6 Best Budgeting Strategies

There are lots of different budgeting strategies. The most popular ones include the 50/30/20 rule, zero-based budgeting, envelope budgeting and the pay-yourself-first method since these strategies provide easy-to-implement techniques to categorize and track expenses as well as enforce spending limits.

Popular Budgeting Strategies

Which budgeting method is the best to use? Well, a lot depends on your specific goals and personal preferences. After all, budgeting is not a one-approach-fits-all task, and a budgeting strategy that works for someone else may not work for you. To help you choose, we’ll explain the most popular budgeting strategies below.

Try WalletHub's free budgeting tools!

50/30/20 Budget Rule

With the 50/30/20 rule, you are creating a budget that splits your paycheck into three separate categories: needs (50% of the money), wants (30%), and savings (20%).

Needs are bills that must be paid or expenses that are necessary for your survival, such as your mortgage and groceries. Wants are things that you enjoy spending money on but are not essential for living.

The remaining amount after taking care of needs and wants goes to savings. This can include building an emergency fund to cover unexpected expenses or money you’re saving for big purchases like a new car or a down payment on a home.

50/30/20 Budget Rule Example

If your job pays you $5,000 a month after taxes, here’s how your budget would line up:

• 50% for needs: $2,500
• 30% for wants: $1,500
• 20% for savings: $1,000

Who Should Use the 50/30/20 Rule?

The 50/30/20 rule is good for people who want to save while still being able to pay for their necessary expenses. Those who use this strategy tend to have money left over after their monthly bills and don’t have a lot of debt, allowing them to contribute more funds to savings.

However, since this method focuses on allocating 50% of your income every month to your necessary expenses, this rule may not be realistic for people in areas with a high cost of living. The fixed percentages may not work so well for people with irregular income, also.

Learn more about the 50/30/20 budget rule.

70/20/10 Budget Rule

The 70/20/10 budget rule is a budgeting strategy that allocates 70% of your after-tax income to your living expenses, 20% to savings and investments, and the remaining 10% to debt and donations. Since you can allocate 70% of your income to living expenses, this rule is a more realistic budgeting method for people with a high cost of living.

70/20/10 Budget Rule Example

If your job pays you $5,000 a month after taxes, here’s how much goes into each category:

• 70% for living expenses: $3,500
• 20% for savings: $1,000
• 10% for debt and donations: $500

Who Should Use the 70/20/10 Rule?

The 70/20/10 budgeting strategy is great for people in areas with a high cost of living. It is also good for those who want to get out of debt sooner since it designates funds specifically to paying down debt. However, it does not separate necessary expenses from discretionary spending, so it can make it difficult for people to cut back on spending if they have trouble separating their needs from their wants.

Learn more about the 70/20/10 budgeting rule.

Zero-Based Budgeting

Zero-based budgeting involves assigning every dollar of your income to a specific monthly expense. This budgeting technique is designed to prevent overspending and ensure every dollar you make serves a purpose. So, when you subtract your expenses from your income, it should always equal zero.

Zero-Based Budget Example

Here’s what your budget spreadsheet could look like if your take-home pay after taxes is $6,000 a month:

 

Compared to other budgeting models, a zero-based budget doesn’t restrict how much you spend on certain items. However, you will need to be very meticulous about tracking your spending and adjusting the budget mid-month to make sure you are not overspending. WalletHub’s free budgeting tools can help keep your budget organized, and a premium account can sync your financial accounts to track your spending automatically.

Who Should Use Zero-Based Budgeting?

Zero-based budgeting can be helpful for people whose income changes from month to month since it doesn’t designate a specific amount of funds to any category. It can also be beneficial for people who live paycheck to paycheck so they can assign every dollar to a specific task. Since zero-based budgeting does not allocate funds to savings, it may not be ideal for people with immediate saving goals.

Learn more about zero-based budgeting.

Envelope Budgeting

With envelope budgeting, you categorize expenses into digital or physical envelopes. You then take money out of the designated envelope for each expense, and once the money has been used up in a particular envelope, you can no longer spend any more in that category for the month.

Like with zero-based budgeting, you will have to be thorough about tracking your expenses, so you don’t go over your budget. There are also multiple spending limits to keep track of. Using Excel, Microsoft Word, or free budgeting templates available online can help you organize your expenses.

Envelope Budget Example

Below is a snapshot of how your envelope budget could look on any given day of the month. You will have your envelopes (i.e. expense categories), your spending limit, how much you’ve spent so far and the amount remaining in each envelope. The funds in some categories may have already been used up, while others still have most of the money in the envelope.

