Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
4 Classic Budgeting Strategies That Still Work Today
ADVERTISEMENT
One of the first pieces of personal finance advice most people learn is that they need a budget. The idea behind this advice is straightforward: You need to know where your money is going, and a budget can help you do that. However, there are many different methods of budgeting, some of which work well for some people and don’t work at all for others.
In recent years, there has been an explosion of digital tools to help you organize a budget. Programs such as Mint and You Need a Budget pledge to help you get your money organized with just a few taps on your smartphone. But while they might provide interesting views of your financial state, they don’t always help you get a grip on your spending and understand where all of your money goes.
There are many classic budgeting strategies that offer different approaches beyond what those smartphone budgeting apps do. Here are four popular classic budgeting strategies that still work today.
- The zero-balance or traditional budget.
- The envelope budget.
- The pay-yourself-first budget.
- The 50/30/20 or rule-of-thumb budget.
ADVERTISEMENT
Read on for more information about each classic budgeting strategy.
The Zero-Balance or Traditional Budget
This strategy is what many people envision when they think of a budget. It’s simply a list of expense categories, such as “food,” “utilities” and “rent,” alongside a target amount that you’ll be spending in that category. Ideally, the total of all the expense categories adds up to less than what you’re earning in a given month, giving you some breathing room or ability to save for the future.
This budgeting approach is thorough and gives you a grasp on where every dollar is going. If you set up such a budget properly, you’ll have a great understanding of your usual money habits and can set realistic targets for cutting back in the more flexible areas of your life. However, it does take a lot of work and attention to get value out of this method, as you get out of it what you put into it. Many budgeting apps try to offer shortcuts to this method that look good, but they often don’t create a perfect picture of your spending. Investing the time to look at every dollar spent and getting a traditional budget right is worth the time if you’re a detail-oriented person.
The Envelope Budget
This is a great simple budgeting strategy for those who are trying to make ends meet. All you do with the envelope strategy is simply cash each paycheck, then sort that cash into a series of paper envelopes for various purposes. You might have an envelope marked “rent,” another envelope marked “utilities” and a third marked “food.” Then, whenever you need to spend money for a particular purpose, you take money from the appropriate envelope. If there’s not much in that envelope, you have to figure out how to make it work.
This strategy makes budgeting simple and physical because you’re directly handling the money and budgeting it by manually putting it in different envelopes. It also makes it easy to understand how much money you have to stretch across all of your necessary expenses, so you can immediately sense whether you can afford to spend money on a treat. It also can help you meet your financial goals, as you can have an envelope for a particular goal or simply leave that money in the bank.
The Pay-Yourself-First Budget
This is a strategy in which the first thing you do after collecting a paycheck is to put some of that money aside for long-term goals, then figure out how to live on what’s left.
This strategy is often made automatic when people put money into their 401(k) or other workplace retirement plans. They’re paying themselves first by having money taken out of their paycheck before they ever receive it, forcing them to live on (and spend) only the remainder of their check. Paying yourself first is a powerful strategy for people who struggle to save for big goals.
The 50/30/20 or Rule-of-Thumb Budget
This budget offers some guidance on what to do with your money right off the bat. First popularized in the book “All Your Worth” by Senator Elizabeth Warren and Ameila Warren Tyagi, it suggests that you spend 50% of your income on basic living expenses, 30% of your money on wants (fun things), and 20% of your money on saving for the future.
If you’re able to follow this strategy, you’ll quickly accumulate money in the bank for future goals, but it can be a challenge for many people who are already drowning in bills to cut their basic living expenses down to 50% of their take-home pay. Following the 50/30/20 budget is great for someone who is first entering the workforce, earning a salary and looking for a model for what to do with that big new paycheck. Plus, it’s simple: Keep your required bills and basic living expenses below 50% of your paycheck, save 20% of your income for the future and enjoy the other 30%.
These strategies have all been around for years and still work because they address the core issue of budgeting: balancing what you want to do with what you should do. These classic strategies offer different advantages that work well for different people: the hands-on person who is comfortable with a traditional budget, the tactile person who uses envelopes, the “pay yourself first” person who struggles saving for goals and the “50/30/20” person who’s trying to find a good model to follow.
