When you’re looking to get started on the path to financial success, your first stop should be your budget. By effectively managing your finances and allocating your resources, you can prepare for future expenses, save for your goals, and avoid debt. With an overwhelming selection of budgeting apps and methods available, it can be challenging to determine which one is best suited for your unique financial situation.

In this article, we will explore six of the most popular types of budgeting techniques, including their pros and cons, and the reasons each technique may be or not be for you. By understanding these methods, you can make an informed decision about which approach will help you save money, improve your financial planning, and ultimately reach your financial goals.

Why are budgets important?

Budgeting your money is one of the most important financial habits you can develop. It can help you keep track of your income and expenses, and allow you to make informed decisions about how to spend your money.

Without a budget, it’s easy to overspend in certain areas, distance yourself from your financial goals, and even end up in debt. You may not even realize how much you’re spending on certain things, like eating out or online shopping, until you sit down and look at your expenses. A budget can give you a clear picture of your financial situation, which can be empowering and motivating.

Budgeting can also help you achieve your financial goals. Whether you want to save for a down payment on a house, pay off student loans, or retire comfortably, a budget can help you prioritize your spending and make progress toward your goals.

When it comes to finding a new budget, there are a few methods you can use to get started. Feel free to experiment with the following ideas and find one that works for you.

1. The 50/30/20 budget method

The 50/30/20 budget method is a straightforward approach to budgeting that focuses on allocating your after-tax income into three main categories: needs, wants, and savings or debt repayment. Created by Harvard bankruptcy expert and United States Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, this method emphasizes simplicity and ease of use.

The 50/30/20 budget method works by allocating 50% of your total after-tax take-home pay to needs, 30% to wants, and 20% to savings or debt repayment.

Needs include essential monthly expenses such as housing, utilities, groceries, debt payments, car payments, student loans, and anything else that must be paid each month. Wants will encompass discretionary spending on activities like eating out, entertainment, and vacations. The remaining 20% should be allocated to savings for emergencies, retirement, or other long-term goals, as well as paying off debt.

This budgeting method is great for anyone who already abides by a similar budget or whose spending patterns closely reflect these ratios. If your needs tend to take up more than 50% of your income, you may want to look at the zero-based budget or the envelope budgeting methods.

How do you get started?

  1. Start by calculating your after-tax income, which is the amount you take home after taxes, deductions, and contributions.
  2. Next, list your monthly expenditures and categorize them into needs, wants, and savings or debt repayment.
  3. Finally, allocate your income according to the 50/30/20 percentages, making adjustments as necessary to ensure your spending aligns with these guidelines.

2. The zero-based budgeting method

Zero-based budgeting is a comprehensive and detailed approach to managing your finances. This budget plan involves allocating every dollar of your income to a specific expense, savings goal, or debt repayment, ensuring that no money is left unassigned at the end of the month.

Zero-based budgeting can help promote intentional spending and help individuals gain a clearer understanding of their financial habits. This is a great method for those who are on tight budgets or those who want to account for every penny spent.

In a zero-based budgeting strategy, every dollar of your income is assigned a purpose, whether it's for expenses, savings, or debt repayment. By meticulously tracking your spending and ensuring that your income and expenses equal zero, you can gain greater control over your finances and reduce unnecessary spending.

How do you get started?

  1. Start by listing your income sources and totaling your monthly earnings.
  2. List all of your expenses, including fixed costs like rent and variable expenses like groceries.
  3. Allocate every dollar of your income to these expenses, savings goals, or debt repayment until your income minus your expenses equals zero.
  4. Make adjustments as needed throughout the month to ensure your budget remains balanced.

3. The envelope budgeting method

The envelope budgeting system is a cash-based budgeting method that encourages users to allocate their income to various spending categories using physical envelopes. By spending only the cash allotted to each envelope, individuals can gain greater control over their finances and reduce the likelihood of overspending.

In the envelope system, cash is distributed among envelopes representing different spending categories, such as groceries, entertainment, and clothing. Users are limited to the total spending money in each envelope, promoting accountability and discipline in their financial decisions. This is a great method for anyone who wants to set clear boundaries about how they spend their money.

How do you get started?

