Budgeting. Budgeting strategies. There are fewer words that would make you roll your eyes.
People see keeping a budget as only a tool to set savings and debt repayment goals. Or worse, a person sees a budget as an endless source of guilt, especially if they have trouble sticking to something that requires lots of self-control.
Let’s flip this notion on its head.
Your budget is the foundation of your personal finance system, to make your future lifestyle goals attainable while helping you spend responsibly in the present. Even if you are far from your future goals, your budgeting strategies should enable you to enjoy your life in the present moment while building to that future. Money matters but how you choose to spend it matters more.
We’ll cover how to set your own financial goals and tie those into different budgeting strategies.
- Choosing the right budgeting strategy depends on your goals, desired level of control, and personal style.
- Common methods include the zero-based, values-based, pay yourself first, and 50-30-20 budget.
- Setting your goals and using helpful tools will give focus to your budget and make it easier to maintain.
Set Your Financial Goals Before Picking a Budgeting Strategy
Travel. Retirement. Becoming financially independent. Setting up an emergency fund. Your goals become attainable when you understand them, set plans, and create a system to follow through with them.
Understand what you want to have in life. Reflecting on what you want and writing it down is the first step to making it happen. Writing down your goals makes them more concrete and attainable. They will be reflected in your budget.
1. Think backwards. How will you get to where you want to be? Think backward and map out the steps from finish to start. It’s helpful to consult a friend or family member to get their perspective on the process, especially if they’ve done it before.
2. Write out your action plan. Working out the steps and building an action plan sets up your approach to making what you want to happen a reality. Add in financial figures where it makes sense to get an idea of what it adds up to be. Remember, it doesn’t have to be perfect since you’ll get more experience and learn more later on to revise your targets.
3. Be realistic. Reflect on your present circumstances — how much you make in after-tax income, rent, etc. — as they determine what you can feasibly do with your money. It’s good to reach for higher goals, but an honest perspective of where you stand and what you can do will start you off on a solid foot. If you live in a high cost-of-living area, you may not be able to save 50% or more of your income, for instance. Achieving early wins helps you get excited and move forward. Set financial targets based on your goals and a realistic perspective as you write a budget.
4. Factor expenses in. It’s time to understand our expenses and prioritize paying yourself first before paying out discretionary expenses. Let’s start with listing all your basic living expenses and key goals that you want to save for overtime. Then list out other expense categories such as entertainment, sports, cable, etc. This list will be handy in the next section when we build it out in the next section.
5. Be flexible and consistent. For your budget to be a successful and useful tool in your life, consistently follow it while keeping it flexible. Your circumstances will change, and you may be able to save more or less at different points in time. It’s okay to revise goals to keep them feasible and attainable.
Using the process above, I set my financial goals and developed my personal finance system at the start of my post-grad life. They included starting an emergency fund and to save for an overseas backpacking experience.
Each budgeting method has its own strengths and work well for different situations. Let’s learn more about each of them.
5 Different Budgeting Strategies
In this budgeting approach, every dollar of take-home pay is assigned to an expense, so that you have $0 left to spend at the month’s end. To do zero-based budgeting, you need to plan out all of your monthly expenses and savings goals and match your dollars to them. This method leaves no room for unplanned expenses and helps you plan what to do with any remaining funds outside of your monthly budget.
After-Tax Income – (Expenses + Savings & Investments) = $0
This budgeting strategy is one of the more flexible and open-ended options on our list and would work well for a beginner figuring out how much to spend on various budget categories like groceries, nights out, loan payments, etc.
50-30-20 Budget Aka The Simple Budget
This budgeting method is based on bucketing your after-tax monthly income into these categories:
The line between needs and wants can get a bit blurry, but it boils down to what you really can’t live without vs. what makes life more enjoyable. Some say this budget method gives too much space for spending money on wants and not focusing enough on saving. Feel free to use these figures as a starting point and set percentages that work for your individual situation. Not everyone will need to spend 50% of their budget on food and rent while others will want to put more towards savings.
This method is a traditional budget as its about viewing your finances as a pie, deciding where you want your money to go, and then following through on your rules. It’s well-suited for a beginner who has more latitude in their discretionary spending and is wanting to better structure their finances. I started off my budgeting journey using this strategy as it was easy to do with an Excel spreadsheet and meet my financial targets at that time. This is the most commonly used of the budgeting strategies.
With this method, you set aside an envelope for each budgeting category and put a set amount of physical cash in each envelope. You can only spend up to the amount you put in each envelope for say rideshare, movies, or groceries.
In this process, every dollar is accounted for.
The envelope budgeting method is a tried-and-true process that has helped many people develop healthy spending habits, crush bad ones, and repay their debts. Though, you can substitute the envelopes for an app or spreadsheet. If you have any leftover funds by the end of the month, you can:
- rollover those funds into next month’s envelope
- save that money
- transfer leftover money into a different budget category (envelope)
The envelope budget relies on a high amount of discipline, self-restriction, and manual effort to put actual cash in individual envelopes. But you can use virtual envelopes instead like GoodWallet or Wally to use this method but without the paper.
I’m not a big fan of this method as it is too inflexible and overly disciplined, making it unlikely I would continually use it. I would also not want to buy so many envelopes!
However, I believe there is value in trying out this budgeting method for one month to become more aware of how much you spend in your everyday life. Our use of credit cards can disconnect us from how much we actually spend every day.
