Which personal budgeting technique is right for you?

M1 Team
M1 Team January 19, 2018
Illustration of a man and woman putting money into savings and checkings account

A well-thought-out personal budget should never feel limiting. A budget that fits your lifestyle and money habits should empower you to reach your financial goals, motivate you to make the most of your money, and give you peace of mind knowing that you’ve covered all your bases. After all, it’s tough to work toward any financial goal without charting where your money should be going in the first place.

So it’s a bit disconcerting that 59 percent of Americans don’t currently use a budget[1] — a stat that also doesn’t make it particularly surprising that a similar portion of the population (about 66 percent[2]) would struggle to scrape together $1,000 in an emergency.

To stay on track with your monetary goals and make sure your bases are covered, you’ll need to choose a personal budgeting strategy that fits your unique needs and financial personality. Using the wrong technique for you certainly won’t motivate you to stick with it through the end of 2018 and beyond. Here’s the breakdown of some of the most popular budgeting strategies.

The Balanced Money Formula (aka the 50/20/30 Rule)

The Balanced Money Formula operates on a simple principle: dividing your expenses into three simple categories, with 50 percent dedicated to needs, 20 percent dedicated to financial goals, and 30 percent dedicated to wants. Its popularity stems from its simplicity and flexibility — the percentages outlined in the rule can be altered to fit the unique financial situation of an individual if need be.

For example, if you’re living in New York City on a slim budget, sky high rent may force you to bump 50 percent to 60 percent and cut back on your “wants” for the time being. Just be sure to keep wants at or below 30 percent of your budget to ensure you continue working toward your long-term financial goals.

While the 50/20/30 Rule has its perks, the pitfall for many investors is the inability to properly differentiate between wants and needs. So as you begin to categorize your expenses, consider what truly constitutes a necessity. For example, do really need internet in your home? If it primarily serves as a means by which to watch Netflix and surf the web, the answer is likely no.

The bottom line? The Balanced Money Formula can be an extremely efficient budgeting technique as long as you categorize spending with a particularly discerning eye.

The Envelope System (aka Cash-Only Budgeting)

Envelope Budgeting is a fantastic option for visual people or those seriously looking to reign in gratuitous spending. This type of budgeting hinges on the idea that individuals are more sensitive to their spending habits when they pay in cash compared to a card, making personal finance significantly more tangible. Here’s how it works:

  1. Determine your after-tax monthly income.
  2. List out categories for your expenses (rent, groceries, gas, etc.). Don’t forget to factor in savings and investments to ensure you always pay yourself first.
  3. Evaluate your budget to establish how much you’ll spend on each category per month. Try to look back at bank statements to get a full snapshot of your recent expenditures rather than simply estimating.
  4. Grab some envelopes, and write the name of each category on the front. You’ll have a “rent” envelope, a “groceries” envelope, a “gas” envelope, and so on. You can also use an accordion folder with a tab for each category if you’d rather have all your cash in one place.
  5. Each month, visit the ATM and withdraw the necessary funds to fill your envelopes to align with your predetermined budget.
  6. Use the cash from each envelope (and only that cash!) for its designated purpose. If you have $500 for a month’s worth of groceries in one envelope, don’t use a card or cash from any other envelope for that purpose. from Once you run out of money in the envelope, you’re done for the month, so you’ll need to be hyperaware of your spending from the get-go.
  7. Make a plan for remaining funds if you have them. You can’t go wrong with socking away the extra money for your financial goals like retirement savings or investing.

Of course, the Envelope System comes with drawbacks. Going to the ATM on a regular basis can be tedious, and you’ll need to watch out for withdrawal fees at certain machines. You also don’t want to be carting around wads of cash, so considering carrying around only the amount you’ll need rather than a fully packed envelope. And finally, consider the impact of a Cash-Only Budget on your credit, since credit agencies want to see some sort of activity on your cards.

To avoid dings to your score, you may want to factor in a few small credit purchases here and there to keep utilization around 10 percent. Just don’t forget to factor those purchases into your overall budget.

The Zero-Based Budget (aka Zero-Sum)

Have you ever heard the rule “Give every dollar a job?” This principle is the driving force behind the Zero-Sum Budget. In other words, the amount of money entering your account each month should be exactly equal to the money leaving your account each month.

Start by creating two columns on a sheet of paper, in a Word doc, or with an Excel spreadsheet. You’ll list all your monthly income (including extras like childcare payments, income from your side hustle, etc.) in the left column and all of your expenses in the right. Your expenses should include savings, investments, and debt payments in addition to basic needs and wants, because (have we said this before?) you’ll want to be sure to pay yourself first. When you’re done, your left- and right-hand columns should cancel each other out, ensuring every dollar of your income serves a specific purpose each month.

Zero-Based Budgeting’s big benefit is that it grants ultimate control over your money. That’s also the reason it can be a bit of a pain if you’re not prepared to micromanage your finances. The Zero-Sum Budget requires acute attention to detail and constant expenditure tracking, so just be sure you’re committed to the demands on your time before diving in.

Common Threads

No matter which approach you take to budgeting, you’ll notice a few prevailing rules of thumb, especially always paying yourself first. So no matter which strategy you choose, consider locking down that aspect with weekly or monthly recurring investments. M1 makes scheduling automatic deposits easy, so socking away money for your future is always a priority. Simply choose the amount, frequency, and day of the week to jive with your budget, and watch your wealth grow over time.

The reality is that you can also combine principles from one or more of these techniques to best fit your needs. For example, if you like how the 50/20/30 Rule breaks down your expenses, but you like the tangibility of the Envelope System, you could always try keeping one envelope of cash for each category from the Balanced Money Formula.

The key is understanding your goals and financial personality to devise the best solution for you. And at the end of the day, if you try one technique and it doesn’t seem to fit with your lifestyle, simple reevaluate and try another.

  1. CNN Money
  2. US News