Budget methods: From simple splits to zero-based control

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Find the method that fits your goals.

© Eric Hood, Scisetti Alfio/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc.

Some people think of “budget” as a dirty word. The perception is that a budget is restrictive, preventing you from spending money the way you’d like. But a budget is really just a tool to help you reach your financial goals. If budgeting has been a frustrating experience, perhaps you’ve not yet found the method that works best for you.

A zero-based budget is what many people think of when they hear the term “budget.” Every dollar of your after-tax income is assigned a purpose. You begin by allocating money to planned expenses, such as housing, groceries, transportation, and utilities. Any money left over is allocated to savings. By the time you’re finished, every dollar has been assigned, so your income minus your planned spending and saving equals zero.

As you spend throughout the month, you track your expenses in each category. If you spend more than planned in one area, you’ll need to reduce spending in another to keep your budget balanced. For example, if you budget $400 for groceries, but spend $500, you’ll need to cut $100 elsewhere, such as restaurant meals.

A zero-based budget works well for households living paycheck to paycheck, families paying down debt, or anyone who wants detailed control over their finances. It requires regular tracking and periodic adjustments, but there’s no penalty for changing your budget as your spending or priorities change.

If you like the structure of a zero-based budget but need firmer spending limits, the envelope budget may give you the boundaries you need. First, set up as many automatic payments as possible from your bank account. Your rent or mortgage, utilities, cell phone, and insurance are all good candidates.

Then withdraw the budgeted amount of cash for your remaining spending categories and place it in envelopes labeled for each expense. Categories might include groceries, gasoline, restaurant meals, entertainment, and clothing. Once the cash in a given envelope is gone, you stop spending in that category until the next month.

The envelope budget also works well for expenses that occur less regularly. For example, if you groom your dog every six weeks, you can set aside money each month and spend it when the expense comes due. The method also allows flexibility. If you need to spend more in one category, you can move money from another envelope. Just don’t withdraw more money from your bank account; that defeats the purpose.

If detailed budgeting feels too restrictive or requires more tracking than you like, a 50-30-20 budget might be right for you. It uses broad spending guidelines rather than detailed expense tracking, dividing your after-tax income into three categories:

The 50-30-20 budget works best as a guide rather than a strict rule. If one category consistently takes up more than its target share, look for ways to rebalance your spending over time. The 50-30-20 budget may be a good choice if you’re just getting started with budgeting or if your income comfortably covers your needs and you simply want help staying on track.

Once you are established in your career and have a stable income, your budget goal may be to consistently build wealth or save for retirement. If you dislike detailed budgeting and can comfortably cover your expenses, you might want to try the pay-yourself-first, or reverse, budgeting method.

With this approach, a portion of your income is automatically directed from your paycheck or bank account to savings or investments. You then use the remaining money for your other expenses. This method works best if you can comfortably live on the money that’s left after saving. If you find yourself overspending because you still see money in your account, you may need a more detailed budget.

Budgeting is simply a tool to help you achieve your financial goals. You may start with one method and move to another as you age and as your income and priorities change. You may even combine methods, such as using a zero-based budget overall while relying on the envelope method for discretionary spending. Review your budget at least once a year to ensure it still reflects your priorities and spending habits. The best budgeting method is the one that fits your needs and that you can stick with over time.