Want to learn more about how to create and stick to a budget? These are 3 of the most popular personal budgeting methods that you need to know about.
Creating and sticking to a budget can feel extremely overwhelming. If you are anything like me, you are looking for a personal budgeting method that you will actually be able to stick to.
When choosing a budgeting method, it is important for you to consider your own habits, lifestyle, and goals. While not all methods work well for everyone, there is definitely a method that will work for you.
You are going to learn about 3 of the most popular personal budgeting methods and will be able to decide for yourself which one is right for you.
This post is all about the best personal budgeting methods that will help you achieve your financial goals.
Best Personal Budgeting Methods
1. 50/30/20 Method of Budgeting
What is it?
The 50/30/20 method of budgeting is one of the most straightforward methods. It divides your take-home income into 3 categories: Needs, Wants, Savings.
This method suggests that you allocate your take-home income as follows:
50% goes to your needs
30% goes to your wants
20% goes to your savings and/or debt payoff
Many people argue that the smallest category is actually the most important. After all- if you are looking to create a budget, you are most likely trying to save some money or payoff debt. This 20% should be adhered to as best as possible.
The other two categories are a bit more flexible.
How to get started with the 50/30/20 Method of Budgeting
Before we dive in deeper, we first need to define “needs” and “wants.”
- Your “needs” are your essentials. Generally these are payments that cannot be avoided such as mortgage/rent payments, groceries, insurance, utilities, transportation, childcare, etc.
- Your “wants” are things you generally want but that are not absolutely essential for surviving. Think: dining out, entertainment, traveling, gym memberships, personal care, monthly subscriptions, etc.
Sometimes it can be difficult to decide if something is a need or a want. Remember this: you get to make your own budget and it is not going to look the exact same as someone else’s. For example: Jessica might consider her gym membership a “need” while Michelle considers it a want.
Don’t worry too much about categories such as this one. Just put it wherever you feel it is most appropriate.
While the 20% category should be considered fixed, the 50% and 30% categories are a bit more flexible. These numbers are simply guidelines, and depending on your lifestyle they may need some adjusting.
Let’s say you live in a high cost of living area. Your “needs” category may need to borrow from your “wants” category. For example, due to a high rent payment you allocate 55% to your needs and 25% to your wants. As long as you stick to allocating 20% for your savings, feel free to play around with the balance between the 50% and 30% categories.
The 50/30/20 personal budgeting method is great for those who want to better understand where their money is going, but don’t want to go into too much detail with it. This method works well for both beginners as well as more seasoned budgeters.
And- if you don’t feel like calculating the numbers yourself, NerdWallet has an easy to use calculator HERE that will do it for you.
2. Pay-Yourself-First Budget
What is it?
In this method, the primary goal is to pay yourself first. Paying yourself is non-negotiable meaning you always pay yourself before you pay any other bills.
You might be wondering: What does “paying yourself” even mean?
Paying yourself means that you are contributing your earned money to any/ all of your retirement or savings accounts (401k, IRA, emergency fund, savings account, or another type of savings vehicle). Paying yourself FIRST means you’re doing this before paying any of your other monthly fixed and variable expenses.
So, how much should you pay yourself?
This of course will vary from person to person. Ultimately, you get to decide. But you should consider your income as well as your savings/ retirement goals when deciding how much to pay yourself.
While the pay-yourself-first method is fairly hands-off once you get going, in order for this method to be successful you do need to spend a little time planning upfront.
How to get started with the Pay-Yourself-First Budget
Look back at your past few months of spending to see on average how much money you spend each month. Then consider your monthly take home income. Subtract your average monthly spending from your monthly take home income to get a rough estimate of how much you have left over. This is the amount you can comfortably afford to pay yourself.
The first time you decide how much to pay yourself, err on the side of caution so you don’t end up running out of money. Remember: you will be paying yourself FIRST, so you want to ensure that after you pay yourself you will have enough money to take care of your monthly expenses.
You can always increase how much you pay yourself after a few months of using this method if you notice you typically have money left over.
Another important thing to consider when deciding how much to pay yourself are your savings and retirement goals.
Let’s say your current goal is to max out your 401k (or 403b or 457) contributions for the year. In 2022, the maximum yearly contribution for these accounts for workers under age 50 is $20,500. In order to accomplish this goal you need to contribute $1,708.33 per month for 12 months. After looking at your monthly expenses to ensure this is within reason, you will contact your employer to change the contributions to your account. You are now paying yourself $1,708.33 per month and can do whatever you wish with the income that remains.
What’s great about this method is that it is automated, so for the most part you can set it and forget it. Whether you are contributing to an employer sponsored plan or a personal account, you should set up an automatic recurring monthly payment so that you don’t have to worry about manually transferring the money.
