Budgeting is one of most common ways for a person to get on their way to personal finance success.
With budgeting, you can determine ahead of time what you will spend your money on, and what you will have left over each month.
Budgeting is to personal finance what dieting is to nutrition. Both require a self-discipline and accountability, and they can be challenging and seem discouraging at times.
However, with consistency and effort, budgeting works.
Budgeting and dieting also share another common trait: they run on deficits and surpluses.
If you want to gain weight, you need to consume more than you burn.
If you want to gain wealth, you need to have income higher than your expenses.
This deficit and surplus theory is the no-nonsense foundation of diets and budgeting methods alike.
In this post, you’ll learn about 5 simple budgeting methods, and how you can budget to make the most of your money.
First, let’s talk about your spending habits and think about what you need vs. what you want.
Applying Simplicity to Your Budget and Life
For those new to the site, you should know I’m a big fan of simple living. This mindset of simplicity applies to budgeting and spending as well.
First, before looking to start budgeting, it’s important to think about your financial goals and current lifestyle.
- Are you looking to save up money for a new purchase?
- Are you looking to get a house or new car?
- What about take a vacation?
- Do you want to start prioritizing health and wellness, and are fine with spending more on healthy food?
With these thoughts, then you can start to determine how much more you want to spend on other categories, and align your goals with your actions.
With these pre-budgeting thoughts and questions out of the way, let’s get on to the 5 simple budgeting methods for personal finance success.
5 Simple Budgeting Methods for Personal Finance Success
Budgeting doesn’t have to be hard or complex, and there are a number of different ways to make sure you are spending your money on what brings you joy.
Below are 5 simple budgeting methods for you to choose from:
- The 50 / 30 / 20 Budgeting Method
- The 80 / 20 Budgeting Method
- The 60% Solution Budgeting Method
- The Cash Envelope Budgeting Method
- No Budget
In the following sections, we’ll go into detail to learn more about these budgeting methods.
It may take some experimenting to find what works for you. After all, personal finance is personal!
The 50 / 30 / 20 Budgeting Method
Elizabeth Warren, a law professor and U.S. Senator, first referenced the 50 / 30 / 20 budgeting method in the book “All Your Worth: The Ultimate Lifetime Money Plan.”
Simply put, the 50 / 30 /20 budgeting method involves spending 50% of your take-home pay on needs, 30% on wants, and 20% on investing and/or debt repayment.
With the 50 / 30 / 20 budgeting method, you only have 3 line items to track every month – it cannot get much simpler than that!
What this method requires is for you to clearly define what is a need vs. what is a want in your life.
After defining your needs and wants, you just need to sort all your monthly expenses into a need or a want, and add up each category.
Then, you can review monthly to see if your spending percentages were roughly on par with the 50 / 30 / 20 guideline.
It should be mentioned that 50 / 30 /20 is just a starting point. These percentages are not practical for everyone.The nature of needs is that they are must-haves, irrespective of your income.
Say your household’s needs are $40,000 a year. If your take-home household income is $60,000, then your needs make up 66% of your income.
If that take-home income were $100,000, then needs would only make up 40% of your income!
So the percentages are variable depending on your situation.
Also, one other limitation is this method may be great for those with salaried jobs, but it’s not ideal for those with highly variable incomes.
Variable income is typical for self-employed people, commission-based jobs, and hourly jobs where the hours worked fluctuate week to week.
Luckily, there are a few other budgeting methods you can read about below.
The 80 / 20 Budgeting Method
The 80/20 budgeting method is an even easier version of the 50/30/20 method.
If you don’t want to make the effort to discern between wants and needs, you can just lump them into one.
In this budgeting method, 80% goes to your wants and needs, and 20% goes to investing and/or debt repayment. That’s really all there is to it!
This budgeting method runs on a “pay yourself first” mentality. First, you should invest the 20% (or use it to pay off debt faster), and then you are free to spend the rest on your wants and needs.
This simple budgeting method is great for people who want to improve their sense of financial accountability.
Following this method will give you an impressive 20% savings rate on your income!
However, it should be noted that those who feel they are stuck living paycheck-to-paycheck would not benefit from this budget.
You’ll need to use a method that discerns between wants and needs, allowing you to see where costs can be trimmed.
