BudgetingManage Money Articles

Need a Budget? 5 Different Budgeting Methods to Consider

There are many different budgeting methods. If one isn't working for you, choose another that helps you achieve your goals.

A budget is a framework that helps you spend money better.

You will need to start a budget to guide you on how to spend and what to save. The good news? You have options when choosing a budget method that works for you.

1. Incremental Budgeting

Incremental budgeting is a traditional method that uses the budget of the previous period. It means that the budget for the subsequent year is generated from the past year. With this budgeting method, you keep your lifestyle the same and account for changes in costs.

The word incremental is used because there may be a slight increase from the last budgeting period to the new period. Incremental budgets have some advantages, such as not having to start from scratch, being easy to understand since you’ve done it before, and keeping spending on your lifestyle consistent.

2. Activity-Based Budgeting

This budget method determines how much money is needed to do something, aka an activity. For instance, how much money must be budgeted for a down payment to purchase a home? Basically, once you’ve established what you’d like to buy or do, you create a budget for it.

The advantages of using activity-based budgeting are that you’ve identified what you’re spending on and the associated costs. It gives a clear cost breakdown of how much is needed to achieve your activity. Want to travel the world for a year? Then, you can use an activity-based budget to prioritize covering your fixed expenses while you’re not traveling and the cost of your actual travel experience.

3. Cash-Only Budgeting

With a cash-only budget, you use only cash, which means not using credit or debit cards or checks. Basically, you’re choosing to opt out of technology. This is often used with the envelope budget system, where your expenses are identified into separate envelopes. For example, rent would be in one envelope, and so would utilities, food, car payments, and so on.

There are clear advantages to using a cash-only method: You stop making purchases once you run out of cash. This method is suitable for people who succumb to impulse buying.

Once cash is spent for the identified expenses, you’ve “run out of money” and must wait until the next period.

4. Percentage-Based Budgeting

This budgeting method uses percentages to divide your expenses. There are two common percentage-based budgets.

50-30-20 budget allocates your paycheck into three areas:

  • 50% for essentials like mortgage or rent, utilities, groceries, etc.
  • 30% for non-essentials like dining out, clothing, streaming services, other subscriptions, etc.
  • 20% for savings goals like rainy day fun, retirement contributions, credit card and loan payments, etc.

80-20 budget is a simpler plan that directs 20% of your paycheck towards savings goals. It leaves 80% for everything else, from essentials to discretionary.

4. Zero-Based Budgeting

With zero-based budgeting, you must justify each expense for the upcoming period. This method has you start from a “zero-base” after each period. You allocate all of your money to expenses, savings, and debt payments. The goal is that your income minus your expenditures equals zero by the end of the month.

Zero-based budgeting keeps you mindful of how much money flows in and out, helping prevent overspending. However, when you have money left at the end of the month, you can put it towards a goal like debt payoff or savings. You’ll simply need to adjust next month’s budget to end with zero.

Using this budget method is helpful, but some people can find it tedious because it requires much more attention. I often recommend this approach because you tell each dollar where to go, making you more accountable to your income and goals.

What Budgeting Method is Right for You?

It all depends on your goals and what really would work for you.

A budget is only as useful if it is used and adhered to. To be honest, none of these methods are practical for most people to follow. But you must understand there are different styles. So, you can create your own method that you’ll follow.

How to Find the Best Budgeting Apps

If you want the help of technology, then you’re in luck. There are many budget apps to choose from, and I certainly have my faves.

You can start by asking your financial institution if they offer a budgeting feature through online banking. You can certainly (and I would recommend) pay for a budget app that categorizes your spending, tracks your progress towards goals, and alerts you of spending overages.

Why pay for a budgeting app that you can get for free? There are fewer reliable free budgeting apps available. Many of them have shuttered. I believe paying a few dollars to keep you on track is a sound financial decision for a better future.

To find apps, visit the phroogal marketplace for the best budgeting apps.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *