Learn the 5 different types of budgeting methods so you can choose the most effective style for you. Weigh the pros and cons of each and make the most out of your money.
If you clicked on this post and had no idea there were different budgeting methods, don’t worry that’s ok.
I didn’t either.
But after endless hours of researching how to build a budget, I realized not everyone budgets the same way.
So what do I mean when I say budgeting techniques or budgeting methods?
Your budgeting style, method, or technique is just the way in which you accomplish or carry out the task of budgeting.
In the end, the purpose of our budget is to allocate a job for our money so we can reach our financial goals.
As long as our budget is fulfilling its purpose it doesn’t really matter what method we use.
So what are those different styles and how can you pick the best one for you?
Every person will have an individualized budget but there a few budgeting methods that ring popular by a lot of people.
The most common budgeting methods are:
Zero based budgeting
Budgeting by paycheck
Month ahead budgeting
Hill and Vally
50/30/20 or percentage budgeting
Even without intentionally picking any of these styles you may have adopted one already.
The easy way to choose which method is best for you is by looking at a few factors.
Decipher how your brain prefers to pay bills, allocate money, and visualize income.
For example, if you are someone who tends to spend money easily you may prefer a zero-based budget.
If you are someone who works off of commissions or has an irregular income you make like budgeting a month ahead of time.
Bi-weekly paid people often times inherently budget by paycheck.
And you may be someone who follows a zero-based budget who is a month ahead budgeter. And thas ok too.
So now after reading those options you may already be thinking about what type of method you would already prefer.
So let’s talk about these budgeting techniques in a little more detail.
Zero-based budgeting:
This is the method that is recommended by Dave Ramsey.
If you read his book you probably have a full understanding of this but if you haven’t…
All it means is that the amount of money you bring in and the amount you spend is equal.
If you make $4,500.00 every month. You spend or allocate $4,500.00 every month.
In a zero-based budget your income is given a purpose that leaves you with with $0.
If you have a hard time with always spending your money this might be a good option.
If you have $0 there is no money left to unintentionally spend.
The issue with a budgeting technique like this is unless you have some type of sinking fund system in place or a checking account cushion if you forget to budget for something it could create an issue.
By paycheck budgeting:
This is a very popular way to budget.
It is especially good for those who get paid every two weeks, or twice per month.
What this style means is that you pay select bills with one paycheck.
For example:
If you get paid on the 1st and the 15th you pay each bill due in that pay period.
For example:
Paycheck 1 received on the 1st: $2,250.00
| Category | Due Date | Amount |
| Rent | 5th | $800 |
| Cell phone | 15th | $45 |
| Gas | 1st-15th | $300 |
| Groceries | 1-15th | $350 |
| Day Care | 10th | $400 |
| Spending money | 1-15th | $100 |
| Savings | 15th | $255 |
Paycheck 2 received on the 15th : $2,250.00
| Category | Due Date | Amount |
| Electric | 1st | $150 |
| Netflix | 1st | $15 |
| Gas | 15th-30th | $300 |
| Groceries | 15th-30th | $350 |
| Sinking funds | 15th-30th | $300 |
| Spending money | 15th-30th | $100 |
| Savings | 15th-30th | $1035 |
Make sense?
This is also an example of how a zero-based budget works.
$4,500.00 came in and $4,500.00 was budgeted for.
Budgeting a month ahead
The technique of budgeting a month ahead is great if you are someone with a variable income.
This method uses last months income to pay this months bills.
Getting a month ahead is the hardest part but once you do this system can totally work.
No guessing if you have enough to pay your bills.
In order to make this successful you will have to have an entire month of expenses saved.
For example:
If your NECESSARY to live expenses equals $3,010.00 that means you need to have this in your account before you can start this technique.
If you are not sure what your necessary expenses are you need to go back and READ THIS POST.
So let’s say your total month earnings for December was $4,876.00
You would use the $4,876 to pay for January’s bills.
And because your bills only cost $3,010.00 you have $1,866.00 to allocate towards spending, saving, investing, or whatever your financial goal is.
You continue this pattern every month and as long as you make at least $3,010.00 this budget method will work for you!
Hill and Valley budget
What if some months you make $7,000 and others you only make $500.
That is when you want to use the hill and Valley budget.
Hill and Valley budgeting is for those who need to prepare for months where they might make almost nothing.
All this means is that you need to save a large chunk of your income so you can pay your bills when your income drops.
Knowing your yearly/monthly expenses will help if you fall in this category.
Lets say you need the same $3,010.00 to pay for all of your necessary expenses.
Knowing that will give you the ability to save at least that amount for when your income is less than that $3,010.00.
This is why budgeting is so important.
Know your income, and know your expenses.
Knowing you need at least $36,120.00 per year to pay your bills is helpful.
This can be a dangerous way to make money but if organized correctly it can absolutely work.
50/30/20 budgeting
Or the lazy man’s budget.
This budget is based on percentages so that you don’t need to track or spend as much time looking at your finances.
This method says you should spend 50% of your income on needs 30% on wants and 20% on savings or debt.
Using your income you can divide out and find the percentages for each category.
For example, if you still make the same $4,500 income $2,250 would go to needs $1,350 would go towards wants and $900 would go to savings or debt.
By using the same $4,500 example you can already tell why I don’t prefer people to use this method.
If you are someone who does not like to track your spending or watch your accounts every day/week here is your solution…
YOU AUTOMATE YOUR BUDGET.
If you are lazy, you pay for a budgeting app or software so it does the leg work for you 🙂
Don’t want to pay for it, then do the leg work you need to reach your goals.
Which method do I use?
I get paid weekly so I choose to budget per month.
I do make an irregular income but I base my budget on the least amount of money I could potentially make.
Hi personal trainer!
My (day job when not in quarantine) income fluctuates regularly but I can easliy estimate the least amount I will take home.
I also don’t follow a zero-based budget and leave myself with nothing.
I leave some money in our checking account to offset any forgotten expenses or small emergencies.
Yes I still forget things.
The reason this is so vital for me is that we don’t carry many sinking funds.
So if we need a small amount of money for whatever reason it is there.
This style of budgeting has worked for my husband and I for the past 4 years.
If you are already an avid budgeter what method do you use?
Interested in reading more?
The best way to write a budget for beginners
How to set effective financial goals
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