How to Budget: 5 Top Budget Strategies for You

From the rise of avocado toast, to the death of gyms, Millennials have been blamed for an eccentric variety of social disruptions. But according to a 2023 Nerdwallet poll, there’s one thing they haven’t ruined: budgeting. 

Nerdwallet found that over 256 million Americans employ some form of budgeting in their monthly planning. A whopping 83% of millennials adhere to a monthly budget, compared to just 67% of boomers and 74% of Gen Xers. 

“Budgeting is often thought of as a bad word or has some negative connotation,” says Ryan Fleming, CFP, principal at Armstrong, Fleming & Moore, Inc. “So we like to call it a ‘spending plan.’”

Making a budget — and sticking to it — is for anyone who wants a well-ordered financial life. And now is a great time to review your existing budget plan or get started with a new one.

Top 5 Budget Strategies

Making a budget shouldn’t be complicated, says Fleming. It’s as simple as understanding all of your expenses and sources of income, so that you can give every dollar a job before it has a chance to wander off and get into trouble. 

Here are five of the most common approaches to budgeting.

1. The 50/30/20 Budget 

The 50/30/20 budget is a formula for budgeting that divides percentages of your income between specific categories:

• 50% for needs, such as housing, food, transportation, insurance, and minimum debt payments.
• 30% toward wants, like subscriptions, movie tickets, concerts, and travel.
• 20% for savings, including emergency funds, retirement savings, and extra debt payments. 

Fleming recommends this type of budget for people who are looking for a fresh start—younger people budgeting for the first time, or someone whose finances may be different as a single person. 

But Ryan A. Hughes, founder & portfolio manager at Bull Oak Capital, says this method "can be challenging in an environment where housing costs are high, especially in expensive urban areas. Your mortgage or rent can easily exceed 50% of your after-tax income.”

2. The Zero-Based Budget 

Zero-based budgeting refers to allocating every dollar of your income toward expenses and financial goals like saving and debt repayment. The net result of allocating all of your income toward specific categories is that you can get “zero” when subtracting your expenses from your income, therefore the name. 

You can, for example, take all your income for the current month and use that money to create a budget for the following month. When the new month arrives, you know exactly what you can spend on each budget category, and can reallocate funds if necessary. 

This method of planning things out a month in advance makes it a great option for those with unpredictable incomes since you’re only working with money you’ve already got in the bank.  

3. The Envelope Budget 

The envelope system is geared toward people looking to pay off debt. With this cash-centric method, you fill physical envelopes each month with a specific amount of cash for various budget categories. The cash in each envelope is used for that specific category and nothing else. If the cash is gone, the budgeting limit has been hit and no more should be spent in that category. 

Budgeting this way is used to combat overspending, as it’s very easy to exceed your limits when swiping a debit or credit card compared to the physical limitation of cash. However, in our increasingly cashless society, using cash can be a challenge.

4. The Pay-Yourself-First Budget

Let’s say you’re making ends meet, but struggling to save up for the future. If that’s the case, the “pay yourself first” method might help adjust your thinking.

Paying yourself first means setting aside a lump sum or percentage of your income each month toward your savings and investments. Doing so ensures that you’re preparing for the future and building a habit of saving and investing. 

5. The Values-Based Budget

If your word of the year is “intentionality,” you may find that values-based budgeting aligns with your goals. It’s easy to let money slip through our fingers on a whim, then look back and feel guilty about what you bought.

 The values-based budget is less about percentages and procedures, and more about identifying your spending patterns and adjusting them to line up with your values. For example, you may value dining out and having new experiences, donating to worthy causes, or paying for dance classes. 

Start by writing a list of what you value. Then allot funds for each category to ensure your money supports your values. This type of budgeting can bring more satisfaction and clarity and help avoid trivial spending. 

Budgeting Blunders to Avoid

Budgets should be revised on a regular basis, especially during big life changes such as marriage, childbirth, divorce, or a job layoff. 

There are a few potential mistakes to watch out for as you work to form new habits with your budget: 

• Not planning for all of your expenses. The fixed payments that are the same each month may be easy to plan for, but until you start tracking your usual expenses it’s a lot more challenging to estimate discretionary spending like restaurants or opportunities for a night out.
• Not tracking your expenses. If you set a budget but don’t track your spending, how will you know if you’re actually sticking to it? Consider signing up for a budgeting app to hold yourself accountable.
• Not revising your budget. Once you’ve been budgeting and tracking expenses for a while,  take a look at your results and adjust where necessary. Are you spending more on dining out than you planned for? Did you lose a source of income? Use these moments as opportunities to tweak things and keep yourself on track.
• Forgoing a budget because of a variable income. If you’re a freelancer, gig worker, or work on commission, your monthly income likely varies. That can make it tougher to budget. Methods like the 50/30/20 budget may be a good fit, so you have percentages as a guide regardless of how much you’re making.
• Not reassigning funds for other purposes. Even with the envelope system, you may dip into other budget categories if you’re at capacity in one category and need to adjust. For example, if you've hit your limit on gas for the month but d need to make an unexpected trip, you can always pull funds from your entertainment envelope to cover those costs.

The Takeaway 

Setting up a budget is like finding the perfect pair of jeans — it might take some trial and error, but once you find the right fit, you'll wonder how you ever lived without it. You can try these various budgeting methods, but the best one will be the one you can stick with and use on a regular basis. 

Just be sure to update your budget as needed and continue tracking where you’re at and where you’re going. Your future self (and your wallet) will thank you.

Learn more about how to budget effectively.

This article was written by Cassie Bottorff from Fortune and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.