  1. Start by determining your monthly income and expenses.
  2. Create envelopes for each spending category and allocate your income accordingly.
  3. Throughout the month, spend only the cash in each envelope for its designated category, and refrain from borrowing from other envelopes.

4. The pay-yourself-first budget method

The pay-yourself-first-budget method emphasizes prioritizing savings and investments before other expenses. By setting aside a portion of your income for long-term goals such as retirement or an emergency fund, you can create a solid financial foundation before allocating money for other needs and wants.

This approach can encourage financial discipline and ensure your most important financial objectives are met. You might be a good fit for this budget if you’re looking to build up your savings or if you have large debts to focus on paying off.

How do you get started?

  1. Start by determining your savings goals, such as retirement, emergency fund, or education expenses.
  2. Calculate a percentage or fixed amount of your income to allocate toward these goals. Automatically transfer the predetermined amount to savings or investment accounts as soon as you receive your income.
  3. Budget and allocate the remaining income for necessities, discretionary spending, and debt repayment.

5. The values-based budget method

Also called value proposition budgeting, the values-based flexible budget method allocates funds according to personal values and priorities, allowing individuals to align their spending with their most important goals. This method promotes conscious spending, ensuring your money is spent on what truly matters to you and not wasted on expenses that don’t align with your values.

This method often works best for those whose values may not align with a typical budget. For instance, if you highly value entertainment and are willing to spend a little more on your monthly subscriptions, then this method is right up your alley.

How do you get started?

  1. Start by identifying your core values and financial priorities.
  2. Determine your monthly income and allocate a portion of your income to each value or priority based on its importance.
  3. Track your spending and adjust your budget as needed to stay aligned with your values.

6. The reverse budgeting method

The reverse budgeting method is a simplified approach to budgeting that involves setting aside a fixed percentage of your income for savings, then spending the rest as desired. Instead of tracking individual expenses, this method can help you reach a predetermined savings goal while providing flexibility in how you spend your remaining income.

If other budgeting methods seem too restrictive or burdensome, the reverse budgeting method may be easier to stick with and more effective for you.

How do you get started?

  1. Start by determining your savings goals, and a fixed percentage of your income or a fixed dollar amount, to allocate toward them.
  2. Automatically transfer the predetermined amount to a savings or investment account as soon as you receive your income.
  3. Spend the remaining income as desired without tracking individual expenses.

How much money should you save?

The amount of money you should aim to save depends on your personal financial goals and circumstances. As a general rule of thumb, financial experts recommend saving at least 20% of your income each month.

However, if you have specific financial goals, such as saving for a down payment on a house or a child's education, you may need to save more. It's important to set realistic goals and create a plan to achieve them, taking into account factors like your income, expenses, and timeline.

Remember that even small savings can add up over time and help you achieve your goals. The key is to be consistent and intentional with your savings and to make adjustments as needed based on your changing circumstances.

It’s generally a good idea to keep your money in a savings account or high-yield savings account so that it can earn interest while it’s in the bank account. High-yield savings accounts (HYSAs) are different from regular savings accounts because they often come with much higher interest rates. This way, you can make more on your money.

The main difference between a HYSA and a regular checking account is that checking accounts are easier to access. You’ll typically get a debit card that connects directly with the account, and you can quickly convert your funds to cash. On the other hand, HYSAs often don’t come with debit cards. However, checking accounts don’t typically earn any interest.

Pick a method and start saving today

In this article, we've explored various budgeting methods that can all help you save money. Each method offers unique advantages and is tailored to different financial preferences and goals. It may be best to try each one for a month or two to determine which one is the ideal fit for you.

As you embark on your personal finance journey, consider Vital Card an additional tool to complement your chosen budgeting method. With cashback rewards and credit health tracking features, Vital Card can help you as you work toward your financial goals.

It’s important to stay committed to your financial journey and remember that budgeting is a continuous process. With the right budgeting method in place, dedication, and a little bit of help from Vital Card and other financial tools, you can build a stable financial future.


How Does Zero-Based Budgeting Work? | Experian

How to Get Started With Envelope Budgeting | Experian

How Much Money Should I Be Saving? | Experian

The 50/30/20 Budget Rule Explained With Examples | Investopedia

Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.