four popular budgeting methods

Everyone, regardless of income level, needs a budget. Businesses survive and thrive with budgets, and it’s no different for personal finance. While business budgets might be complicated, your finances don’t have to be. Budgeting can be smooth sailing and even fun when you choose the proper budget for your goals and personal style.

Managing personal finances effectively is essential for achieving financial stability and meeting long-term goals. Various budgeting methods offer structured ways to handle money, each tailored to different spending habits and financial objectives.

This article will explore four popular budgeting methods: the Envelope System, Zero-Based Budgeting, the Pay Yourself First approach, and Proportional Budgeting (50/30/20 rule). Each method provides unique benefits and can be implemented to suit individual needs, whether you’re looking to curb overspending, enhance savings, or align your spending with your financial goals.

1. Zero-based Budgeting

Zero-based budgets account for every dollar. Your income minus your expenses should equal zero. However, this doesn’t mean you want to spend every dollar. This strategy also accounts for money you save or invest.

Zero-based budgeting is excellent for those who understand their spending but want to know how much money is funding each expense. This budget also helps you see where to cut back and save more.

How the Zero-Based Budgeting System Works

  1. Justification of Expenses: Unlike traditional budgeting, which often modifies the previous year’s budget to make adjustments, zero-based budgeting starts from scratch — every dollar spent needs to be justified as if the budgets were being created for the first time.
  2. Identification of Needs: Departments aren’t given money just because they spent it last year. Instead, they must justify each of their expenses as necessary for operation.
  3. Prioritization of Spending: Funds are allocated based on how essential the expenses are to the organization’s goals. This process forces companies to prioritize expenses, which can lead to more strategic decision-making.
  4. Cost-Benefit Analysis: Each department evaluates the cost-effectiveness of different spending areas and proposes its budget based on detailed needs and benefits analyses.
  5. Approval and Revision: Top management reviews the proposed budgets and adjusts them as needed to align with the organization’s financial capabilities and strategic objectives.

2. Envelope System

Envelope budgeting is choosing how much money you spend in specific categories and putting it aside in real or virtual envelopes. Each envelope contains the entire amount of money available to spend on that expense for the month.

The goal is to keep your spending in check by only spending the money in each envelope. When the envelope is empty, you shouldn’t spend any more money on that category until next month, when you refill the envelope.

How the Envelope Budgeting System Works

  1. Budget Categories: You start by defining your monthly budget categories, such as groceries, entertainment, utilities, transportation, etc.
  2. Envelope Preparation: You prepare an envelope for each category and label it accordingly.
  3. Allocating Money: After you receive your income, you allocate a predetermined amount of cash to each envelope based on your budget plan. This amount is what you can spend for that category for the month.
  4. Spending: Use the cash from the respective envelope when you need money. For example, buying groceries takes money from the “groceries” envelope.
  5. Monitoring and Adjusting: Once an envelope is empty, you can’t spend any more in that category until the next budget cycle begins. If there’s money left over, it can be saved or reallocated to other categories.
rocket money

Using an online budgeting app is much easier than physically putting cash into many different envelopes (safer, too). Rocket Money is the budgeting app I use to track my expenses, set reminders to pay certain bills, and build my budget. You can also use the envelope method with Rocket if you subscribe to their premium features. The cost is $4 a month (well worth it for me)

3. Pay Yourself First

Paying yourself first is precisely what it sounds like. You fund your savings and investing goals first and then fill in the rest of your budget.

If you have a trip coming up in 10 months that will cost $1,000, you start each month by allocating $100 into your travel account and allocate funds to your other savings and investing goals.

How the Pay Yourself First Budgeting System Works

  1. Identify Savings Goals: Identify your financial goals, such as saving for retirement, accumulating an emergency fund, or setting aside money for a large purchase.
  2. Determine Savings Amount: Decide on a specific amount or percentage of your income that you want to save. This should be based on your financial goals and what you can realistically afford while meeting your basic needs.
  3. Automate Savings: Set up automatic transfers from your checking account to your savings account, investment account, or retirement fund as soon as you receive your paycheck. This ensures that the designated amount is saved before you can spend it.
  4. Budget Remaining Funds: After your savings have been automatically deducted, use the remaining money to cover all other budget categories like housing, utilities, groceries, and entertainment.

