero-based budget differs from other budgeting methods. Instead of dividing your income into broad categories, you need to list every single expense that you have or expect to have in a month. You need to include both your fixed and variable expenses, as well as your savings and investment goals. You need to assign a specific amount to each expense and make sure that the total of your expenses matches your income.
Tracking: This is the most important part of the zero-based budget. You need to track every dollar that you spend and compare it with your budget. You need to make sure that you stick to your budget and don’t overspend or underspend in any category. If you have any leftover money at the end of the month, you need to assign it to another category or roll it over to the next month.

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The zero-based budget is a good budgeting method for people who want a complete and accurate control over their money. It helps you to be more aware of your spending habits, eliminate waste, and achieve your financial goals faster. However, it also requires a lot of time and effort, especially if you have a lot of expenses or a variable income. You need to update your budget frequently and adjust it according to your changing needs and circ*mstances.

3. The envelope system

The envelope system is a classic and simple budgeting method that uses cash and envelopes to manage your money. The idea is to allocate a certain amount of cash to each of your expense categories and put them in separate envelopes. You can only spend the money that is in the envelope for that category and nothing more. Here is how it works:

Income: This is the same as the first step of creating a budget. You need to calculate your total monthly income from all sources.
Expenses: This is similar to the second step of creating a budget. You need to calculate your total monthly expenses and divide them into categories. However, you only need to use the envelope system for your variable expenses, such as your groceries, entertainment, clothing, etc. You can use other methods, such as online banking or automatic payments, for your fixed expenses, such as your rent, mortgage, utilities, etc.
Envelopes: This is the unique part of the envelope system. You need to label each envelope with the name of the expense category and the amount of money that you have allocated to it. You need to withdraw cash from your bank account and distribute it among the envelopes according to your budget. You need to keep the envelopes in a safe and accessible place, such as your wallet, purse, or drawer.
Spending: This is the fun part of the envelope system. You can spend the money that is in the envelope for that category as you wish, but you can’t spend more than what is in the envelope. If you run out of money in an envelope before the end of the month, you have two options: you can either stop spending in that category or you can borrow money from another envelope. However, you can’t borrow money from your savings or investment envelopes, and you have to pay back the money that you borrowed in the next month.

The envelope system is a good budgeting method for people who want a simple and tangible way to manage their money. It helps you to limit your spending, avoid debt, and save more. However, it also has some drawbacks, such as the inconvenience of carrying cash, the risk of losing or stealing money, and the difficulty of tracking your spending.

Visit this article that discusses the pros and cons of the envelope system, as advocated by personal finance expert Dave Ramsey. It also compares the envelope system with other budgeting methods, such as the 50/30/20 rule and the zero-based budget.

4. The 80/20 budget

The 80/20 budget is a minimalist and flexible budgeting method that divides your income into two categories: savings and spending. The idea is to save 20% of your income and spend the remaining 80% on whatever you want. Here is how it works:

Income: This is the same as the first step of creating a budget. You need to calculate your total monthly income from all sources.
Savings: This is the first and most important category of the 80/20 budget. You need to save or invest 20% of your income for your future, such as your emergency fund, retirement fund, education fund, etc. You need to pay yourself first before you spend any money on anything else. You can use automatic transfers or direct deposits to make this easier and more consistent.
Spending: This is the second and only other category of the 80/20 budget. You can spend the remaining 80% of your income on whatever you want, as long as you don’t go over your limit. You don’t need to track or categorize your spending, as long as you stick to your budget. You can enjoy your life and have fun with your money, without feeling guilty or stressed.

The 80/20 budget is a good budgeting method for people who want a minimalist and flexible way to manage their money. It helps you to save a significant amount of money and spend the rest freely, without worrying about the details. However, it also requires some discipline and responsibility, especially if your income is low or your expenses are high. You may need to adjust your spending habits, increase your income, or change your lifestyle to fit into the 80/20 rule.

Rad more about this method.

5. The pay yourself first budget

The pay yourself first budget is a motivational and goal-oriented budgeting method that focuses on saving or investing a certain amount of money for your goals before you spend any money on anything else. The idea is to treat your savings or investments as a fixed expense that you have to pay every month, just like your rent or mortgage. Here is how it works:

Income: This is the same as the first step of creating a budget. You need to calculate your total monthly income from all sources.
Goals: This is the first and most important category of the pay yourself first budget. You need to set and prioritize your financial goals, such as building an emergency fund, paying off debt, saving for a vacation, or investing for retirement. You need to determine how much money you need to save or invest for each goal and how long it will take you to achieve it. You need to allocate a certain percentage or amount of your income to each goal and pay yourself first before you spend any money on anything else. You can use online tools or apps to track your progress and motivate yourself.
Expenses: This is the second and only other category of the pay yourself first budget. You can spend the remaining money on your expenses, such as your housing, food, transportation, utilities, insurance, etc. You don’t need to track or categorize your expenses, as long as you don’t spend more than what you have left after paying yourself first. You can cover your needs and enjoy your wants, without compromising your goals.

The pay yourself first budget is a good budgeting method for people who want a motivational and goal-oriented way to manage their money. It helps you to save or invest a substantial amount of money and achieve your financial dreams, without sacrificing your quality of life. However, it also requires some planning and commitment, especially if your income is low or your goals are high. You may need to set realistic and achievable goals, increase your income, or reduce your expenses to fit into the pay yourself first rule. Here you can learn more about this method.

Conclusion

Budgeting is not a one-size-fits-all solution, but a personal and flexible tool that you can use to improve your financial situation and happiness. You can choose the budgeting method that works best for you, or you can mix and match different methods to suit your needs and preferences. The most important thing is to find a budgeting method that you can stick to and that helps you achieve your financial goals.

Embracing budgeting might seem daunting initially, but the rewards are significant greater control over your finances, reduced stress, and the ability to achieve your financial goals. Remember, this is a journey, not a destination. Adapt your approach as needed, celebrate your progress, and don’t get discouraged by setbacks.

By understanding your income and expenses, exploring different budgeting methods, and utilizing helpful tools and resources, you’ll equip yourself with the knowledge and tools needed to succeed.

Frequently Asked Questions

What is the easiest budgeting method?

The easiest budgeting method is the one that suits your personal preferences, goals, and lifestyle. However, some of the simplest and most popular budgeting methods are the 50/30/20 rule, the envelope system, and the zero-based budget.

What are the 5 methods of controlling a budget?

The 5 methods of controlling a budget are: establishing actual position, comparing actual with budget, calculating variances, establishing reasons for variances and taking action to exert control

Budgeting methods for students.

Some budgeting methods for students are: the 50/30/20 rule, the envelope system, the 80/20 budget, the reverse budgeting, and the traditional method.

Budgeting methods for personal finance.

Some budgeting methods for personal finance are: the 50/30/20 rule, the envelope system, the zero-based budget, the pay yourself first or 80/20 budget, the reverse budgeting, and the value proposition budgeting.

Budgeting methods for business.

Some budgeting methods for business are: incremental budgeting, activity-based budgeting, value proposition budgeting, zero-based budgeting, priority-based budgeting, participative budgeting, and negotiated budgeting

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5 Budgeting Methods That Actually Work (and Are Easy to Stick To) - Easyfinancewins (2024)

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