Four Types of Budgets to Level Up Your Finances
- Choose a budgeting method that works for your current lifestyle and financial situation.
- There are many reasons people fail at budgeting, but one of the most prominent is they don’t know how to do it.
- Allocating your money can help level up your personal finances by staying organized, out of debt, and on your way to building wealth.
The word budget sometimes falls in the same category as the words diet and exercise. Although it is proven that dieting and exercise are good for us, many times we decide to avoid it. However, having this mentality can have detrimental effects on our overall lifestyle.
The problem with this mentality is that people often think budgeting is restrictive. However, creating a budget isn’t about setting limits and ruining your life, but instead is about freeing yourself from financial hardship.
There are many reasons people fail, but one of the most prominent reasons is that they don’t really know how to properly implement a financial plan.
The Top Four Budgeting Styles
There are four main styles to consider. These main methods include:
- The Line Budget
- The 50/30/20 Budget Rule
- The Zero-Based Budget
- The Envelope Budget
Line Budget
The line budget is the original method. This is where you have a list of categories that you plan to spend in, and you assign each of your purchases or bills to one of those categories. Each category also has a spending target to stop you from going over your allotted amount.
This is a great option because it is simple yet dynamic. You can change your categories to fit your current lifestyle and financial situation.
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The line system can be problematic for some people because it’s really easy to go over budget. When you set your categories at the start of the month, you allocate what you believe you spend monthly.
Too often, these assumptions turn out to be categorically false. This can be incredibly discouraging. And since this is the system most people try first, it leads to many people quitting altogether.
The best way to use a line budget is to track your spending without categories the first month, then build your categories from there. After that, tweak and adjust as needed.
Since the line method is generic, this system can be a great fit for almost anyone. However, as you become more comfortable, you may be inclined to change your budget to better fit your lifestyle.
50, 30, 20 Budget Rule
The 50/30/20 rule is by far one of the easier budgeting methods to follow. This technique breaks down your spending into three catch-all categories.
50% for essentials (needs)
Your paycheck is split into three key parts when you decide to use the 50/30/20 rule. One part (50%) of your paycheck will go toward necessary spending. This includes bills, taxes, groceries, transportation, and insurance.
30% for nonessentials (wants)
Another part (30%) of your paycheck will go toward discretionary spending, also defined as nonessential expenses. If you can live without a certain expense, it would be considered a discretionary expense, including entertainment, vacations, and eating out.
20% for savings and debt
The last part (20%) of your paycheck will go toward savings and debt.
This saving category is ambiguous, but this type of savings means saving and investing for the future of increasing your wealth.
Anyone who doesn’t want to deal with the nuance of categories or feels too pressed for time to create a customized budget will benefit from the 50/30/20 budget.
Zero-based Budget
The Zero-based method is the most detailed because it requires exactness. Every dollar has to be accounted for, and there is no waste or “extra money.”
Either way, every dollar that comes in goes to a specific place, whether it's for bills or your savings/investing account. This budgeting method allows you to not overspend.
This has to be a very personalized plan based on your spending habits, which makes this a detailed budget.
The Zero-based Budget is for those who want to get into the details of their spending. A properly run Zero-based plan will ensure that you never go over budget and grow wealth over time.
Envelope (Cash) Budget
The Envelope Budget is similar to the Zero-based method because every dollar has a specific job. This is especially useful for those who know that they tend to overspend.
In the envelope method, you put actual cash into actual envelopes that are labeled with the categories you spend on. Then you only use the cash in the envelope for that specific category.
For example, if you have used all of the money in your envelope that is run out of money for eating out, you stop eating out.
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People that follow the envelope method find this style to be the most effective way to get out of debt and stop accruing more debt.
Apps like the CapWay mobile app allow you to use the CapWay Money Account to the same effect as cash envelopes. CapWay calculates the amount of money you spent on each category and pre-calculates the money you plan to spend.
Regardless of which system you use, budgets are there to guide your money, reach financial goals, avoid debt, grow your investments, and give you freedom.
What money system do you like to use the best? Why? Please share your thoughts in the comment section below.
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