The price of goods and services in the US increased by 2.4% in January 2024 in comparison to the previous year. While this inflation rate doesn’t seem severe, this is on top of the 10% increase in consumer expenditures we experienced in 2022. Worse yet, the average American only allocates 3.8% of their disposable income as savings in 2024.
To help remedy this, we’ve compiled four different budgeting systems so you can choose the right one for you.
1. 50-30-20 Rule
The 50/30/20 budget rule requires you to balance your money into these three categories:
- 50% – Your Must-Haves (the things you need)
- 30% – Your Wants (the stuff that’s just for fun)
- 20% – Your Savings (the money you save)
At first glance, 50% of your budget might seem like it’s not enough to fund your needs. But we tend to overspend on necessities since their cost is easy to justify. You’d be surprised at the number of cheaper alternatives available to you once you start limiting your spending on ‘must-haves.’
On the other hand, 30% of your budget going to your ‘wants’ might seem like overkill. However, allocating enough money to your wants is the key to motivating you to follow through on your budget, as long as you remember to set a clear limit, use cash whenever possible, and watch out for emotional spending.
Finally, the basis of the 50-30-20 rule is called the ‘The Balanced Money Formula.’ And that budgeting technique requires you to pay off all your debt before allocating money to your savings. So 20% of your budget should go to paying your debts first, and you should only start saving once you’re debt-free.
2. Zero-based Budgeting
Zero-based budgeting follows this simple formula: Income – Expenses = 0
This allows you to maximize your funds by making you reassess and justify your spending based on your income. The first step to this budgeting method is to track your income. While this might seem unnecessary, an unexpected influx of cash often sparks spending sprees.
By tracking your income diligently and then immediately allocating it to an expense category or your savings, you’ll be able to prevent impulse purchases. The second step is to track and prioritize your expenses.
Finally, you need to make sure that when you subtract your total income from your total expenses (including savings and investments), you’ll end up with zero.
3. Envelope System
The Envelope System, also known as Cash Stuffing, is a budgeting technique that makes use of physical envelopes to encourage thoughtful spending. Aside from the physical aspect of it, this budgeting method is quite similar to the 50-30-20 rule (albeit with more lenient percentages).
The first step in the envelope system is to categorize your spending and assign an envelope for each of the categories. You’ll then stuff the envelopes with the appropriate amount of cash based on your budget. Each time you need to spend money, you’ll have to take the cash from the appropriate envelope.
The envelope system works well for some people because of the physical aspect of it. You can see the cash being depleted and you have to hand over the money yourself every time you buy something. But this is also the biggest downside of the envelope system since it’s limited to cash.
4. The Pay-Yourself-First Budget
Pay-Yourself-First, also known as Reverse Budgeting, prioritizes saving and paying off debt. This is the opposite of how most budgeting techniques in which you save your savings and debt repayment for last, hence the reverse budgeting moniker.
The biggest issue with paying yourself first is that this could leave you with insufficient funds for your essential expenses if you’re not careful. But once you get the hang of it, this budgeting method is arguably the best way to pay off all your debts.
It’s also a great way of figuring out which of your expenses are actually essential. When your budget for food and recurring expenses isn’t the priority, you’ll get a better understanding of what’s truly necessary for your lifestyle.
This budgeting method is best for those who don’t want to spend too much time and effort on keeping track of their spending. Just pay yourself first and spend the rest of your money according to your wants and needs.
Summary
The 50/30/20 budget rule requires you to balance your money into must-haves, wants, and savings. This budgeting method is great for those with minimal debt and for those who struggle to stick to their budget.
Zero-based budgeting follows this simple formula: Income – Expenses = 0. And it’s a great budgeting system for those who struggle with impulse buying.
The Envelope System makes use of physical envelopes to encourage thoughtful spending. This system is perfect for people who predominantly use cash.
The Pay-Yourself-First Budget prioritizes saving and paying off debt and is a great choice for those who don’t want to spend too much time and effort on keeping track of their spending.
