It sucks to wonder where all your money went at the end of the month. Even worse is wondering how all your money is gone when you still have a week left until payday.
If you’ve added up some receipts, you might be flabbergasted by how much you spend on food, clothes or your kids’ activities.
A budget can help. Budgets are designed to keep you on top of the money that comes in and the money that goes out.
But there isn’t just one simple way to budget; budget styles vary considerably. What works for you will depend on your goals and how you prefer to track your finances.
So let’s break down some popular budgeting methods, and you can choose one that’s right for you.
Budgeting Method No. 1: The 50/30/20 Method
Aileen Perilla/The Penny Hoarder
Have you ever asked yourself how much you should be spending on necessities as opposed to the stuff you want? Have you wondered what portion of your paycheck should be going to better your financial future? The 50/30/20 budget might be right for you.
How to Budget Using the 50/30/20 Method
Divvy up your money so that 50% of your income goes to covering the essentials, 30% goes to buying what you really enjoy and 20% goes to meeting financial goals.
Let’s say your take-home pay is $3,000 per month. That breaks down to $1,500 for the essentials, $900 for whatever you desire and $600 for financial goals.
Some of the necessities you’d spend $1,500 on could include:
- Rent/mortgage
- Insurance
- Utilities
- Internet
- Phone bill
- Minimum credit card payments
- Student loan payments
- Food
- Car note
- Gas
You should allocate $900 to spend on the fun stuff:
- Hulu/Netflix.
- Dining out
- Vacations
- Date nights
- Movies
- Clothing
- Accessories
- Makeup
- Magazines
- Sporting events
- Concerts
That leaves you with $600 to put toward things like:
- Emergency fund
- Short-term savings
- 401(k) or IRAs
- 529 college savings plan
- Extra payments on your credit cards
With the 50/30/20 method, you don’t have to lay out how much you’ll spend in individual categories. For instance, you don’t need to set a spending limit on groceries or a cap on how much you spend on date nights as long as your spending stays within the established percentage brackets.
If you like the idea of the 50/30/20 method but can’t stick to those exact percentages, you can also tweak the numbers a bit.
One Penny Hoarder shared with us how her financial adviser recommended she work from a 60/20/20 budget — where 60% is spent on essentials, 20% is saved and another 20% can be spent on fun stuff.
Is the 50/30/20 Method Right for You?
This method is a great fit for people who need guidance on balancing saving, investing and repaying debt.
If you tend to go overboard with your discretionary spending, this budget will keep you in line without making you feel like you have to sacrifice the things you want.
After all, 30% is a pretty generous allotment for fun spending.
Budgeting Method No. 2: The Zero-Based Budget
Type A folks, rejoice. The zero-based budget lays out a plan for every dollar you make, putting you in control of it all.
How to Budget Using the Zero-Based Budget
The goal is to make sure your monthly income minus your monthly expenses (including allocations like putting money in savings or investment accounts) equals zero. There should be no money left over at the end of the month — and no spending more than you bring in.
To get started, analyze your bank statements, credit card statements and receipts from the past few months to get a sense of how much you spend in the budget categories that apply to your life.
Next, assign a spending limit to each of those budget categories. You may need to play around with the numbers a bit until the amount of money you have going out equals the amount of money you have coming in.
Here’s an example of what your budget might look like:
Income:
- Paycheck No. 1: $1,500
- Paycheck No. 2: $1,500
Total income $3,000
Expenses:
- Rent: $900
- Utilities: $150
- Phone bill: $80
- Internet: $70
- Student loan: $150
- Credit card debt: $100
- Car note: $300
- Insurance: $150
- Groceries: $300
- Gas: $100
- Dining out: $150
- Entertainment: $100
- Gifts: $50
- Personal care items: $100
- Gym membership: $50
- Streaming services: $15
- Cleaning supplies: $15
- Clothing: $70
- Savings: $150
Total expenses $3,000
Is a Zero-Based Budget Right For You?
The zero-based budget is perfect for budgeters who want to be intentional about every dollar. It’ll help you become hyperaware of your finances.
This budget may even tip you off to where your financial problems lie — whether you’re simply not making enough money or you’re spending too much in a certain budget category.
Budgeting Method No. 3: Bare-Bones Budgeting
Aileen Perilla/The Penny Hoarder
Sometimes, you just gotta trim all the fat from your budget and focus on the basics. It’s not deprivation. It’s discipline.
How to Budget Using Bare-Bones Budgeting
This budgeting method is pretty self-explanatory. With a bare-bones budget, you cover only the expenses that are absolutely necessary. Whatever is left over, you save.