When I first started my budgeting plan, I closely tracked my spending habits and was astonished at how much I spent on certain things like transportation and food. After this realization, I became more aware of when I spent money and put spending limits on dining out and using rideshare. Using these limits, I made smarter financial decisions and contributed more towards my savings goals.
Beyond meeting your fixed expenses and enjoying your time, do you want to do something more with your dollars?
This is where values-based budgeting comes in.
With this budgeting plan, you’ll blend your finances with your intentions of living your best life and of making the world a better place. There’s a long list of causes and ways to better your well-being.
As you review your financial goals, consider the intentions behind them and how you could put some of your money behind your values. A few changes to your budget could make your spending and saving a bit more rewarding.
Some of my favorites include:
- Going to local cafes and small businesses in my neighborhood
- Donating to non-profits working on climate change solutions
- Using a personal trainer app to improve my health and exercise routine
- Setting aside part of my pretax income to build my retirement savings
You can build your values into your budget instead of only using any extra money. Taking a solid look at your spending will identify places where you can shift money to more fulfilling things. For instance, if you spend 20% of your budget on entertainment you can put a chunk of that towards a gym membership, a few houseplants, or as a donation to your local soup kitchen.
Ultimately, budgeting from your values brings intention to your finances and brings your life more in line with your beliefs. I’m a fan of this idea as I strive to be mindful of how I spend my money and where it goes.
Pay Yourself First Budget
The Pay Yourself First budgeting strategy is my favorite because it aligns with my personal finance philosophy. You pay yourself on the 1st of each month by transferring a recurring amount as an automatic savings contribution. You treat paying yourself as making a regular investment toward your financial future and as important as paying your fixed expenses, such as rent. After that, you pay off your bills and spend the rest as you see fit.
I like the Pay Yourself First budget because it gets people to think about how they can use their money to invest in themselves first before thinking of how to spend. This mentality helps a person create their goals, get more value from their money, and be more intentional in their spending.
This method encouraged me to think flexibly and adopt a mindset of saving first, and spending later, which helped me save for my travels.
Budgeting Process Factors Regardless of Budgeting Strategies
Savings and Debt Repayment
Most of us will have to take on debt or save up for something at some point. Debt has a nasty tendency to grow through compound interest and you can miss out on building savings if you don’t act on it.
Before taking on debt, it’s best to understand and model out how much your monthly debt repayments will impact your financial health. Write down when your monthly payment is due or when you want to make your savings contribution, then automate that process so you won’t forget it.
I prefer to automate payments with my credit card so they are made ahead of time while allowing me to get cash back too.
Unexpected Expenses — Creating an Emergency Fund
Life happens to everyone. Everyone has unanticipated personal expenses that come up like car repairs or visits to the doctor’s office. Although you can’t prepare for the unexpected, you can make sure you have enough money set aside to remove the financial stress of the situation.
Our best tip is to create an emergency fund with at least 6 months worth of expenses in a High-Yield Savings account (HYSA). You can open this account with banks like Ally, Marcus by Goldman Sachs, etc. No matter what you save for it is better to use a HYSA rather than a checking account as you will make more in interest.
Having an emergency fund brings stability to your financial situation and is a great start to setting longer-term financial goals. When I started out on my personal finance journey, one of my first budgeting goals was to build up a 3-month emergency fund. I recommend building a fund like this regardless of which of the budgeting strategies you use.
Use Budgeting Apps to Simplify Your Process
Setting up and maintaining your budget manually can give you a lot of control, but can also be a pain to do. There are lots of tools out there to make the budgeting process easy, automatic, and insightful. Some of the leading apps include Mint, Personal Capital, PocketGuard, and YNAB.
Personally, I use Mint and Personal Capital. I’ve found Mint to be superior for tracking my spending as it shows account balances, spending by budget categories, bill payments, and allows you to set your own goals. On the other hand, Personal Capital is better at tracking the performance of your investments and the changes in your net worth over time.
To get started, all you have to do is integrate your various financial accounts into one of these apps.
The Bottom Line
A budget can be a great tool to help you achieve financial freedom. Though we’ve covered the most popular budgeting strategies, the theme stays the same. Setting your priorities, tracking your spending, and sticking to your plan will make your budgeting journey a smooth one. Everyone’s situation is different and the best method for you might be one of these or a mix-and-match. Try them out to see what works for you!
FAQs – Frequently Asked Questions
Q: I’ve heard of the 4 budgeting strategies. What are the 4 strategies and what is each best for?
- To Save and Invest: Pay Yourself First
- To Get Started Out: 50-30-20 Budget Strategy
- To Control Your Spending: Envelope Budgeting
- To Push the Value of Each Dollar: Zero-Based Budget
Q: Why is budgeting so important?
Budgeting helps you not to overspend and to better value the money you make, helping you make the most of your money plan for necessary expenses and long-term goals. It’s a great, helpful way for anyone with income and expenses to look after their finances. Budgeting helps you to not overspend and to better value the money that you make, helping you prepare for necessary expenses and long-term goal setting. It’s a great, helpful way for anyone with income and
Q: How to Spend Money Wisely?
These tips can help you spend more mindfully, in a way that aligns with your financial situation and needs:
- Think about benefits and costs of your purchases
- Only spend on your credit card if you can pay it off each month
- Don’t worry about impressing other people — they have short attention spans
- Cut off expenses that drain you and your budget
- Invest early
- Save instead of spend where you can but don’t obsess over every penny
- Find experiences to enjoy, especially with others. The money you put on experiences feels like its worth more than your emotional return from buying material things.