Everyone, regardless of income level, needs a budget. Businesses survive and thrive with budgets, and it’s no different for personal finance.
But while business budgets might be complicated, your finances don’t have to be. Budgeting can be smooth sailing and even fun when you choose the proper budget for your goals and personal style.
Learn about the four types of budgets below that will have you spending less, saving more, and reaching your financial goals.
These Are the 4 Main Types of Budgets
Zero-based budgets account for every dollar. Your income minus your expenses should equal zero. However, this doesn’t mean you want to spend every dollar. This strategy also accounts for money you save or invest.
Zero-based budgeting is an excellent system for those who have a pretty good understanding of how much they spend but want to know exactly how much money is funding each expense. This budget also helps you see where you can cut back and save more.
Zero-based budgeting also encourages saving and investing. Any other budgeting system might leave you with left-over money that you may feel tempted to spend. But zero-based budgeting forces you to allocate that money to savings or investments instead. Once you watch those pots of money grow, you’ll be more likely to want to keep up the momentum and continue building your savings and investment accounts.
Envelope budgeting is choosing how much money you plan to spend in specific categories and putting it aside in real or virtual envelopes. Each envelope contains the entire amount of money available to spend on that expense for the month.
The goal is to keep your spending in check by only spending the money in each envelope. When the envelope is empty, you shouldn’t spend any more money on that category until next month, when you refill the envelope.
Envelope budgeting is like zero-based budgeting because it forces you to allocate dollars to certain expenses. You can also learn which expenses you can cut back on and save more.
However, juggling physical envelopes and cash can be a pain, and it’s also not the safest way to store your money. It’s also tempting to easily take cash from one envelope to fund another.
The better option would be to use an app with virtual envelopes, and you’ll want to be sure you have envelopes for savings and investments.
Pay Yourself First
Paying yourself first is precisely what it sounds like. You fund your savings and investing goals first and then fill in the rest of your budget.
If you have a trip coming up in 10 months that will cost $1,000, you start each month by allocating $100 into your travel account and allocate funds to your other savings and investing goals.
After funding those near-term and long-term goals, you would look at how the rest of your expenses fit in with your income and budget.
You’re opting to make your own goals, short-term or long-term, a priority over immediate gratification by paying yourself first. You are planning for your future.
After covering your expenses, you can allocate some fun money to treat yourself during the month if you have discretionary income left. The order of operations for this budget style is:
- Fund savings, investment, and debt payoff goals
- Cover your essentials (e.g., rent, utilities, etc.)
- Spend any remaining money on fun or things you want
Proportional budgets look less at specific categories and more about where your money should be going as a whole. The two most common ones are the 50/30/20 rule and the 80/20 rule.
Let’s start with the 50/30/20 rule. Here’s the breakdown: 50% of your income should go towards needs, 30% towards wants, and 20% towards savings, investing, and paying down debt.
The 80/20 budget is simple–you live on 80% of your income and save the other 20%. These are great for people wanting a less restrictive budget.
Budgeting helps you achieve short- and long-term financial goals. If you have a trip planned for next year and plan to use credit cards to pay for it, budgeting can help you avoid that. Every month, sock away a little for that trip, and before you know it, you’ll be able to afford it without going into debt.
Budgeting is essential for anyone to achieve financial goals like reducing your spending so you can save for a house, or a car, or pay off debt.
Tips for Successful Budgeting
Sticking to a budget can be difficult because we don’t like telling ourselves “no,” and budgeting can feel like that at first.
When you’re struggling and want to spend money on something you don’t need, you can remind yourself, “I’m saying no now to say yes later.”
Here are some tips for successful budgeting:
- Have a goal so that budgeting seems like a tool and not a constraint
- Be realistic and set goals that are feasible on your income
- Try different methods and find the one (or two) that works best for you
- Don’t be afraid to change your budget as your life and priorities change.
Budgeting should be a tool and not a limitation. It may be helpful to think of it as a spending plan. You’ll always have a money goal to work towards, buying a home, replacing a vehicle, paying off debt, saving for a vacation, replacing broken appliances or furniture, even paying a medical bill. The list is endless. So, the point here is that you don’t want to budget and stop once you reach one goal. You want to keep going and work towards another goal on your list.
The next step is choosing a budgeting tool that fits your style. Check out our list of the 8 best budgeting apps here.