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12 Types of Budgeting Methods

The ability to budget well and stick to it is a skill that many people take time to learn. But once learned, it’s a skill that will set you up for life. Don’t worry if you’re 18 or 35 or 50. No matter where you are in life, there’s no right or wrong time to learn how to be responsible. Take the first step by learning the different budgeting methods discussed in this article. From traditional approaches like zero-based to innovative strategies such as the 50/30/20 rule and envelope budgeting, each method offers a unique perspective on managing finances. 

Understanding these types of budgeting will not only empower you to tailor your financial plans to specific needs but also encourage you to be proactive and informed when navigating the intricate world of budgetary decision-making.

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The 50/20/30 Budget

Under the principles of the 50/20/30 budget, direct 50% of your net income towards necessities, allocate 20% to savings and debt payments, and designate 30% for discretionary spending. It’s a great budgeting strategy for people who want to set aside some savings and are clear about what they consider as a want and a need. However, if you have huge debts or want to save as much as possible as soon as possible, this might not be the best budgeting option for you.

Best for:

  • People who are new to budgeting 
  • People who want to learn budgeting

Pay Yourself First

The Pay Yourself First budgeting method prioritizes your savings. Allocate a predetermined sum to your savings at the start of every month. Once you've ensured your savings, you can proceed to paying your bills, and the remaining funds can be used as you see fit.

Best for:

  • People who struggle with setting aside savings
  • People who don’t want to list every expense

Zero-Based Budget

Zero-based budgeting involves committing every dollar earned to a specific expense, resulting in a balanced budget where the remaining amount is $0. 

Income earned - Allocated expenses = 0 (zero)

This approach demands that you can thoroughly anticipate all upcoming expenses, including your savings. By planning for every dollar, this method acts as a safeguard against impulsive spending habits. 

Best for: 

  • People who have fixed income every month
  • People who are used to having a budget

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Envelope Budget

With envelope budgeting, you assign specific amounts of money to envelopes—whether in physical cash or through a digital tool like an app or spreadsheet—to represent different budget categories. Once you've used up the funds in a particular envelope, you're not allowed to spend in that budget category until the next month. In case there are remaining funds by the end of the month, you have several choices.

    • Roll over the remaining money into the same envelope for the next month
    • Transfer the money into a different envelope
    • Add the remaining funds for savings

Best for:

  • People who are comfortable keeping cash
  • People who don’t like using debit or credit cards

No Budget Budget

The No Budget budgeting technique involves taking careful stock of:

  • how much you currently have (your bank balance)
  • tracking every expense
  • noting when recurring bills hit your account
  • setting aside cash for savings
  • setting aside a budget for paying off debts
  • using automatic transfer tools to pay bills and debts and set aside savings
  • Spend whatever is left as you see fit without overdrawing. 

Best for:

  • Flexible spenders
  • Beginners to budgeting
  • Busy individuals who don’t have the time to make detailed budgets
  • Goal-oriented spenders

Activity-Based Budgeting

This kind of budgeting strategy is often used in business wherein all activities that cost money are carefully tracked and analyzed so that future costs can be predicted. Not only that but it also helps identify activities where potential savings can be made by optimizing how things are being done.

Applying the principles of activity-based budgeting to personal finance, you will need to:

  • Identify activities every month that cost money (e.g. getting to places, housing, etc.)
  • Carefully track every single expense
  • Assign each of those expenses to an activity category (e.g. all fuel costs will be under Transportation or getting to places)
  • Get a total of all the expenses under each category. The resulting amount would be the budget for that particular activity.
  • The overall aim is to bring down the cost for each activity. So you can either allocate a certain amount based on what it currently costs or try to do things differently in an effort to avoid engaging in cost-incurring activities.

Best for:

  • People who are beginners to budgeting
  • People who want to bring down the costs of their expenses
  • People who want to be more spending-conscious

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Traditional Budgeting

Traditional budgeting involves using the previous month’s budget as a benchmark to set the budget for the new month. That is, of course, adjusting for any anticipated additions and cuts to your expenses. This is a great budgeting strategy to use along with other budgeting methods. It’s perfect for those who have been budgeting for a while and have found a budgeting method that works for them. 

Best for:

  • People who are used to budgeting
  • People who are not too keen on tracking expenses too much

80/20 Budget

Implementing the 80/20 budgeting strategy entails committing 20% of your take-home pay to savings, while the remaining 80% is earmarked for expenditures. For example: if you earn a total of $3,000 a month, set aside $600 to your savings account, and leave the remaining $2,400 for various expenses, covering both necessities and discretionary spending. 

To streamline this process, consider setting up an automated withdrawal from your checking account. Schedule these withdrawals to happen a day or two post each paycheck so that the funds are sent straight to your savings account. This systematic approach allows you to only focus on what’s left of your funds for your spending.

Best for:

  • People who want to ensure savings every month
  • People who don’t have a lot of debts 
  • Families with multiple financial goals
  • Savers with multiple income streams
  • Roommates and couples
  • People who have irregular income
  • Long-term planners

Sub-savings accounts method

The method of sub-savings accounts suggests opening multiple savings accounts to segregate funds for different financial purposes. For instance, you might want to create separate accounts for your savings and emergency fund. Maybe you want to open a new one specifically for your vacation savings? Each account represents your specific financial goals. Using the advantage of automatic transfers, you can automatically funnel the money from your main account to each of these special accounts, making sure your money is going towards the things that matter. 

Best for: 

  • People who are serious about committing to their financial goals (e.g. saving up an emergency fund)

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60% Solution Budget Method

The 60% solution shares similarities with the widely known 80/20 budgeting strategy. In this scenario, 60% of your income is allocated to cover essential committed expenses, deviating from the standard 80% norm. Rather than earmarking 20% for savings, this approach involves dividing 40% of your earnings to systematically address your savings goals. This 40% can be further distributed across specific categories to better align with your different financial goals such as:

  • Retirement
  • Short-term savings
  • Long-term savings
  • Money saved after taxes, insurance, and savings

Best for:

  • Beginners in budgeting
  • Individuals with irregular income
  • Families with moderate fixed expenses

Values-Based Budgeting

Values-based budgeting entails aligning your financial decisions with your life's priorities and taking a more lifestyle-centric approach to spending and saving. Rather than focusing on specific financial milestones, this method allows you to let your values dictate your financial choices. If, for instance, travel holds more significance for you than upscale living, you might choose a more modest accommodation, freeing up resources for your travel fund. This approach suits individuals who prefer considering the overarching goals and values in their financial planning.

Best for: 

  • Travelers
  • Small Business Owners
  • Goal-oriented individuals
  • Families with specific values
  • High-earners with varied interests
  • Individuals who earn irregular income
  • Sustainability-conscious individuals
  • Career-changers
  • Health-oriented individuals
  • Retirees planning for retirement

Line-Item Budgeting

You have the flexibility to create a line-item budget using either manual tools like pencil and paper or digital platforms like Excel. This entails listing every expense or expense category for a specific duration, such as a month or a year. Periodically comparing your current expenses to historical ones helps you gauge your financial progress. Keep in mind that a line-item budget is primarily designed for tracking spending rather than emphasizing savings, so remember to allocate a specific line item for savings in your expenditure list.

Best for:

  • Individuals with fixed incomes

Final Word

Recognizing the nuanced advantages of each approach underscores the importance of a customized financial plan. Hopefully, the knowledge gained from exploring these types of budgeting methods will empower you to take an informed direction toward long-term success.

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