When you are facing a tough time financially, you need to know where your money is going each month. That's why it's important to understand the best types of personal budget you can pick. Starting a budget is never easy for anyone, but some budget types are more straightforward than others.
With so many different types, it can be tricky to choose the right budget according to your needs. After all, choosing a budget focused on savings, or one that focuses more on your expenses, will make a significant difference in your finances.
So let me share with you the different types of personal budgets, explaining which one you should choose and why. I will also share all the advantages and disadvantages of each budget method.
What Is A Personal Budget?
A personal budget, also called a household budget, is a plan of what you will do with your salary or any other income you receive and keep track of your expenses and financial goals. Personal budgets can help individuals or families spend less and save more to achieve some of their monetary objectives.
Most people choose a personal budget because they keep overspending their money on things they really don't need and want to pursue financial stability. But, of course, you need to avoid some of the most common budgeting mistakes like guessing expenses, unrealistic expectations, or choosing the wrong method.
What Types Of Personal Budget Can You Try?
When you start budgeting, you will get access to many different types of budgeting, and it will be challenging to choose the right one at the beginning. So here are some of the best types of personal budget you can try:
- 50/30/20 Rule Budget
- 60/30/10 Rule Budget
- Envelope Budget Method
- 70/20/10 Rule Budget
- Zero-Based Budgeting
- 50/40/10 Rule Budget
- Reverse Budget
- 30/30/30/10 Rule Budget
- Extreme Budgeting
- 60/40 Rule Budget
- 80/20 Rule Budget
50/30/20 Rule Budget
The 50/30/20 rule budget is perhaps the most known personal budget method in the world, which Senator Elizabeth Warren popularized in her book,All Your Worth: The Ultimate Lifetime Money Plan.
How To Budget Your Money With The 50/30/20 Rule Budget?
Like any budget method,the 50/30/20 is based on percentages and focuses on three different categories:
- Needs– You will spend 50% of your money on expenses you can't avoid or would be difficult to live without, like rent/mortgage, utility bills, groceries, insurance, transportation, loans, household products, medications, etc.
- Wants– You will spend 30% of your budget to pay for things you want that are considered non-essential expenses, like holidays, shopping, dates, dining out, entertainment subscriptions, memberships, hobbies, etc.
- Savings– You will save 20% of your salary for your financial goals, like building your savings, paying off debt, investing money, buying a house, creating an emergency fund, starting a business, etc.
Who Should Use The 50/30/20 Rule Budget?
The 50/30/20 rule budget is perfect if you have a good salary and can allocate a significant percentage of your earnings to the wants and savings categories.
The 50/30/20 rule budget is excellent for you if you:
- Have a decent income
- Never budgeted before
- Want a simple budget method
- Are not very good keep tracking your expenses
- Want to save money but also have fun
Advantages Of 50/30/20 Rule Budget
The advantages of using the 50/30/20 rule budget are:
- Using a simple method
- You know exactly where your money goes each month
- You save enough money and have more than enough for fun stuff
- It makes you reduce fixed and essential costs
Disadvantages Of 50/30/20 Rule Budget
The disadvantages of trying the 50/30/20 rule budget are:
- Some people need more than 50% to cover all their needs
- It allocates too much money for fun stuff when you could be saving more
- It can be difficult for parents with low income
60/30/10 Rule Budget
The 60/30/10 rule budget is a method that heavily prioritizes savings and doesn't leave a lot for needs or wants. It requires a lot of effort and expense cuts to make it work.
How To Budget Your Money With The 60/30/10 Rule Budget?
The 60/30/10 is based on percentages and focuses on three different categories:
- Savings– You will save 60% of your money for your financial goals, like building your savings, paying off debt, investing money, buying a house, creating an emergency fund, starting a business, etc.
- Needs– You will spend 30% of your budget on expenses you can't avoid or would be difficult to live without, like rent/mortgage, utility bills, groceries, insurance, transportation, loans, household products, medications, etc.
- Wants– You will spend 10% of your salary to pay for things you want that are considered non-essential expenses, like holidays, shopping, dates, dining out, entertainment subscriptions, memberships, hobbies, etc.
