Who it’s best for: Anyone who wants better control over their spending and get a better picture of where their money goes each month.
When you think of a traditional budget, you may think of the incremental budgeting method. With incremental budgeting, you adjust your budget every month based on what you spent the prior month. You track your spending by category.
For example, you could have categories for where you spend the most, such as housing, groceries, insurance, gas, personal care, medical costs, debt payments, and travel. And you can get as detailed as you want, or choose higher-level categories. One person might lump all food purchases into one category while another may break it down into groceries, fast food, and fine dining. What’s most important is to choose categories that help you track and control your spending.
Budgets are generally fine-tuned between periods. For example, if you found you could actually spend $500 on groceries despite a $600 budget, you would adjust your budget to $500 the next month. As long as your total budget isn’t more than your income, you can spend up to the amount allocated without breaking the bank or going into debt.
- Customized budgeting categories
- Improved visibility over your spending
- Make month-to-month adjustments to your budget as needed
- Time-intensive to create and maintain
- Doesn’t always provide motivation to save or invest
Who it’s best for: People who want detailed control over their spending and anyone in debt.
With zero-based budgeting, every dollar you earn gets a job. Specifically, your total income is broken up into expenses, debt payments, savings, and investments. If you want to follow the personal finance strategy of paying your advice first or have trouble managing debt or spending, zero-based budgeting may be the right choice.
Funds allocated to savings and investments count as an “expense” for budgeting purposes even though you’re keeping the money. At the end of the month, your income minus your expenses should equal zero.
When every dollar is accounted for, you’re in the driver’s seat of your finances. Zero-based budgets encourage thoughtful spending as no dollar goes unaccounted for.
- Get detailed insights into every dollar you spend
- Encourages allocating income toward debt payoff, savings, and investments
- One of the most detailed and time-intensive budgeting methods to follow
- Possibly too many details for those who already have control over their finances
Who it’s best for: People who want to budget without spending too much time on the details.
The 50/30/20 budgeting rule has become more and more popular over the last few years. This budgeting strategy uses just three categories to direct your spending based on your income: needs, wants, and savings/investments. Because you don’t have to get into extremely detailed budget categories, following this type of spending plan takes less time and energy to maintain.
With a 50/30/20 budget:
- 50% of your income is allocated to needs like housing, food, and transportation
- 30% goes to wants like dining out, entertainment, and hobbies.
- The last 20% goes to savings and investments.
Instead of looking at every dollar closely, as you do with zero-based budgets, 50/30/20 budgeting’s larger spending buckets tell you how much you’re spending but without quite as much insight into your spending habits. If you don’t have any debt and your finances are generally on the right track, you should consider 50/30/20 budgeting.
- A high-level budget that takes less time to set up and maintain
- Encourages saving and investing
- May not provide enough details into where your money goes
Who it’s best for: Anyone who prefers using cash or has trouble with overspending. Also good for young people learning how to manage money.
When you can’t seem to get your spending under control, envelope budgeting may be the best solution. With envelope budgeting, you withdraw your budget in cash from your bank or an ATM and divide it up into envelopes for each budgeting category. Once your envelope is empty for a category for the month, you’re done spending on that type of purchase until the next month.
If you prefer cash, envelope budgeting could be the best budgeting strategy for you. Once you’ve spent your entire “clothing” envelope, for example, you’re done spending on that category until your next budgeting period begins. This method enforces a hard spending cutoff, though you can borrow from another category if needed.
For parents teaching kids about money, envelope budgeting could be a fun way to divide up allowance to teach good habits. Even if you don’t like cash, there are apps available designed to help you follow a digital envelope budget.
- Enforces limits to help you avoid overspending
- Easy to follow once you are set up for the month
- Hard spending limits may be difficult for some people
- Often tempting to “borrow” from other categories
- Added risks of carrying and spending with cash
Who it’s best for: Small businesses, freelancers, or anyone who wants to use business strategies for their personal finances.
Most people will find their budgeting needs met through the budgeting styles above. If you want to treat your money more like a business, you may want to follow one of these less-common budget setting techniques.
Cash Limited Budgeting
Often used by businesses but still helpful for some individuals, cash limited budgeting puts all of your money into one pot. Once you’ve spent it all, you’re done until the next budgeting period.
- Very clear parameters
- Encourages saving
- No flexibility for unexpected expenses
Another budgeting technique that’s more popular for businesses, contingency budgeting involves creating a primary budget and leaving aside funds as a contingency in case any other category runs out. In a detailed budget, an “other” category could be used for a contingency budget.
- Quick and easy to set up
- Very flexible
- Not always accurate
- Difficult to monitor