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Three Approaches to Budgeting

Budgeting often gets a bad rap. But a budget is a valuable tool that can help you stop overspending, save more, and hopefully achieve your financial goals faster. So why do 1 in 3 Americans admit to not having a budget even though more than 90 percent believe everyone should have one?

There are many reasons, ranging from thinking it takes too long to believing they don’t have enough money to make budgeting worthwhile or necessary. But a budget can be a powerful tool to help you manage your money more effectively, ensure you’re spending it in a way that aligns with your priorities, and achieve long-term financial security.

Here are three budgeting systems that could help you get started today achieving all of these objectives.


1. Envelope System Budgeting

This system is just what it sounds like. You identify different categories you typically spend your money on (groceries, gas, entertainment, etc.) and create an envelope for each category. The categories you select are completely up to you. After you identify the categories, decide how much you’re going to budget for each that month and put the appropriate amount of money into each of the envelopes. Every time you need to make a purchase, take some money from the appropriate envelope to buy what you need.

Once the money’s gone, it’s gone. So, if you budget $500 for groceries for the month and have no money in that envelope with a week left in the month, that means you’re eating leftovers or raiding the pantry until the beginning of the next month. You can’t borrow money from next month’s allotment, and you can’t use money from a different envelope to buy more groceries. Because the envelopes create a physical, visual system that lets you know precisely how much you’re spending in each category, it can be incredibly effective in helping to avoid overspending.

So, what happens if you have money left over in certain envelopes at the end of the month? You decide what to do with it. You can splurge on something you enjoy or save it to help you achieve a larger financial goal. It’s completely up to you.


2. 50/30/20 Budgeting

If you don’t want to divide your spending into lots of different categories, the 50/30/20 budget might be a better fit for you. With this system, you divide your take-home pay (after you add back any automatic deductions that were withdrawn from your paycheck) into three buckets—needs (50%), wants (30%) and savings/debt payments (20%).

Needs include expenses like housing, food, transportation, and your minimum debt payments. Wants include items you enjoy that aren’t strictly necessary, like streaming services or eating out. The remaining 20% is what you use to repay debt and save for the future. You can use this money to pay more than the minimum due on your loans and credit cards, build an emergency fund, or contribute to a retirement account.

The 50/30/20 budget gives you more flexibility than the envelope system while still helping you live within your means and stay on track to achieve your savings goals and repay debt.


3. Zero-Based Budgeting

With zero-based budgeting, every dollar you take in has a purpose. You begin by listing all of your expenses for the month, including savings allocations and debt payments. By the time you’re finished, every dollar you earn for the month should be accounted for. When you add up your expenses and subtract that number from the amount of money you bring home each month, the answer to the mathematical equation should be zero.

If it’s more than zero, you have money left over and you need to decide how you want to use it. But if you find yourself staring at a negative number, go back and identify areas of your budget that you can cut until the amount you’re spending is equal to the amount you’re earning.

Since you’ll repeat this process every month, zero-based budgeting may be a good option, if your expenses aren’t consistent from month to month, because it allows you to decide which expenses you’ll spend money on every month.


Paying for Emergencies

One big question about any type of budget is what happens if an unexpected expense comes up? After all, we can’t predict every expense we’re going to have every single month. What happens if your car breaks down or you have an unexpected doctor’s bill? That’s where an emergency fund comes in. With an emergency fund, you can use money from it to pay for life’s little—or big—emergencies. Just don’t forget to add “payments” for your emergency fund into whatever type of budget you use until you’ve fully funded it again.


Tips for Staying on Track

Let’s face it, life happens. And it can sometimes be tough to keep your budget on track. Here are four tips to help you stick with your plan, even when things get challenging.

  • Track your spending. When you see where your money is going, you’ll know how much you have left to spend.
  • Automate your savings. It’s easy to say you’ll save whatever’s left over at the end of the month. But if you do that, you’re unlikely to save much of anything. Pay yourself first by automating your savings and using what’s left over to cover your expenses.
  • Set up an emergency fund. It doesn’t matter how well you plan. Unexpected expenses will come up. That’s why experts recommend having an emergency fund equal to three to six months of living expenses. Using money from your emergency fund to pay for unexpected costs makes it easier to keep your monthly budget on track.
  • Don’t spend money you don’t have. If you don’t have enough money to buy something, it’s easy to convince yourself that “borrowing” from next month’s budget isn’t a big deal. Don’t do it. If you can’t afford to pay for something now, wait to buy it until you can. Borrowing from tomorrow is one of the many ways you can overspend, and it often leads to debt.


Budgeting may not be the most exciting thing you’ll ever do, but investing a little time to create a budget is well worth it. Following a budget can help you prevent overspending, improve your chances of achieving your financial goals, and set you up for fiscal success. 

About the author:

Jennifer Brozic

Jennifer Brozic began her writing career at seven years old, when she scribed the epic tale of her kite-flying (and skyward-looking) uncle crossing paths with a deep hole in a sandy beach. After earning a degree in journalism, Jen worked in the insurance and financial services industries before earning a master’s degree in communication management. She left the nine-to-five corporate world in 2010 and has been freelance writing ever since. Her areas of expertise include insurance, financial planning & budgeting, and building credit.

This material is for informational purposes only and is not intended to replace the advice of a qualified tax advisor, attorney or financial advisor. Readers should consult with their own tax advisor, attorney or financial advisor with regard to their personal situations.