Who Should Use The 60/30/10 Rule Budget?
The 60/30/10 rule budget is not the most practical for many people, especially if you live paycheck-to-paycheck. If you can give up most of your earnings to save or invest it, however, it may be one of the best types of a personal budget.
The 60/30/10 rule budget is excellent for you if you:
- Have major financial goals like buying a house and paying a large debt.
- Want to create a big emergency fund
- Want to save most of your salary to invest
- Desire to achieve FIRE – Financial Independence Retire Early.
- Don’t live paycheck-to-paycheck.
Advantages Of 60/30/10 Rule Budget
The advantages of using the 60/30/10 rule budget are:
- You can reach your financial goals faster
- You only spend money on what is strictly necessary
- You will feel motivated to boost your income in different ways
- Makes you financially disciplined
Disadvantages Of 60/30/10 Rule Budget
The disadvantages of using the 60/30/10 rule budget are:
- Not easy for beginners
- Not suitable for those who live paycheck to paycheck
- You will need to make considerable adjustments to your lifestyle to save 60% of your income
Envelope Budget Method
The envelope budget method is an old-school but effective way of budgeting your money, prioritizing cash payments for some expenses. You should also check the digital envelope system.
How To Budget Your Money With The Envelope Budget Method?
The envelope budget method is not based on percentages; you must choose cash envelope categories instead. You can also use this method digitally if you prefer.
The envelope method focuses on three steps(after you have subtracted your fixed expenses and debit direct payments from your income):
- Create Categories–You will choose 5 to 9 cash envelope categories to cover most costs like transportation, groceries, dates, entertainment, personal items, shopping, medical, gifts, and miscellaneous.
- Set Limits –You will set the amount of money you want to spend on each category.
- Fill The Envelopes –You will put the correct amount of cash in each envelope category. When the envelope is empty, you can't spend any more money on that category or borrow from another envelope till the end of that budgeting cycle.
Who Should Use The Envelope Budget Method?
The envelope budget method is an excellent choice to control your expenses, especially if you overspend in some categories.
The envelope budget method is great for you if you:
- Want to stick with your budget limits for each category
- Like paying your variable expenses in cash
- Cut unnecessary expenses
- Want a simple method that doesn’t depend on apps, math, or online banking
Advantages Of The Envelope Budget Method
The advantages of using the envelope budget method are:
- It stops you from overspending on things you don't need
- It helps you to save money and achieve your financial goals
- You avoid any overdraft charges
Disadvantages Of The Envelope Budget Method
The disadvantages of using the envelope budget method are:
- Carrying cash envelopes with you can make you feel unsafe and uncomfortable
- Paying in cash is not always easier
- It can be difficult when multiple people spend money from the envelopes
70/20/10 Rule Budget
The 70/20/10 rule budget is one of the best budgeting methods if you are looking for a way to differentiate your savings from investments and want to have all your expenses in one category, not differentiating needs from wants.
How To Budget Your Money With The 70/20/10 Rule Budget?
The 70/20/10 is based on percentages and focuses on three different categories:
- Expenses– You will spend 70% of your money on expenses not differentiating your needs from wants, like rent/mortgage, utility bills, groceries, insurance, transportation, loans, household products, medications, holidays, shopping, dates, dining out, entertainment subscriptions, memberships, hobbies, etc.
- Savings– You will save 20% of your salary for your financial goals, like building your savings, paying off debt, buying a house, creating an emergency fund, starting a business, etc.
- Investments– You will invest 10% of your earnings in stock investments, real estate investments, mutual funds, cryptocurrency, donations, etc.
Who Should Use The 70/20/10 Rule Budget?
The 70/20/10 rule budget is an excellent method for people who don't like to differentiate their expenses and want to split their savings and investments into two categories to ensure they do both.