4. 50/30/20 Budget

Proportional budgets look less at specific categories and more about where your money should go. The two most common ones are the 50/30/20 rule and the 80/20 rule.

How the 50/30/20 Budgeting System Works

  1. Divide Income into Categories:
    • 50% Needs: This portion of your income covers essential expenses you cannot avoid, such as rent or mortgage payments, utilities, groceries, transportation, health insurance, and other debts.
    • 30% Wants: This part includes all non-essential expenses you could live without if necessary. These might include dining out, entertainment, vacations, luxury items, and other discretionary spending.
    • 20% Savings: This final portion is allocated to your financial future, including savings, investments, retirement funds, and debt repayments beyond the minimum payments included in the needs category.
  2. Apply and Adjust: After categorizing your income, apply these proportions to manage your monthly finances. You can adjust the specific percentages based on your financial goals and circumstances, such as focusing on paying down debt faster or saving for a large goal.

The 80/20 budget is simple–you live on 80% of your income and save the other 20%. These are great for people wanting a less restrictive budget.

Why Should You Budget?

Budgeting helps you achieve short- and long-term financial goals. If you plan a trip for next year and use credit cards to pay for it, budgeting can help you avoid that. Every month, sock away a little for that trip, and before you know it, you’ll be able to afford it without going into debt.

Budgeting is also a critical tool for financial management, serving as a roadmap that guides individuals and businesses toward fiscal stability and success. By meticulously outlining where money should be spent and how much should be saved, budgeting helps avoid the pitfall of living paycheck to paycheck. It ensures that every dollar is allocated purposefully, helping to curb unnecessary spending and prioritize essential expenses.

This discipline is crucial for anyone aiming to achieve financial goals, whether maintaining daily operational costs, saving for a dream vacation or preparing for a comfortable retirement. Moreover, a well-planned budget can act as a financial buffer, setting aside funds for unexpected expenses and reducing the likelihood of needing to incur debt.

Tips for Successful Budgeting

Sticking to a budget can be difficult because we don’t like telling ourselves “no,” and budgeting can feel like that at first. 

When you’re struggling and want to spend money on something you don’t need, you can remind yourself, “I’m saying no now to say yes later.”

Here are some quick tips for creating and sticking to a successful, stress-free budget:

  • Have a goal so that budgeting seems like a tool and not a constraint
  • Be realistic and set goals that are feasible on your income
  • Try different methods and find the one (or two) that works best for you
  • Don’t be afraid to change your budget as your life and priorities change

Final Thought on Different Budgeting Methods

Budgeting should be a tool and not a limitation. It may be helpful to think of it as a spending plan. You’ll always have a money goal to work towards buying a home, replacing a vehicle, paying off debt, saving for a vacation, replacing broken appliances or furniture, and even paying a medical bill. The list is endless. So, the point is that you don’t want to budget and stop once you reach one goal. You want to keep going and work towards another goal on your list.

Choosing the right budgeting app and method can transform your financial life, offering a structured path to achieving your economic goals. Whether it’s the hands-on control of the Envelope System, the meticulous scrutiny of Zero-Based Budgeting, the disciplined saving of the Pay Yourself First approach, or the balanced allocation of the Proportional Budgeting method, each strategy offers unique advantages tailored to different financial needs and lifestyles.

By understanding and applying these methods, you can gain greater control over your finances, reduce financial stress, and move confidently towards a more secure and prosperous future. Remember, the best budgeting approach is one that you can stick with consistently—so choose wisely, adjust as necessary, and take that first step toward mastering your financial destiny.


  • Michael Pruser

    Michael is a graduate of the University of Miami with a degree in Mathematics. He's worked in the personal finance realm for more than 15 years, writing for Lending Tree, Business Insider, and many others. If you can't find him speaking at a financial conference, he's likely creating data-driven algorithms for fun.