Guide | Budgeting
Build the Budget You Want with These 3 Methods
Whether you are looking for a budget method that tracks everything or one that gives you a bit more spending freedom, there’s a style for every household. Focus on your finance goals with these budgets below.
Building a budget is a great way to know your spending habits, save money, and keep your bills and payments on track. According to a recent survey, 3 in 5 Americans don’t know how much money they spent last month, and the ones who did know said they wanted to have spent less. But what if you are not sure where to start with a budget or the method you tried hasn’t worked well for you in the past? Well, the good news is that there is more than one way to budget. You just need to find the one that fits your life and goals best, and we’re here to help. Check out our breakdown of these 3 different budgeting systems to decide if they make sense for you.
The Ratio Budget
Ratio budgeting, also called percentage or proportional budgeting, is an easy-to-track system with flexibility being a key benefit. You break out percentages of your income into broad expense categories and spend accordingly. To figure out the dollar amount for each ratio, simply take your monthly pay and multiply it by the percentage for each category. For example, if your monthly take-home pay is $3,000 and you want to set aside 50% for bills and essentials, just multiply $3,000 by .50 and you’ll know you have $1,500 for your needs category.
There are several ways you can divide up where your money goes, but we’ve included some common popular ones here. Check out how you can organize your spending with these three ratio budgets.
One proportional budget is the 70/20/10 rule. Three ratios are given for — you guessed it — 3 spending categories. First, 70% of your monthly income will go to all your living expenses, like housing, car payments, insurance, water and electric, child care and more. This lets you focus on having everything you need. Then you’ll take what’s left over and allocate 20% to savings and 10% for debt repayment.
For savings, you can split the 20% into 3 subcategories: retirement, emergency fund and financial goals. This way you can prepare for the future, build up your savings account and put away money for a down payment or vacation. If your debt is more than 10% of your income, you can adjust the categories — such as switching the debt and savings ratio — until you can pay your debt down. Then, following the 70/20/10 rule will help you keep your debt manageable.
The 50/30/20 budget, originating from the book “All Your Worth: The Ultimate Lifetime Money Plan,” also has you break down your monthly net income into three areas. Your biggest category will be your needs (like house payments, utilities, groceries, gas, etc.), so 50% of your money should be allocated there. Your wants —such as entertainment, streaming services, dining – then get 30%, and the remaining 20% is set aside for savings or repaying debts. A main pro to this budgeting style is people don’t feel so restricted with their personal spending, so they can still enjoy fun events while being sure to cover essentials. But just be sure to stay clear on what you classify as needs and wants.
The 80/20 system is the simplest ratio budget and is sometimes called the Pay Yourself First method. Put 20% of your income into savings (this can include emergency funds and retirement), and the remaining 80% is for everything else, like bills, groceries, gas, dates, etc. This rule is particularly useful for people who are looking to start a budget or prefer less structure when making their budget.
Do you want to save more or maybe need more wiggle room to cover your needs category? Know that you can adjust the ratios for these systems to tailor them more to your specific situation and goals.
The Envelope Budget
This system of budgeting, popular with Dave Ramsey, works like it sounds. First, you break out all your expenses each month into categories, and then each category gets its own labeled envelope. You put cash in each envelope to cover the specific expense.
The cash helps you stick to your original budget and not overspend because you only have the money in the envelope. So, if you allotted $250 for groceries for the month, leave your debit and credit cards at home and go to the supermarket with your grocery list and your envelope. This can cut out those impulse buys that eat into your wallet.
Don’t forget to plan for irregular expenses each month too, such as a parent’s birthday or an upcoming concert. And if you have automatic or online payments, keep track of them with a spreadsheet or notebook so their “envelope” is accounted for. Any money left over in the envelopes at the month can be used for savings, debt repayment or adding to the next month’s budget. If you find any categories you keep underbudgeting for, see where you can adjust for next time.
A drawback of this system is having to carry cash in a card-convenient world and keeping all the envelopes safe and organized. However, physically seeing how much cash is going out can help enforce disciplined spending. But if you prefer online and digital payments, talk to your bank about if they offer a digital envelope program, or there are several digital envelope apps you can use as well.
The Zero-Based Budget
Zero-based budgeting means you plan where every dollar goes and your monthly income plus your monthly expenses equal zero. Once you know your monthly net income, you list out all your expenses, debts and saving goals and assign them amounts. We’d advise looking at your bank statements from the past several months to figure out how much you need to spend on each expense. Once you deduct your listed items from your pay, you should have a zero balance, not showing any money over or under. If you have any money left over, you can move it to another category.
It can take time to get your expenses assigned and the budget created, but this system can help you focus on financial goals and maximize your net income. The zero-based budget works best for those with set or predictable incomes as they are easier to plan for.
Building a budget that is best for you and your household is key. Know that it can take several months of trying out a method to decide if it works, and soon those smart spending practices will become habits. Need more help with budgeting? Check out our Tips & Tools blog or download our free budgeting worksheet.
Guide | Home Buying
Article | Home Buying
Guide | Budgeting
Stay in the Know