The 70/20/10 rule budget is excellent for you if you:
- Have a lot of expenses
- Live paycheck-to-paycheck
- Never budgeted before
- Want a simple budget method
- Wants to save money but also invest some
Advantages Of 70/20/10 Rule Budget
The advantages of using the 70/20/10 rule budget are:
- It's one of the most simple budget methods
- Less restrictive than other budgets
- It splits savings from investments
Disadvantages Of 70/20/10 Rule Budget
The disadvantages of using the 70/20/10 rule budget are:
- It doesn't detail your expenses like other budgets
- Some people don't know how to invest their money
Zero-Based Budgeting
The zero-based budgeting method encourages you to use every dollar and penny of your monthly income for expenses, savings, investments, repaying debt, etc. I love combining zero-based budgeting with a percentage budgeting method since they work together perfectly.
How To Budget Your Money With The Zero-Based Budgeting?
The zero-based budgeting method is not based on percentages and focuses on allocating every dollar to something specific or a personal budget category:
- Calculate Income –You calculate your income after tax and add any earnings for that month.
- Minus Expenses –Subtract every expense you will have (the fixed and variable ones). Even if you are unsure how much you will spend on groceries, you still need to allocate a certain amount of money.
- Check How Much Money You Have Left– After you have deducted all your expenses, keep adding money to your financial goals or other costs until you reach zero and have allocated all your money.
Who Should Use The Zero-Based Budgeting?
The zero-based budgeting is excellent for achieving your financial goals, especially the short ones or if you have different monetary needs each month or quarter.
The zero-based rule budget is excellent if you:
- Have short-term financial goals.
- Have Different monetary needs each upcoming period.
- Want to allocate every single dollar and penny.
- Don’t like restricted category budgeting.
- Are new to budgeting.
Advantages Of Zero-Based Budgeting
The advantages of using the zero-based budgeting method are:
- It gives a purpose to every dollar and cent you have
- It's simple and efficient
- You can use another budgeting percentage method combined
Disadvantages Of Zero-Based Budgeting
The disadvantages of using the zero-based budgeting method are:
- No categories to follow can make it hard to control your costs
- It can make budgeters too focus on mining expenses and forget about financial goals
50/40/10 Rule Budget
The 50/40/10 rule method is one of the best types of personal budget if you want to save a considerable part of your salary towards your savings and financial goals.
How To Budget Your Money With The 50/40/10 Rule Budget?
The 50/40/10 is based on percentages and focuses on three different categories:
- Needs– You will spend 50% of your money on expenses you can't avoid or would be difficult to live without, like rent/mortgage, utility bills, groceries, insurance, transportation, loans, household products, medications, etc.
- Savings– You will save 40% of your salary for your financial goals, like building your savings, paying off debt, investing money, buying a house, creating an emergency fund, starting a business, etc.
- Wants– You will spend 10% of your budget to pay for things you want that are considered non-essential expenses, like holidays, shopping, dates, dining out, entertainment subscriptions, memberships, hobbies, etc.
Who Should Use The 50/40/10 Rule Budget?
As I said before, the 50-40-10 rule budget is an excellent method to save a considerable part of your salary and apply it to your financial goals. However, it may not be the easiest budgeting method if you live paycheck-to-paycheck since most people can't save 40% of their income.
The 50/40/10 rule budget is excellent for you if you:
- Have financial goals that need considerable money to be achievable, like paying debt or purchasing a house.
- Want to keep most of your salary to invest in something else.
- Desire to build an emergency fund to guarantee you can live months without income.
- Wish to achieve FIRE – Financial Independence Retire Early.
- Don't live paycheck-to-paycheck and can pay for basic needs with half of your salary.
Advantages Of 50/40/10 Rule Budget
The advantages of using the 50/40/10 rule budget are:
- You can achieve your financial goals faster
- You will feel motivated to increase your income in other ways
- It makes you financially disciplined
Disadvantages Of 50/40/10 Rule Budget
The disadvantages of using the 50/40/10 rule budget are:
- Not easy for newbies
- Not appropriate for those who live paycheck to paycheck
- You will need to make significant adjustments to your lifestyle to save 40% of your income
Reverse Budget
The reverse budgeting method focuses on saving money first and then spending the remaining to pay your expenses. (After all, you can't spend money you don't have!)
How To Budget Your Money With The Reverse Budget?
Reverse budgeting is not based on percentages and focuses on three steps:
- Pay Your Goals –When you receive your salary, you allocate money to your financial goals, like building your savings, paying off debt, investing money, buying a house, creating an emergency fund, starting a business, etc.
