Which Budget Is Best?

Did you know that the majority of Americans don’t keep a budget? And nearly the same amount don’t actually know how much money they spent last month or where it went.

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Until recently, I could count myself amongst those numbers. It wasn’t until I realized that I was almost completely unaware of what was in my retirement accounts and whether or not I was on track with my financial planning that I began to take more interest in my own money.

This ignorance inspired me to start tracking my money and understand exactly where it went each month. The more I learned, the more I realized just exactly how many different types of budgeting existed!

If you’ve ever found yourself wondering exactly how you can make a budget and what works for you, keep reading. We’ll investigate some of the most popular types of budgets for you and your family to choose from below.

50/30/20 Budget

At its most basic, the 50/30/20 budget can be broken down into only 3 categories: 50% of your net income goes to needs, 30% goes to wants, and 20% goes toward savings and debt repayment.

This approach is great for anyone who doesn’t want to get into the minutia and details of each transaction and spend hours on an Excel spreadsheet each month. It also has a lot of flexibility, depending on your personal finance goals or amount of debt.

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However, if you have big savings goals or are trying to quickly pay down a large amount of debt, you may need to take a more aggressive approach in order to reach your goals.

Zero-Based Budget

If you’re someone who wants to make sure all your income gets an assignment and you’re not left wondering where your paycheck went, then be sure to check out the zero-based budget approach.

At the end of each month, your income minus expenses should equal zero. Hence, the “zero” in the name.

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But this doesn’t mean you spend everything you make. Instead, pay yourself first by figuring out what you can reasonably save, then make your budget off the rest of what you have leftover.

For example, if you make $2000 a month, your budget could look something like this:

ExpenseAmountRemaining
Savings$250$1750
Rent$750$1000
Utilities$100$900
Groceries$400$500
Gas/car insurance$200$300
Student Loan payment$150$150
Gym Membership$50$100
Entertainment/Fun Money$100$0

In the above example, you’ll notice that everything has been allocated, even the savings amount. This works great if you have the same income each month with little variation.

Envelope Budget

Made famous by Dave Ramsey, this system works great if you have trouble controlling your spending and find yourself with a credit card bill you can’t pay in full each month. When credit cards are keeping you from making good financial decisions for yourself and your future, it may be time to try something more drastic.

That’s where the envelope system comes in. Instead of putting all your purchases on a credit card, you pull your monthly expenses out in cash at the beginning of the month. Then, you place your predetermined amounts into separate envelopes for you different categories. For example, you may have $500 for groceries, $100 for gas, etc.

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The theory behind this method is that seeing the cash leaving your hand makes you more aware of your spending. And when the envelope is empty, you can’t spend any more.

The obvious drawback to this method is the large amounts of cash you could potentially carry with you at any given time. There are also certain expenses that you pay online (such as a mortgage, utilities, or insurance) that don’t work with the all-cash envelop approach.

Line Item Budget

For most of us, when we think of a budget we’re most likely thinking of a line item budget. If you love details, spreadsheets, and getting into the nitty gritty of every purchase and transaction, this may be for you!

A line item budget requires you to log every single expense, purchase, and transaction and categorize it. This works best through an Excel spreadsheet, Google Sheet, or even an app (and there are plenty out there).

The benefits to this method is that it can really help you get a clear and detailed picture of your spending, when it’s happening, and what are some of your biggest budget busters. If you want to understand more behind the why of your spending, getting into the weeds may provide you a clear picture and help you moving forward.

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However, many new budgeters get overwhelmed by this level of detail and quit easily because of the level of detail and the time commitment to maintain accuracy. If you’re not willing to sit down and update your line item budget at least once a week, this type of budget probably won’t work for you.

So Which Budget Is Best?

Here’s the thing about personal finance: it’s personal. Keeping track of a budget is often the first and best step towards understanding your spending, reaching financial goals, and getting a handle on your cash flow.

So the best type of budget is whatever YOU can maintain and makes sense for you, your family, and your goals. Feel free to experience with some or all of these suggestions until you find the best fit for your specific situation.

What are some of your budgeting strategies? Are there any methods you use that weren’t mentioned above? Leave a comment and let me know!

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