Your budget might look something like this:
Income:
- Paycheck No. 1: $1,500
- Paycheck No. 2: $1,500
Total income $3,000
Expenses:
- Rent: $900
- Utilities : $150
- Phone bill: $80
- Internet: $70
- Student loan: $150
- Credit card debt: $100
- Car note: $300
- Insurance: $150
- Groceries: $300
- Gas: $100
- Savings: $700
Total expenses $3,000
Is Bare-Bones Budgeting Right for You?
The bare-bones method is helpful for budgeters who are really looking to bulk up their savings — or perhaps aggressively pay down debt, like this woman who paid off $68,000 of debt with a bare-bones budget.
The bare-bones method can help anyone needing a spending reset. It can also be helpful to those trying to manage their money on a low income or those with a ton of essential expenses to account for.
Budgeting Method No. 4: 60% Solution
Sure, it’s smart to prioritize the essentials. But what about those expenses that aren’t vital but that we consider very important to our lives? The 60% solution gives value to that type of spending.
How to Budget Using the 60% Solution
This budgeting method is similar to the 50/30/20 method, but the rules are a bit different. With the 60% solution, you’re budgeting 60% of your income on expenses you’re committed to. That includes essential spending plus those expenses that are most important to you, such as your kid’s activities, a personal trainer, dues to a professional organization or monthly road trips to visit loved ones.
As for the other 40% of your income? You can put that toward savings or use some of the money for discretionary spending. Richard Jenkins, the financial author who came up with the 60% solution, split his 40% into four 10% increments: retirement savings, long-term savings, short-term savings and fun money.
Here’s an example of a budget that uses the 60% solution:
Income:
- Paycheck No. 1: $1,500
- Paycheck No. 2: $1,500
Total income $3,000
Expenses:
Committed expenses (60%):
- Rent: $775
- Utilities : $120
- Phone bill: $80
- Internet: $70
- Student loan: $125
- Credit card debt: $50
- Insurance: $75
- Groceries: $250
- Gas: $75
- Personal trainer: $100
- Cooking lessons: $80
Other expenses (40%):
- Retirement savings: $300
- Long-term savings: $300
- Short-term savings: $300
- Fun money: $300
Total expenses $3,000
Is the 60% Solution Right for You?
The 60% solution is great for those who want to prioritize nonessential expenses that they care about. It’s also good for budgeters who want guidance on where their money should be going but don’t want to be too strict about tracking every dollar.
Bonus Budgeting Hack: The Cash Envelope System
Tina Russell/The Penny Hoarder
The cash envelope system isn’t technically a budgeting method; it’s a way to carry out a budgeting method. Still, it’s worth mentioning.
If you’ve ever struggled with sticking to a spending limit when you’re grocery shopping, updating your wardrobe or buying gifts for loved ones, then it could be time to transition to cash.
How to Use the Cash Envelope System
You commit to paying for variable expenses — such as groceries, clothing, entertainment and dining out — with cash.
First, you’ll need to determine how much you can spend in each category. Using a zero-based budget makes this part seamless, because you already know your spending limits in all budget categories.
Next, you’ll label envelopes with each spending category and fill them up with their allotted amount of cash.
One envelope might contain $300 for groceries and another might have $100 for entertainment. When you’re out food shopping, you’d spend money from your groceries envelope. If you go to the movies later, you’d pay for the tickets using cash from the entertainment envelope.
Once you’ve used up all the cash in a given envelope, you can’t spend in that category again until it’s time to refill your envelopes with money.
It’s important to note that you won’t use cash envelopes when it comes to fixed expenses. Even bills that tend to vary — like your utility bills — should be exempt. You can automate those bills via online banking or pay them as you normally would.
In addition, your savings allocations should go into the appropriate accounts — not cash envelopes.
Is the Cash Envelope System Right for You?
This system is for those who find themselves swiping their debit or credit cards past their budgeted spending limits. By limiting yourself to a finite amount of cash, it’s (almost) impossible to overspend.
Choosing the Best Budgeting Method
Now that you’ve been given an overview of several popular budgeting methods, you should have a good idea of which will work best for your financial life.
When choosing a budgeting method, you’ll want to consider how strict you want to be with your spending. Do you want to track every dollar or take a broad approach to monitoring where your money is going?
You also need to think about your financial priorities. Are you budgeting to increase your savings, or so you can still travel and go out for drinks without damaging your financial standing?
After you choose a budgeting method, think about how you’ll carry out that budget. Will you go old school and break out a pen and paper to write everything down? If you’d rather have your budget on your smartphone or computer, try creating an Excel budget spreadsheet, using free online budget templates or managing your budget with apps.
You may find that it takes some trial and error to get yourself accustomed to budgeting. You might try out a budgeting method, only to decide it’s not for you. And that’s OK. You might prefer another.
Don’t let the budgeting blunders get to you. Keep at it, and eventually, you’ll master this whole money management thing.
Nicole Dow is a senior writer at The Penny Hoarder.