4 Types of Budget Plans to Know About

Sorting home finances

Using a budget can help you save money, pay off debt and work toward other important financial goals. But making a budget that's effective can be difficult if you don't have a blueprint.

These four budgeting plans can help you manage your money in a way that works for you and will hopefully help you achieve all of your money goals.

1. Envelope System

The envelope system is an old-fashioned approach to budgeting that typically relies on cash in physical envelopes.

You'll start by determining how much you typically spend (or how much you'd prefer to spend) in different categories, such as rent, groceries and entertainment. Once you've determined an appropriate amount for your spending in each category, you'll label an envelope for each one and put the corresponding amount of cash in the envelope.

Once you've used up all the cash in an envelope, you won't be able to spend any more money in that category unless you pull cash from another envelope. Budgets are intended to keep you disciplined, however, and continually moving around money could have a domino effect that impacts expenses you can't afford to cut back on.

Also, keep in mind that you may not be able to make some payments in cash. While you don't need to set aside an envelope for these bills, you'll still need to account for them as you determine how much to allocate for other spending categories.

The envelope budgeting system can be a good idea for someone who prefers to use cash and wants to be strict with how they manage their money. If you're not a cash user but like the sound of this method, the features of your online banking software may make it possible to do something similar.

2. 50/30/20 Plan

If you want a simpler approach to managing your money, the 50/30/20 budgeting method could be a better approach for you.

With the 50/30/20 plan, there are only three spending categories you'll need to keep track of: necessary expenses, discretionary expenses and financial goals. As a benchmark, the plan works out so that 50% of your expenses go toward necessities, 30% goes toward your lifestyle and 20% goes toward financial goals like paying off debt, saving and investing.

That said, you can come up with your own ratios based on your current situation and your goals. For example, if you have a lot of debt or a small emergency fund, it may make sense to put more than 20% of your budget toward those goals while also cutting back on discretionary spending.

This budgeting plan can be good if you think too many budgeting categories will be overwhelming and you prefer a more straightforward approach.

3. Zero-Based Budget

The zero-based budgeting method works similarly to the envelope system but with a couple of key differences. First, you don't have to use envelopes to keep track of your money, and second, you're not restricted to using cash.

The main concept behind a zero-based budget is that you give every dollar you earn a purpose—in the end, your monthly expenses should equal your monthly income. But this doesn't mean you're supposed to spend every dime that comes in every month. In fact, this approach is all about being meticulous with where your money goes.

You'll likely have a lot of spending categories to plan for and keep track of, and a plan for what to do with any money that's left over (put it in your savings, for instance). If you overspend in one category, you'll need to stop spending in that area until the next month or take from another category.

A zero-based budget is a good option for someone looking for a detailed approach to managing their money who wants to know exactly where all of their money goes so they can make better decisions. This approach can also be good for someone who prefers to use credit cards. You're less likely to overdraw your checking account when you've budgeted every dollar to the penny.

4. Pay-Yourself-First Budget

With this budgeting approach, the most important thing is to make sure that your savings and debt goals are met. When you get your paycheck, you'll set aside money for those goals. After that, you can use the remaining money for whatever you want.

Of course, you'll need to account for recurring expenses like rent or mortgage payments, utilities and other bills. Once your priorities are handled, you'll know what you have left over for the fun stuff. The idea with this budgeting method is that you don't have to keep track of exactly where your money goes, just that you don't run out of it.

The pay-yourself-first budget is best suited for someone who doesn't want a complicated budgeting process. It's also best to avoid credit cards with this approach because they don't give you an accurate view of how much money you actually have to spend in your checking account.

How to Stick to Your Budget

Creating a budget is an important first step, but it won't accomplish much if you don't stick to your budget. Here are some tips that can help you stay motivated and on track:

  • Choose a budgeting method that works for you. Do your homework and take a second to think critically before settling on a budgeting method. Instead of simply going with the one you think can save you the most money, think about which method appeals to you the most. If a budgeting method sounds like pure drudgery to you, it's unlikely you'll stick to it. Choose one you expect to bring you some satisfaction.
  • Track spending. Review your transactions at least once a week to keep track of whether you're spending within your budget. This can help you make adjustments throughout the month if need be to avoid overspending.
  • Use a budgeting app. There are several apps that can help you keep track of your budget. Some of them even directly import your transactions from all of your financial accounts into one place, making it easier to keep track of your expenses. Having a budget process that's convenient will make you more likely to succeed.
  • Evaluate your budget regularly. Every six months to a year, take a look at your budgeting approach and determine whether it's still working for you. If it's not, you may need to make some minor adjustments to better align your goals with reality. In some cases, it may even make sense to switch to an entirely different budgeting approach.
  • Keep your goals in sight. It can take time to master a budget, and even then, it can be challenging to stay motivated. Keep a vision board or list of reasons why you're budgeting. It may be that you want to save money to start a business, take your family on vacation or retire at a certain age. Whatever it is, the information can help you stay motivated.

How Budgeting Can Improve Your Finances

A budget is one of the simplest elements of a financial plan, but it also provides a solid foundation for financial success.

The greatest resource a budget provides is information. Understanding exactly where your money goes can help you change how you spend so that you're more likely to achieve your financial goals.

For example, if you want to start making extra debt payments or put more money in your emergency fund, all you have to do is look at your budget to determine which expenses to cut back on and how to reallocate that money toward your objective.

Building Credit Can Help Your Budgeting

Having a good credit score can do wonders for your budget because it can help you qualify for lower-cost credit. Whether it's a mortgage loan, auto loan, student loan or whatever else, getting low interest rates with good credit allows you to save money that you can put to good work elsewhere in your budget.

Take some time to work on building your credit score. Monitor your credit regularly to understand which areas you can address, and keep track of your progress. As your credit improves, you may be able to refinance existing debts and qualify for new loans when you need them and save in the process.

Learn More About Budget Plans

  • How to Make a Budget
    A budget can help you make the most of your financial plan. These six steps can help you get started and establish a successful budgeting plan.
  • What Is Cash Stuffing?
    Cash stuffing or envelope budgeting involves allocating cash to various expense categories each month and putting the money in envelopes.
  • How to Budget Using the 50/30/20 Rule
    The 50/30/20 rule is a budgeting strategy that helps you figure out how much to spend on necessities, discretionary items, savings and debt repayment.
  • How Does Zero-Based Budgeting Work?
    Zero-based budgeting is more complicated than other budgeting methods but can provide you with a deeper understanding of where your money is going.
  • What Does It Mean to Pay Yourself First?
    If you never have money left for savings, try saving your money first. Paying yourself first gives savings goals the priority they deserve.
  • What Is a Reverse Budget?
    Here’s what a reverse budget is and how it can help you save more money, plus the downsides to keep in mind.