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In the last episode, I discussed the reasons why we need to budget and the importance of having a financial foundation. I also talked about gathering all of your financial income and spending information. Let’s now put the information to good use. This episode, I’m going to talk about three different types of budgeting methods and the benefits of each. I’ll end with talking about my preferred budgeting method.
Percentage Budget Type
Using your take home income number, section it out into categories, depending on your preferred method.
The 50/30/20 plan allocates 50% of your income to your expenses, 30% to savings and 20% to wants. You can adjust this budget to your liking. Maybe you want to allocate 30% to wants and 20% to savings, it’s up to you.
These kinds of budgets are great for you to take your total income each month and allocate it easily. No need to think about lots of categories or bill due dates.
The 60% Solution budget allocates 60% of your income to expenses and 40% to everything else. The 40% is split in four ways; 10% to retirement, 10% to long-term savings, 10% to short term savings and 10% to wants. Again, these can be adjusted according to your liking.
| 50/30/20 | 60% Solution |
| 50% to expenses | 60% to expenses |
| 30% to savings | 10% to retirement |
| 20% to wants | 10% to long-term savings |
| 10% to short-term savings | |
| 10% to wants |
These are good budget methods when you have a high income. I’d guess that most average people can’t pay all of their expenses with 60% of their income, let alone 50%. I can see why this kind of budget can be beneficial to some like those with extremely low expenses or those with large incomes.
Envelope Budget Type
There are different types of envelope budgets, those that use physical cash in envelopes and those that use apps to help track a digital set of envelopes or categories. I’ll start off by saying that I am not a fan of handling cash, but I won’t deny that it works for some.
For this type of method, you’ll need to know details of your expenses. You need to break up your spending into categories and bills. You will have an envelope for every spending category – rent or mortgage, groceries, electricity, gas for your car, etc. Put in each envelope what you think you’ll need for that category. Some will be easy, like your rent, as it shouldn’t change month to month. For more complicated categories like groceries or dining, take an average of previous months’ totals. Use an envelope for a particular category until you’ve run out of money in that envelope for the month, then you can no longer spend money on that category. I’m simplifying things a little, but you get the idea.
There are apps that can connect to your accounts and do this digitally for you, if you don’t like handling cash. I don’t like connecting my accounts to these services, but it’s easier than getting cash and stuffing envelopes monthly. If it works for you, then great.
Zero Based Budget
This is my favorite method. The zero based budget is simple: start with your total monthly income, then subtract each monthly spending or saving category until you hit zero. In my opinion, this is the best way to manage your money. You will be able to monitor each dollar that you spend.
For this example, say you earn $2500 per month. Categorize your monthly expenses. Categorize your monthly savings. Then subtract accordingly until you’re out of money.
| Paycheck | $2500 |
| Mortgage/Rent | -$1,200 |
| Electricity | -$75 |
| Water | -$50 |
| Internet | -$50 |
| Phone | -$80 |
| Groceries/Food | -$400 |
| Gas | -$50 |
| Streaming app 1 | -$15 |
| Streaming app 2 | -$10 |
| Non-monthly bills & other expenses* | -$321 |
| Fun Money | -$100 |
| Savings goal 1 | -$100 |
| Savings goal 2 | -$49 |
| TOTAL | = -$2500 |
| Leftovers | $0 |
The zero-based and envelope budgets can work well when you want to set mini budgets and control each category every month. Multiply everything by 12 months, and you’ll know your budget for an entire year. Imagine knowing exactly how much you’re going to budget for your expenses for a whole year. Having this kind of information can be powerful.
There are also apps you can use to make this an even easier process, but I highly suggest making your own, so it’s more personalized. Make something hand written or in a computer spreadsheet. I can go over my personal budget and spreadsheets in a future episode. I’ll tell you that I use a combination of a zero based budget and a digital envelope system for my personal budget.
I treat it like a game. I do my best each month to come under budget for each possible category. The less I spend in a category, the more I have leftover for saving that month. Of course, there are months when I do go over budget in some categories, but I do what I can to prevent that from happening too often.
Budgets can be as complex or as simple as you like. It’s your personal plan. Make it yours. I like to monitor both my monthly and yearly bills and even discretionary spending on clothing or video games. Nearly every time I spend money, it has its own category.