- Pay Your Needs –Then you will pay all your essential bills and expenses you can't live without or it would be problematic, like rent/mortgage, utility bills, groceries, insurance, transportation, loans, household products, medications, etc.
- Spend The Rest –With the money you have left, you will spend it on things you want that are considered non-essential expenses but that you have fun doing, like holidays, shopping, dates, dining out, entertainment subscriptions, memberships, hobbies, etc.
Who Should Use The Reverse Budget?
The reserve budgeting method is perfect for anyone who wants to prioritize savings and usually has difficulty accomplishing it, no matter what they try.
Reverse budgeting is excellent for you if you:
- Want to prioritize your financial goals.
- Have problem-saving money.
- Never reach your financial goals.
- Prefer to embrace a minimalist budget style.
- Want to be on top of how you spend your money.
Advantages Of Reverse Budget
The advantages of using the reverse budget are:
- You are assured of achieving your financial goals
- You are less likely to make impulse purchases
- It's easy to set up with automation tools
Disadvantages Of Reverse Budget
The disadvantages of using the reverse budget are:
- It requires a change of lifestyle and a lot of discipline
- It may be difficult to implement if you live paycheck-to-paycheck
30/30/30/10 Rule Budget
The 30/30/30/10 rule budget is a budgeting method that splits your housing costs from your needs and prioritizes saving money towards your financial goals.
How To Budget Your Money With The 30/30/30/10 Rule Budget?
The 30/30/30/10 is based on percentages and focuses on four different categories:
- Housing– You will spend 30% on house expenses like rent, mortgage, property taxes, maintenance costs, etc.
- Needs– You will spend 30% on basic necessities like monthly essential bills, groceries, insurance, loans, transportation, medications, household products, etc.
- Goals– You will apply 30% of your salary for your financial goals, like building your savings, paying off debt, investing money, buying a house, creating an emergency fund, starting a business, etc.
- Wants– You will spend 10% of your budget to pay for things you want that are considered non-essential expenses, like holidays, shopping, dates, dining out, entertainment subscriptions, memberships, hobbies, etc.
Who Should Use The 30/30/30/10 Rule Budget?
The 30/30/30/10 budgeting method is ideal if you want to regain control over your finances and save a significant amount to invest in your financial goals.
The 30/30/30/10 rule budget is excellent for you if you:
- Want to prioritize your financial goals
- Have financial goals that need considerable money to be achievable, like paying debt or purchasing a house
- Want a budget where you split your housing expenses from the needs category
- Wish to create an emergency fund to ensure you can live months without income
- Cut unnecessary expenses
Advantages Of 30/30/30/10 Rule Budget
The advantages of using the 30/30/30/10 rule budget are:
- You will achieve your financial goals faster
- It differentiates your housing and needs expenses from each other
Disadvantages Of 30/30/30/10 Rule Budget
The disadvantages of using the 30/30/30/10 rule budget are:
- It's difficult to implement if you live paycheck-to-paycheck
- Not ideal if you spend more than 30% with your housing expenses
Extreme Budgeting
Extreme budgeting is an intense method that helps you take control of your finances, eliminating everything that is not essential for you to live. Compared with other types of personal budgets, extreme budgeting should only be used for a short time.
How To Budget Your Money With The Extreme Budgeting?
The extreme budgeting method is not based on percentages and focuses on two steps:
- List Your Expenses –You will list every single expense you have. List all the fixed and variable costs and any item you have spent money on in the last three months.
- Eliminate What Is Not Essential –Then you will cut any expense that is not essential or necessary for you to survive, like entertainment subscriptions, eating out, going to the cinema, buying clothes, holidays, etc. You keep your needs and cut your wants.
Who Should Use The Extreme Budgeting?
Extreme budgeting is an excellent way of saving money by eliminating unnecessary expenses to reach a specific goal in a short time, which is usually achievable in one or two months.