The 60% Solution Budgeting Method
The next budgeting method is the 60% Solution.
The 60% Solution was first referenced in an article written by MSN Money editor-in-chief Richard Jenkins. This budget has five categories for your GROSS income (ie. pre-tax) outlined below:
- 60% to “commited” expenses
- 10% to retirement savings
- 10% to long-term savings
- 10% to short term savings
- 10% for “fun money”
This budgeting method effectively suggests you can live off 60% of your gross income. According to the original article,
“I determined that we needed to keep our committed expenses at or below 60% of our gross income to come out ahead at the end of the month.
* Basic food and clothing needs.
* Essential household expenses.
* Insurance premiums.
* Charitable contributions.
* All of our bills — even such non-essentials as our satellite TV service.
* ALL of our taxes”
This budgeting method really simplifies expense tracking since all your “committed” costs are lumped into one category.
However, it carries the same challenges as the 50 / 30 /20 method since 60% may not work for your household.
I suggest starting with 60%, and changing it by +/- 5% depending on how easy or difficult it is.
For the other buckets, here are some examples of what they could involve:
- The 10% retirement savings would be akin to an IRA or 401(k).
- The long-term savings could be a goal such as saving up for a new vehicle or home down payment.
- Short-term savings could be contributions to your emergency fund, or some purchase you are making in the next 12 months.
- Fun money is self-explanatory!
This 5 category budgeting method is great for those who want to itemize their spending a little more, without evolving into a full-grown line item budget.
The Cash Envelope Budgeting Method
The cash envelope budgeting method is the oldest form of budgeting out there.
In fact, the word budget originated from the Old French word for purse.
While the cash envelope method requires the most effort out of any method on this list, it is still relatively simple.
The cash envelope budgeting method requires you to go old school by using nothing but cash for all your purchases.
You need to create a few spending categories and make an envelope for each one. At the beginning of each month, you then put a predetermined amount of cash in it, which makes it impossible to overspend.
Here are some common categories:
- Vehicle expenses
This method is just great for people who struggle with impulse spending, or people who prefer visual organization.
As mentioned before, it is impossible to overspend if you follow the method correctly. This budgeting method helps build discipline for those who need it when it comes to discretionary spending.
There are some negatives with the cash envelope method however.
First off, not using any plastic means you may be forgoing credit card rewards (assuming you’d pay your balance in full and on time).
Secondly, carrying wads of cash in today’s day and age is slightly impractical and potentially unsafe.
Finally, the amount of effort required is far greater than other budgeting methods in terms of tracking expenses. There are no monthly statements prepared for you when using cash!
No Budget Method
The last budgeting method may shock you, but the best budget may be no budget at all! This may sound silly, but hear me out.
Of course, from a solely financial perspective, there is no valid reason not to have a budget.
However, personal finance is more than just numbers.
Psychology plays a huge role.
Many people dislike budgeting due to the scarcity mindset it may force on you. Granted, this mindset may be necessary if you’re paycheck-to-paycheck and trying to get out of that cycle.
But, is it really sustainable?
With the No Budget budgeting method, all you really need to keep an eye on is your savings rate. You can improve your savings rate greatly by reducing big expenses.
Of course, the higher savings rate, the better.
The concept of savings rate is actually incorporated in the other simple budgeting methods mentioned.
For example, if you have no budget and have a 20% savings rate, you’re actually inadvertently following the 80 / 20 budget.
This idea is great for those who aren’t in any deep financial trouble but still want to improve their financial situation.
Simply monitor your savings rate; as long as you are happy with the number, there is no reason to track more in-depth!
Which Budgeting Method is Right for You?
At this point, you are probably wondering, “which budgeting method is best and right for me?”
The best one is likely the one that resonated the most with you when reading the above.
Objectively speaking, some methods are more effective than others, but you should remember that this is not solely an objective matter.
The budgeting method has to be one that YOU think will work for yourself.
A budget is useless if you don’t think it’s a method you can reasonably follow.
If you can’t pick a budgeting method today, then to start improving your financial situation, I’d recommend to start tracking your expenses today. Don’t wait until the first of next month to act.
Look at your daily spending for a couple weeks, you can see where you’re at. With these measurements, you can figure out roughly how your budget is going to work starting next month.
Readers: have you tried any of these methods? Which have you found most effective for your household?