Who Should Use Envelope Budgeting?

Envelope budgeting can be good for people living paycheck to paycheck or those budgeting with limited income since they can set strict spending limits. These limits can also work well for people who have the tendency to overspend.

However, just like zero-based budgeting, envelope budgeting doesn’t specifically require you to put money away for savings, though you can add envelopes for your retirement and investment accounts.

Learn more about envelope budgeting.

Pay-Yourself-First Budgeting

With the pay-yourself-first budgeting method, you prioritize putting money into your savings first before taking care of your other expenses. This can include putting money into an emergency fund for future unexpected expenses, contributing to your retirement account, and adding funds to your savings account, for example.

Unlike other common budgeting strategies, the pay-yourself-first budget doesn’t require listing all your expenses. However, you do need to figure out how much you can afford to save while still having enough to take care of your monthly bills.

Pay-Yourself-First Budget Example

If you make $5,000 after taxes and you want to save and invest 30% of your paycheck once you get it, the rundown of your budget could look a little like the example below. You could split 30% of your income, which would be $1,500, among your retirement account, emergency fund and savings account. The remaining 70% of your income would go to the rest of your living expenses.

• $500 (10%) to an emergency fund
• $500 (10%) to a retirement account
• $500 (10%) to savings for other goals
• $3,500 (70%) for all other expenses

Note that there isn’t a set amount you need to save with this strategy. You can save as little or as much as you want as long as you are not overextending your budget.

Who Should Use Pay-Yourself-First Budgeting?

The pay-yourself-first strategy can work well for someone who has a long-term savings goal, like saving money for a future vacation or a new car, but it might not be ideal for someone with a lot of high-interest debt. It may be better for them to pay down the debt first before saving extra funds.

Learn more about pay-yourself-first budgeting.

Values-Based Budgeting

Values-based budgeting is all about saving for and spending money on the things you value the most, so you don’t waste money on the things you don’t care about. For example, if you value the environment, you could factor the purchase of an electric vehicle into your budget instead of a truck that runs on gasoline.

Values-Based Budget Example

If you like to travel, you can adjust your budget so you have enough money to contribute to your travel fund every month. That could include finding an apartment that costs $1,000 per month versus $1,500 per month or reducing your dining out budget from $400 to $200 a month, for example, so you can put the savings toward your next vacation.

Or let’s say you really care about animals and you want to make room in your budget for something like donating to your local pet shelter. If you are following the envelope strategy, you could have an envelope specifically for pet shelter donations. Or if you use the 70/20/10 rule, you can put the remaining funds you have left after paying your debt toward buying food to bring to a pet shelter.

Who Should Use Values-Based Budgeting?

Values-based budgeting is good for people who want to stay mindful about their spending so that it matches with their core values. However, values-based budgeting doesn’t focus on a particular way to save or cut spending. So people who need strict guidelines to make their budget work may want to consider combining values-based budgeting with another budgeting strategy that has firm rules, like 50/30/20 or envelope budgeting.

How to Choose the Best Budgeting Strategy for You

To find the right strategy for you, consider the financial goals you want to achieve and the commitment level you are willing to put in. Your current financial status and your personal preferences should also play a role in your strategy selection.

Pick a strategy that aligns with your financial goals.

Whether it’s to pay down debt or start an emergency fund, for example, you should choose the strategy that will best help you reach your goal. For instance, if you are looking to save money, the pay-yourself-first method allows you to save a portion of your paycheck before doing anything else with the money. On the other hand, if you are trying to curb bad spending habits, envelope budgeting allows you to set strict spending limits.

Figure out your commitment level.

Are you willing to track every single expense you have, or would you rather focus on necessary expenses and group everything else together? Budgeting takes some work, and if you want to know where every dollar of your income is going, the zero-based budgeting strategy can work for you. If you don’t want to get into the nitty gritty of every expense, a budgeting style like value-based budgeting might work better for you.

Evaluate your financial status.

The strategy you choose should work with your lifestyle. For example, strategies like the 50/30/20 rule may not work for someone who doesn’t have enough funds for saving after paying their living expenses. This could include people living in areas with a high cost of living or who have irregular income since it may be difficult for them to stick to these strict percentages for needs, wants and savings every month.

On the other hand, if you have funds leftover after taking care of necessary expenses, any strategy that focuses on saving, such as the 50/30/20 rule or the 70/20/10 rule, could work for you.