Types of Personal Budgets

At its heart, every budget is simply a document that subtracts your expected expenses from your expected income. But there are actually many different budgeting strategies that you can use to track your spending and plan how you will use your money.

The budgeting strategy that’s right for you will depend on your own personal financial goals. There is no right or wrong answer. Below are some of the most popular types of personal budgets that you might consider choosing from.

  1. 50/30/20 Budget

To follow the 50/30/20 budget, you will take your net income (your take-home pay after taxes and other payroll deductions) and divide it into three categories: 50 percent to your needs (things like rent, utilities, debt payments, food); 30 percent for your wants (things like entertainment, eating out, and clothing), and 20 percent for your savings (like saving for retirement, emergencies, and other goals).

This type of budget is popular with those who are new to budgeting, and for good reason: It’s one of the simplest budgets to set up and follow. It offers structure to guide your spending, but also gives you the flexibility and freedom to indulge every once in a while so long as you still fall within the appropriate expense ranges.

  1. Envelope Budgeting

The envelope budget involves splitting out your expenses into different expense categories and designating a specific amount of money that you can spend on each category.

For each category (for instance, groceries, entertainment, etc.), you will carry a physical envelope, which you will fill with a predetermined amount of cash and bring with you when you plan on using that pool of money. Once you’ve spent all of the money designated to a specific category, that’s it—you’re done. If you finish the month with cash left over in an envelope, it’s typically recommended that you use it to bolster your savings or pay down your debt.

Envelope budgeting is often used by individuals who are trying to rein in their spending, for a number of reasons. Strict limits for individual categories make it easy to know exactly where your money is going. Paired with the psychological effects of spending physical money (and, in this case, watching your pool of available funds dwindle over the course of a month), it can help you make better decisions about how you spend your money.

  1. Zero-Based Budgeting

Zero-based budgeting involves taking your monthly income and deliberately assigning every dollar a task to perform: paying for food and groceries, covering your utilities, contributing to savings, etc. The goal is to have a balance of zero dollars at all times.

By giving every dollar a specific job to do, zero-based budgeting makes tracking your spending pretty easy, which can help curb overspending. It can also be effective for those who find that they have very little wiggle room in their budgets, because it helps you make every dollar count.

  1. Pay Yourself First Budgeting

The “pay yourself first” budget method is exactly what it sounds like: Each month, you decide what percentage of your income you want to designate to saving or other financial goals, and you immediately transfer that money out of your checking account. You can spend the rest of your money however you wish, so long as you meet your obligations.

Because this budgeting strategy prioritizes your financial goals over all other expenses, “pay yourself first” budgeting can work for those who have struggled to save enough in the past, as well as those who have particularly ambitious financial goals.

(This article written by: Tim Stobierski)

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