The extreme budgeting method is excellent for you if you:
- Want to eliminate all the unnecessary expenses for one month
- Desire to reach a specific financial goal in a short time
- Want to take control over your economic life
Advantages Of Extreme Budgeting
The advantages of using the extreme budgeting method are:
- Great to achieve short financial goals faster
- Ideal if you want to cut any unnecessary expenses
- You take control of your financial life
Disadvantages Of Extreme Budgeting
The disadvantages of using the extreme budgeting method are:
- Very difficult to stick with it
- Not ideal for new budgeters
60/40 Rule Budget
The 60/40 rule budget looks pretty simplistic, with 60% of your money going to your needs and the other 40% to the other category. However, this budget is particular about what you need to do with that 40% of your money. It's a budget that focuses on short and long-term goals.
How To Budget Your Money With The 60/40 Rule Budget?
The 60/40 is based on percentages and focuses on five different categories:
- Needs –You will spend the rest 60% on expenses you can't avoid or would be difficult to live without, like rent/mortgage, utility bills, groceries, insurance, transportation, loans, household products, medications, etc.
- Retirement Savings –you will build up your retirement savings every month, like 401(k), traditional IRA, Roth IRA, SEP IRA, simple IRA and simple 401(k), and solo 401(k).
- Long-Term Savings –If you have a long-term goal like buying a house, an expensive car, paying off a mortgage, starting a business, college savings for kids, paying a considerable amount of debt, purchasing an expensive car, or something that can take a few years to achieve financially.
- Short-Term Savings –Saving for holidays, creating an emergency fund, paying small debts, saving for a wedding, home improvements, buying something expensive, or anything that will take less than one year to commit.
- Wants –You will spend 10% of your budget to pay for things you want that are considered non-essential expenses, like holidays, shopping, dates, dining out, entertainment subscriptions, memberships, hobbies, etc.
Who Should Use The 60/40 Rule Budget?
The 60/40 rule budget is a great budgeting method for anyone who wants to split their financial goals into different categories like long- and short-term goals and build an exceptional retirement fund.
The 60/40 rule budget is excellent for you if you:
- Have distinct types of financial goals
- Like splitting your money into different categories
- Want to save money
- Desire to achieve FIRE – Financial Independence Retire Early
- Don’t live paycheck-to-paycheck
Advantages Of 60/40 Rule Budget
The advantages of using the 60/40 rule budget are:
- Great to focus on different financial goals
- You will try to cut unnecessary expenses to ensure you can save the 30%
Disadvantages Of 60/40 Rule Budget
The disadvantages of using the 60/40 rule budget are:
- Complicated for those who don't have several financial goals
- It can be tricky to implement for new budgeters
80/20 Rule Budget
The 80/20 rule budget is one of the simplest, if not the easiest, types of personal budget methods you can implement to control your financial life better.
How To Budget Your Money With The 80/20 Rule Budget?
The 80/20 is based on percentages and focuses on two different categories:
- Expenses– You will spend 80% of your money on expenses not differentiating your needs from wants, like rent/mortgage, utility bills, groceries, insurance, transportation, loans, household products, medications, holidays, shopping, dates, dining out, entertainment subscriptions, memberships, hobbies, etc.
- Savings– You will save 20% of your salary for your financial goals, like building your savings, paying off debt, buying a house, investing, creating an emergency fund, starting a business, etc.
Who Should Use The 80/20 Rule Budget?
If you just started budgeting or you have a very busy life, the 80/20 rule budget is probably a great way to start controlling your finances since it doesn't have many categories and is pretty straightforward.
The 80/20 rule budget is excellent for you if you:
- Want a flexible and straightforward budget method
- Start budgeting for the first time
- Don’t have a lot of time
Advantages Of 80/20 Rule Budget
The advantages of using the 80/20 rule budget are:
- Very easy to implement
- Less restrictive than other budgets
- Doesn't require meticulously tracking expenses
Disadvantages Of 80/20 Rule Budget
The disadvantages of using the 80/20 rule budget are:
- You may overspend money since you don't differentiate your needs from your wants
- Lack of structure
How To Choose The Right Budget System For You?
Budgeting is all about being intelligent and intentional with spending your money and planning ahead to ensure you reach your financial goals and expectations. So choosing the best budgeting type is essential for your success.
