Learn about the different types of budgeting methods so you can choose the best budget system for your personal finances.
After you learn all the basics about how to budget, it’s time to learn all about the many different types of budgeting methods. There are many different kinds of budgets out there for you to choose from, each with its own unique benefits and advantages.
It’s important to take some time to learn about them all because some might be perfect for you, while others just don’t make a great fit. Learn about all of the budget options out there so you can determine which one will work best for you and your unique financial situation.
Incremental Budget (Traditional Budgeting)
The incremental budget is a budgeting practice that involves making incremental changes to your monthly budget each month. It’s often also called traditional budgeting and is one of the most commonly used practices.
Incremental Budget Benefits
This practice is great for anyone whose budget changes on a frequent basis, who has a lot of varied expenses to manage each month, or who is managing household expenses that can vary month to month.
Incremental Budget Example
Use incremental budgeting practices by picking a day at the start or end of each month to sit down and review your budget on a monthly basis so you can make adjustments as needed for the next month.
- Create a budget before the month starts
- Use that budget for the month
- Review the budget at the end of the month
- Make necessary adjustments
- Use the adjusted budget for the next month
- Repeat the cycle at the start of each new month
Zero-Based Budget (ZBB)
The zero-based budget (ZBB) is a type of budgeting practice that ensures every dollar is accounted for and intentionally allocated to a specific expense and purpose. The goal of a ZBB is to have no money left unaccounted for at the end of each month, so your income minus your expenses equals “zero.”
Zero-Based Budget Benefits
This practice is very useful for businesses or households that have a lot of finances to manage and want to make sure all their money is recorded and accounted for and being put to good use.
Zero-Based Budget Example
To use the zero-based budget, you’ll want to list out every possible expense you have during the month and account for how much you can spend on that expense.
You might also organize these expenses into categories like wants vs needs or variable vs fixed expenses, but you’ll want to list every individual expense. This list may end up being rather long, but then you’ll have a full, detailed account of your spending plans.
- Rent: $1,500
- Utilities: $200
- Internet: $100
- Food and House Supplies: $500
- Health Insurance: $250
- Car Payment: $300
- Car Insurance: $100
- Gas Money: $200
- Credit Card Payment: $200
- Student Loan Payment: $300
- Emergency Fund: $300
- Savings Account: $200
- Retirement Fund: $400
- Entertainment: $250
- Clothing: $100
- Subscriptions: $50
- Monthly Buffer: $50
- Total Monthly Income: $5,000
- Total Spending = $5,000
After you finish outlining all of your expenses you’ll want to make plans for all of your monthly income so every dollar is accounted for. At the end of your budget, your total spending should “zero out” and be equal to your total monthly income.
Activity Based Budget (ABB)
The activity based budget (ABB) is a budgeting practice that divides up the areas of your budget based on activities rather than spending categories. This financing system is commonly used by businesses to organize the costs of company efforts like sales expenses, customer processing expenses, etc.
Activity Based Budget Benefits
You may want to use an activity based budget for your personal finances if you want to attribute an active purpose to all your expenses. For example, if you have a specific lifestyle you want to prioritize in your budget, then activities related to that lifestyle might be their own category in your budget.
Activity Based Budget Example
To use this practice for yourself, think about the activities and purposes behind each expense. Maybe you have a personal comforts, fun with friends, household administration, health and wellness, or professional career growth budgeting categories based on those actions.
Value Based Budget (Value Proposition Budget)
The value based budget is a budgeting practice that prioritizes your financial resources toward what matters most to you, or whatever expenses you determine to have the highest value. It can also be referred to as the value proposition budget and is often used by businesses to focus company finances on the products and services that are the most valuable to customers.
Value Based Budget Benefits
This financial mindset is very useful if you want to make sure all of your spending has significant value. Everyone’s financial priorities are going to be slightly different and this budgeting practice helps you keep those priorities top of mind so you spend money on what actually matters most to you.
Value Based Budget Example
Use the value based budgeting practice by labeling all of your expenses as necessary or unnecessary. Then you can review unnecessary expenses to cut out spending that doesn’t have significant value to you. You can also further prioritize your necessary expenses by noting the purpose and level of value of each essential expense with color codes, a numbering system, priority flags, or a list in order from highest to lowest value.
The No-Budget Budget
The no budget is a budgeting practice that prioritizes being as simple as possible, as if you had “no” budget. It divides your finances into 2 simple categories: savings and essentials. Then you set up automatic payments so your most important financial commitments (savings and essentials) are paid first. The rest is free to spend however you want or need.
The No Budget Benefits
This system is great for anyone who wants to keep things simple and not make their finances too complicated, by setting up a kind of automatic budgeting system.
The No Budget Example
To set up a no-budget system, first set up an automatic payment to your savings account and schedule the payment for whenever you get your first paycheck each month.
Then, set up automatic, online payments for all of your essential, necessary expenses each month, like paying rent, utilities, phone bills, etc., also scheduled for whenever you get your first paycheck each month.
That way, all of your most important expenses are automatically handled first thing each month by the online, automatic system you put in place.
Cash Envelope System Budget (Cash Budget)
The cash envelope system is a budgeting method that uses envelopes and cash to physically organize your money in a tangible way. Instead of relying on digital apps or spreadsheets, you’ll take out your money in cash and divide cash between envelopes that represent your spending categories.
