There are some basic, inescapable facts about adult life. You need to clean your house. You need to pay attention to what you eat. And you absolutely need to have a budget. Whether you use some fancy app or just work out the math on a piece of paper, you need to take control of your finances to both avoid penury and the psychological stress that debt and financial chaos can cause.
In other words, you need a budgeting system (and a backup budget in case of financial disaster). But people don’t handle money the same way, so there’s no “one size fits all” system for managing your personal income and budget. While using any kind of system will be better than just YOLOing your way through your financial life, choosing a budgeting system that matches both your life goals and your personality will not only increase your odds of success, it will increase the odds that you stick to the system long enough to see results. Here’s a rundown of seven popular budgeting systems and who they’re best suited for.
The 50/30/20 budget
How it works: This is one of the simplest and most ubiquitous budgeting systems, especially for folks new to the concept. It divides your entire expense sheet into three categories: Needs, wants, and savings. You put 50% of your monthly income into stuff you must have (rent, groceries), 30% into stuff you want (travel, cocktails with friends), and 20% into savings (or debt reduction). You can adjust these ratios up or down if you must (or use a variation on the theme like the 60/40 Budget)—if you live in a high-cost-of-living (HCOL) area, for example, you might need to put more in the “needs” category to afford rent, for example.
Who it’s for: If you’ve never lived with a budget before, this is a great starter option. Its simplicity makes it easy to see at a glance what you can afford. For example, if you bring in $5,000 every month in income, your “needs” category has a $2,500 budget. Once you subtract food, commuting, utilities, insurance, minimum payments on stuff like credit cards, and any other expenses you can’t eliminate, what’s left is what you can afford for housing. Once you’re in the habit of thinking about how you spend your money (and you’ve got a steady stream of money heading into your savings) you can start getting fancier with your budgets.
The envelope system
How it works: Sometimes called “cash-stuffing,” the Envelope System is a way of physically tracking your money. It’s easy to say you’re only going to spend a certain amount of money on take-out, for example, but it’s very hard to track every single swipe of your credit or debit card. Using the Envelope System, you first work out your monthly budget as usual. Then you mark a bunch of envelopes with each line item: Groceries, shipping, eating out, clothes, rent—everything. Then you literally stuff cash into those envelopes. If you decided that you’re going to spend $200 on groceries this month, then you put $200 cash into the grocery envelope. When a particular envelope is empty, you can’t spend any more in that category.
Who it’s for: If you’re the type who spends kind of mindlessly, entering a kind of trance when you’re in a store or scrolling Amazon online, the Envelope System can help you maintain conscious control. Handling cash makes us more aware of our spending, for one thing, as there’s a physical change we experience by handing over physical money. And the empty envelope is a stark visual that reminds us that we’ve hit our budget, instead of having some vague and inaccurate sense of how much we’ve spent.
Pay yourself
How it works: Also called an 80/20 Budget, this is a simplified budget that focuses on just two categories: Your savings (20% of your income) and literally everything else (80%). In other words, every payday you put 20% into your savings and then you use what’s left for every single other expense, from rent to bubble teas.
Who it’s for: Folks who suffer from lifestyle inflation. If you tend to spend every dime you get your hands on, this method makes one-fifth of your money vanish into savings immediately, so no matter how many vacations you take this year you’ll still have an emergency fund to fall back on when your boss notices how many vacations you took this year.
It’s also a good choice for folks who find detail work mind-numbing, because you don’t have to track much. If you can’t handle two big, vague buckets in your budget you probably need someone else to manage your money.
Zero-based
How it works: A zero-based budget focuses on income and outlay exclusively. The goal here is to have every single dollar coming in allocated to a specific purpose, with the end result being that you have zero uncategorized dollars at the end of the month.
First, calculate your monthly post-tax income. Then list every expense you’ll have this month (including savings and retirement contributions if they’re not already taken from your paycheck), add them up, and compare the two. If they aren’t exactly equal, it’s time to adjust the budget. If you have a surplus, find someplace where the money could be used (e.g., paying down debt, extra savings). If you have a shortfall, adjust an expense down until you have zero dollars left over.
Who it’s for: Folks who lose track of their spending easily or who can’t make a percentage-based budget like the 50/30/20 or 60/40 Budget work. This could be because you live in an HCOL area and your “need” bucket is way above 50% of your budget, or because you just don’t have any money left over for savings at the end of each month. By earmarking every dollar deliberately you’ll be in full control of your money—and there won’t be any surprises.
PERK method
How it works: Developed by financial advisor Robert Pagliarini, the PERK method can be a budgeting system in itself or it can be used to periodically review your budget to make sure it’s still on track. The way it works is simple: List all of your current expenses. Then place each expense into one of four categories:
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Postpone: If the expense can be put off for a period of time, do it. For example, if you want a new phone but your current phone works just fine, postpone that expense.
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Eliminate: Sometimes our expenses just become background noise, but the PERK method forces us to think about each one. Stuff placed in this category could be dropped entirely—whether it’s an extra streaming service, or an indulgent treat you’ve gotten into the habit of paying for every single day.
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Reduce: Where can you trim the fat? If you see certain expenses rising steadily over the course of a few months, this is the category where they go so you can think about how they can be trimmed down.
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Keep: These are the expenses that you either can’t change, or simply don’t want to change because they’re important to you for any reason.
Who it’s for: If you’re the type who launches new budgeting systems with great gusto and then slowly allows them to degenerate into chaos, the PERK method will force you to reconsider your finances regularly, letting you see destructive patterns and do something about them. It’s also a useful exercise even if you’ve got a different system that works for you.
Kakeibo method
How it works: Kakeibo is a very old, Japanese budgeting system. The method encourages a more thoughtful approach to money that starts with asking yourself how much money you have, how much you’d like to have, and identifying the obstacles you’re putting in your own way. It then uses a simple system of just four categories: Survival (essential bills), Extra (one-time costs), Optional (nice-to-haves), and Culture (stuff that feeds your soul).
The point of Kakeibo is to be mindful about your money, and thus bring order to your financial house without feeling deprived. By categorizing things as “optional” you’re giving yourself permission to skip them, and having a whole category for the stuff that makes you happy helps reduce the sense of being in “money prison” that many budget systems have.
Who it’s for: If you chafe at the harsh, businesslike approach of other budgets and hate having to track dozens of line items, this more philosophical approach might make you feel empowered instead of limited.
Values-based
How it works: A values-based budget is more flexible than other budgets. You first decide on your priorities—the things that matter to you. Then you allocate money towards those priorities proportionally—and you adjust those proportions as your priorities shift over time.
For example, maybe you’re carrying a lot of debt right now, but your main priority is traveling and seeing the world while you’re young and have few responsibilities tying you down. In a values-based system, you would put more money into your travel fund for the time being. Then, when you’ve piled so much debt onto your credit cards that you’re losing sleep at night, your values shift and you re-allocate your budget accordingly.
Who it’s for: Anyone who finds other budgeting systems too rigid. A values-based budget doesn’t ignore your other debts and bills, but it allows you the flexibility to put money towards something other than the fundamentals when you need to. If you’ve tried budgeting before and keep ending the experiment to finance things they don’t cover, a values-based approach might be the solution.