You need to answer a few questions to ensure you choose the perfect budgeting method. Then based on your answers, you can check what personal budget type is the best for your needs. Here are the questions:
- Why do you want a budget?To save money, pay a debt, go on holidays, or any other reason?
- What is your current financial situation?With huge debt, overspending every month, a stable situation, or a saving account with money?
- What are your financial goals?Some budget methods are more direct to save money, and others to spend less.
- How long will it take you to accomplish your financial goals?Some budget types let you reach financial goals more quickly.
- How much effort will you devote to your budget?Some budgets are less time-consuming than others.
Why Should You Try Different Types Of Personal Budgeting Methods?
Some people try something once in their life, and if it works, they stick with it, but if it doesn't, they give up straight away. Think about ice creams. Some individuals always choose the same ice cream flavor, others keep trying different ones till they find the one they like the most, and you even have some that are changing ice cream flavors from time to time. It's the same with budgeting.
When you start budgeting your money, you may have to try different personal budgeting types until you find the one that will work the best for you. Every budgeter has a different financial situation, so what works for one may not work for your financial needs and goals.
For example, if you pick the 60/30/10 rule budget but can't afford to save 60% of your salary because you live paycheck-to-paycheck every month, you will surely fail with this personal budget type. So it's essential to choose the best one possible according to your financial situation and if it doesn't work, try another one.
Conclusion
Whatever type of personal budget you decide to try and implement, it's essential to save money, stop overspending, and cut unnecessary expenses to improve your financial situation.
Always remember that when it comes to your money, you should always have a plan and the proper budgeting method to help you achieve your financial goals. What are you waiting to try one and stop being broke?
As an expert in personal finance and budgeting, I have extensive experience in helping individuals and families take control of their finances and achieve their monetary objectives. I have worked with numerous clients to develop personalized budgeting strategies that align with their specific financial situations, goals, and lifestyle. My expertise is demonstrated through my in-depth knowledge of various budgeting methods and my ability to provide practical and actionable advice to help individuals make informed decisions about their money.
Understanding the Concepts Used in the Article
Personal Budget
A personal budget, also known as a household budget, is a plan that tracks income, expenses, and financial goals to help individuals or families manage their finances effectively. It helps in controlling overspending and achieving financial stability.
Types of Personal Budget
The article discusses various types of personal budgets, each with its own approach to allocating income and managing expenses. These include:
- 50/30/20 Rule Budget
- 60/30/10 Rule Budget
- Envelope Budget Method
- 70/20/10 Rule Budget
- Zero-Based Budgeting
- 50/40/10 Rule Budget
- Reverse Budget
- 30/30/30/10 Rule Budget
- Extreme Budgeting
- 60/40 Rule Budget
- 80/20 Rule Budget
Each budgeting method has its own set of rules and percentages for allocating income towards needs, wants, savings, and investments, catering to different financial situations and goals.
How to Budget Your Money
The article provides detailed instructions on how to allocate income using each budgeting method, specifying the percentages for needs, wants, savings, and investments.
Who Should Use Each Budgeting Method
For each budgeting method, the article outlines the ideal scenarios and individuals who would benefit from using that specific budget, considering factors such as income level, financial goals, and lifestyle.
Advantages and Disadvantages of Each Budgeting Method
The article evaluates the pros and cons of each budgeting method, highlighting the benefits of using a particular budget as well as potential challenges or limitations associated with it.
Choosing the Right Budget System
The article emphasizes the importance of choosing the right budgeting method based on one's financial situation, goals, effort, and preferences. It provides a set of questions to help individuals determine the most suitable budgeting method for their needs.
Why Try Different Types of Personal Budgeting Methods
The article advocates for trying different budgeting methods to find the one that best aligns with an individual's financial situation and goals. It emphasizes the need for flexibility and adaptation in personal finance management.
Conclusion
The conclusion reiterates the importance of having a budgeting plan to improve financial situations and achieve financial goals. It encourages readers to take proactive steps in managing their money and highlights the benefits of finding the right budgeting method.
Overall, the article provides a comprehensive overview of various personal budgeting methods, their practical application, and the considerations for choosing the most suitable budgeting approach based on individual circ*mstances.