Every couple of months you can re-evaluate to determine if you are still paying yourself an appropriate amount of money or if you need to make a change.
By paying yourself first, you are prioritizing your savings. You do not have to keep any detailed records of your spending. You don’t need to worry about tracking spending by category. For this reason, the pay-yourself-first budgeting method is fairly low maintenance and would be great for beginners.
The pay-yourself-first method can also help you reel in your extra spending since you will need to more carefully spend your remaining money to ensure you have enough to cover all essentials after you have paid yourself.
However, this method might not be best for those who have a large sum of high-interest debt. If you do have high-interest debt, such as credit card debt, you’ll want to focus on paying that down before prioritizing paying yourself first.
3. Zero-Based Budgeting
What is it?
The primary goal in zero-based budgeting is to ensure that every penny has a purpose.
You will allocate every single cent of your income to your expenses, savings, and debt payments. By the end of the month you should zero out, meaning that your total income minus your total money spent equals zero.
The zero-based budgeting method is much more hands on than the previous two methods discussed above. This method is ideal for someone who really wants to better control and understand where their money goes each month.
Please note that while the method is called the zero-based budget, this does not mean you should end up with $0 in your bank account. I recommend leaving some buffer money in the account (anywhere from $100-$500) to minimize the risk of overdrafting.
When creating your zero-based budget, you will want to first list out every single thing you spend money on in a month. Consider each of the categories listed below.
The miscellaneous category is important so that when an unexpected cost pops up, you won’t need to worry about it throwing off your entire budget. It will already be factored in.
Creating your zero-based budget and getting it perfectly right on the first try can be difficult. So don’t be too hard on yourself if it doesn’t go quite as expected on your first try. You’re taking steps to be more responsible with your money, and you should be proud of that!
How to get started with Zero-Based Budgeting
When making your zero-based budget for the first time, look at last month’s numbers to see how it adds up.
Did you spend less money that you earned? Great! This means you can (and should!) allocate more money to your retirement or savings accounts!
Did you spend more money than you earned? In this case, you have two options.
Option 1 is to figure out where you can cut costs. You’ll want to start with money spent in your “Extras” category. If you’re like me, you’re probably eating out too much and will want to cut back by preparing more meals at home.
If you’re finding it difficult to cut expenses, you’ll need to resort to Option 2. Increase your income! Consider starting a small side hustle or maybe try to sell all those clothes you never wear.
Once you have created your zero-based budget, you’re going to need to make sure you are able to stick with it. You will have to track your expenses all month long. Track all the money you earn and all the money you spend.
For example, let’s say your monthly grocery budget is $400 and you just spent $87 on your most recent grocery trip. You’ll want to deduct that $87 from your $400, leaving you with $313 left to spend on groceries for the month.
Tracking in this way allows you to know at any given time how much money you have left to spend. And while this zero-based budgeting method is more involved than other budgeting methods, it is extremely insightful and a great way to keep yourself from overspending.
Your budget likely will not change too much from month to month, but nevertheless it is important to re-evaluate at the start of a new month.
You should create a new zero-based budget every single month. Remember what was mentioned above. If you earned more than you spent, it is time to allocate more money to your retirement and/or savings. Whereas if you spent more than you earned, you’ll need to decide where to cut costs or how to increase your income.
Creating a new budget each month is also especially important because it helps us account for special celebrations and/or holidays, as well as costs that we only incur a few times a year such as a car service.
For example, if your partner is having a birthday in the month of June, you’ll likely want to make room in the budget for that. By creating a new monthly budget, you ensure that you will not overspend since you have already factored this special cost into your budget.
The zero-based budgeting method will work best for people who are detail-oriented and are willing to take the time to record all of their spending. I believe this is the best method to use if you really want to better control how you spend every single dollar you earn.
This post was all about 3 of the most popular personal budgeting methods that will help you achieve your financial goals.
Remember- budgeting is not a one size fits all situation. You should choose a personal budgeting method that is going to work for YOU.
The most important thing is to pick one budgeting method and give it a try. You can always switch it up if you decide it’s not the best method for you.
דירות דיסקרטיות בצפון says
Greetings! Very helpful advice in this particular post! It is the little changes that make the most significant changes. Thanks for sharing!
Bree says
Yes- you are right! Little changes really add up. Thanks for taking the time to read and leave a comment 🙂
Brian says
Thank you! This is a great post about budgeting methods! You’ve helped tremendously by laying out these different saving methods, I’ve decided to try the Pay Yourself First method, which seems like a set strategy, which I’m fond of.
Zero-based budgeting seems intense! Which method do you use?
Bree says
Hey Brian! I am happy to hear you’re going to try the pay yourself first method! That’s also the one I use. I love how simple and straightforward it is.
Zero-based budgeting is definitely quite involved, but a great one to use when you need a budget “reset” 🙂
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