Cash Envelope Budget Benefits
This budgeting method is great for anyone who has trouble visualizing digital finances or has trouble with overspending. A cash-only budget can make it very difficult to swipe a card and accidentally overdraft or overspend on a specific spending limit you want to keep.
Cash Envelope Budget Example
To use the cash envelope system take out the money you’ve allotted for spending this month and divide it into physical envelopes with the name of what that money is for written on the envelope. Then, instead of swiping a card to pay for things, you’ll use the cash available in these envelopes like an allowance you can’t accidentally overspend.
- Total Monthly Income: $5,000
- Grocery Envelope: $1,000
- Gas Money Envelope: $200
- Eating Out Envelope: $100
Budget Spreadsheet (Digital Budget)
A budget spreadsheet is a common type of digital budgeting method that uses technology to outline, organize, and plan your monthly expenses. There are also many budget apps that can help you create and stick to a budget without having to put pen to paper.
Digital Budget Benefits
Whether you use a spreadsheet or a budget app that connects to your online bank account, digital budgeting is a great way to keep track of your finances quickly and accurately without having to pull out the old calculator.
Digital Budget Example
Google Sheets or Microsoft Excel both have great spreadsheet budget templates to get you started on making a budget spreadsheet of your very own. Make sure you remember to use the spreadsheet formulas to make your calculations fast, automated, and accurate too.
50 30 20 Budget
The 50 30 20 budget is a budgeting rule that recommends spending percentages for the 3 main budget categories: needs, wants, and savings. This rule suggests spending 50% on needs, 30% on wants, and 20% on savings or debt repayments.
- 50% for needs and essentials
- 30% for wants or variable monthly expenses
- 20% for savings or paying down debts
50 30 20 Budget Benefits
These suggested spending percentages can provide a great recommendation if you’re looking for a benchmark for how much you should be spending on needs, wants, and savings.
50 30 20 Budget Example
Use the 50 30 20 rule by taking your total monthly income and multiplying that number by 0.50 to get 50%, 0.30 to get 30%, and 0.20 to get 20%. Then compare these benchmarks to your actual monthly spending to adjust how much you spend each month so you don’t go over these spending limits.
- Total Monthly Income: $5,000
- Needs (50%): $2,500
- Wants (30%): $1,500
- Savings or Debt Repayment (20%): $1,000
Pay Yourself First Budget (80 20 Budget)
The pay yourself first budget is a budgeting rule that recommends prioritizing paying yourself first whenever you get a paycheck. The concept of paying yourself first means that whenever you get paid, instead of paying others first, like a credit card bill or car payment, you first pay yourself by putting money into a savings account, emergency fund, or retirement account.
This rule is also sometimes referred to as the 80 20 rule because it recommends you prioritize putting 20% of your income into a savings account, emergency fund, or retirement account before you worry about the remaining 80% of your monthly income.
- 80% for everything else
- 20% for savings account, emergency fund, or retirement account
Pay Yourself First Budget Benefits
This rule offers a great recommendation for how to prioritize yourself and your financial future by putting aside 20% of your monthly earnings toward yourself. You can also easily combine this budgeting tip with many other budgeting systems.
Pay Yourself First Budget Example
Use the pay yourself first budget, or the 80 20 rule by taking your total monthly income and multiplying that number by 0.20 to get 20% and subtracting that amount from the total to get the remaining 80%. Then you could set up automatic payments to send that 20% to a personal savings account.
- Total Monthly Income: $5,000
- Savings, Emergency Fund, Retirement (20%): $1,000
- Remaining Budget (80%): $4,000
50 15 5 Budget
The 50 15 5 budget is a budgeting rule that recommends you spend 50% on needs, the remaining 30% on wants, and then set aside 15% toward retirement and 5% toward an emergency fund. It’s similar to the 50 30 20 rule, but divides the 20% portion you are meant to save into 2 potential saving categories like retirement and emergencies.
50 15 5 Budget Benefits
This rule is great for anyone who has multiple financial goals to work toward. Rather than putting 20% of your budget into a savings account, you could divide that portion into 15% and 5% to build multiple savings accounts like a college savings account, retirement fund, emergency fund, sinking fund, etc.
50 15 5 Budget Example
Use the 50 15 5 rule by taking your total monthly income and multiplying that number by 0.50 to get 50%, 0.15 to get 15%, and 0.05 to get 5%.
- Total Monthly Income: $5,000
- Needs (50%): $2,500
- Wants (30%): $1,500
- Retirement Fund (15%): $750
- Emergency Fund (5%): $250
Which Budgeting Method is Right for Me?
Everyone has different needs when it comes to how we manage our personal finances. You might even find it helpful to combine some of the following practices, methods, or rules together for a hybrid budget all your own.
Budget Practices:
- Incremental Budget (Traditional Budgeting)
- Zero-Based Budget (ZBB)
- Activity Based Budget (ABB)
- Value Based Budget (Value Proposition Budget)
- The No-Budget Budget
Budget Methods:
- Cash Envelope System Budget
- Spreadsheet Budget
- Budget App
Budget Rules:
- 50 30 20 Budget
- Pay Yourself First Budget (80 20 Budget)
- 50 15 5 Budget
This content is not intended to substitute credit counseling. Consult with a qualified financial advisor who can assess your unique financial situation and provide appropriate recommendations for personalized financial guidance.
