Which budgeting methods are the right ones for you?

If you find budgeting laborious and hard to stick to, it might just be that your not matching your budgeting methods to your personality and lifestyle.

“You mean I have to track every dollar? Every week? On a spreadsheet?!”

“Um, why would I want to carry cash around in an envelope?!”

“But I want to take a holiday now, not plan for one when I’m 65!?”

Your friend has just told you about their ‘best ever’ budgeting method, but you’re not sold. Great that it’s working so well for your mate, but their plan seems really limiting and awkward. You simply couldn’t live like that.

That’s the thing about budgeting: you’ve got to find what feels right for you. Otherwise you’ll never stick to it. Otherwise you’re wasting your time.

Just remember, though, that budgeting itself isn’t a waste of your time. So if hearing about other people’s budgeting methods has turned you off budgets altogether, you’re not winning.

Whether you have a budget or you don’t, the money still gets spent. If you’d like to have a better idea about what it’s being spent on, and a better chance at saving some of it, you need to find a budgeting method that best fits your lifestyle.

Here’s a rundown of different budgeting methods. I promise there will be a method here that suits you, so stay open!

Category budgeting
Envelope budgeting
Percentage-based budgeting
Values-based budgeting
No budget budgeting

1. Category budgeting

If you’re the kind who doesn’t mind the odd spreadsheet, then category budgeting might suit you well. With this method, you allocate your monthly budget based on what you generally spend your money on. That way you can track where you’re money is going and tweak your spending accordingly.

I use this method of budgeting, so to give you an idea of what it looks like, here are the categories I track each month (I love a good spreadsheet):

Charity – we donate to three charities regularly and other charities occasionally.
Children – this is basically my kids’ allowances and random spending.
Eat Out – I separate out our groceries from eating out, but a general ‘food and drink’ category might work for you.
Education – I’m tempted to merge this with the ‘children’ category, but haven’t yet done so.
Financial – this is for fees and fines and I try to have a zero actual balance in this category at the end of each month.
Gifts – I find it helpful to track gift giving separately, but I get it might feel a bit miserly to many.
Groceries – the first thing that hit me when I first started category budgeting was how much of our income went towards food we eat at home.
Health – medical, pharmacy, vitamins, gym memberships, etc.
Home Entertainment – this includes Netflix, Spotify, games, iCloud storage and any home-based leisure/hobbies.
Household – anything we spend on our house that isn’t utilities or the mortgage. Think ‘rates’ and ‘garden supplies’ and ‘pool equipment’.
Housing – the cost of our mortgage.
Insurance – speaks for itself. Just know that it’s worth tracking how much you spend in this category.
Investing – aka savings other than our emergency fund. Each month we automatically transfer savings straight into investing in shares and ETFs.
Leisure – money for anything we do outside of the home that’s not eating out.
Personal – clothing, hair cuts, treating myself to a well-deserved facial, etc.
Pets – our dog and chickens costs us more than we ever thought, so it’s worth tracking their food, vet bills and other spend carefully.
Transport – everything it costs us to get from A to B, including all car costs and public transport.
Utilities – electricity, gas, mobile phones and water.
Other – 100 bucks a month just in case.

For a peek at a different way to set up your categories, see how Jessica Irvine from Money With Jess sets up her categories here.

2. Envelope budgeting

Why would you want to carry cash around in an envelope? Well, because it’s a simple-as method of staying on track with your budget. Envelope budgeting would suit anyone who doesn’t like spreadsheets, limiting themselves to set life categories or tracking every dollar.

On payday, you allocate your money into different envelopes so you know exactly what you can spend each month.

Your envelopes can be as simple as:

Spend
Pay off debts
Save

The Barefoot Investor method is an envelope-style of budgeting. It’s a bit more complex than the example above, but the envelopes are essentially:

Daily expenses – 60 per cent of your income goes into this envelope and is used for everyday transactions like bills, rent/mortgage and groceries.
Splurge – 10 per cent of your income that you can spend however you like (daily coffee, dinner out, new clothes, whatever catches your eye).
Smile – this envelope holds 10 per cent of your income to put towards your savings.
Fire extinguisher – Pape recommends putting 20 per cent into this envelope to ‘put out financial fires’. That might be paying off debts, saving for a home deposit or paying your mortgage down faster.
Mojo – this is your emergency fund envelope that you build up over time (no set percentage of your income is allocated). Pape wants you to aim to have a minimum of $2k in here to use in the event of a job loss or health crisis. Let’s just say the $2k is he bare minimum to get you through a financial crisis, so stack this envelope high.

Now, some of your ‘envelopes’ can be actual envelopes, if you want to work in cash. But generally it’s going to be a bigger, virtual envelope – like a bank account. The point is that this budgeting method is fairly loose and easy. Once you’ve spent what’s in your envelope that month, you’re done until next payday.

3. Percentage-based budgeting

This budgeting method means you pay less attention to categories of spending and more to the overall percentage of your budget that your expenses are using.

Percentage-based budgeting can be as simple or as detailed as you can stand. Elizabeth Warren is famous for her 50/30/20 budget – 50 per cent towards needs, 30 per cent towards wants and 20 per cent towards saving.

If that’s too loose for you, you can use the categories budgeting method and instead of setting your budget based on expenses in each category, set it on a percentage instead.

One of the advantages of percentage-based budgeting is that you can set aside the percentage of your income that you want to save first. So, you could simply decide that you want to save at least 10 per cent of your money and it doesn’t matter what you spend the other 90 per cent on.

This budgeting method is particularly popular with those following the FIRE movement because you take care of your savings first. FIRE advocates try to save at least 50 per cent (preferably more) every single month.

4. Values-based budgeting

If you’re worried that your budget will give you a severe case of FOMO, this method is worth a try. Actually, all budgeting methods should be ‘values-based‘, but this one takes it next-level.

With values-based budgeting, you set your budget based on what matters the most to you. So, if you’re big on travel, you’re going to allocate a good proportion of your money towards it. Or fine dining, or camping, or buying every Pay TV subscription service on offer. Or whatever floats your boat.

Whatever it is, you make it count the most in your budget. Just remember that values-based budgeting is a ‘push/pull’ strategy. You can’t value everything. If you’re going to allocate a big sum towards eating out, you might cut back on your groceries. Or if travel takes priority, eating out might be what you cut right back on.

This is one of the best budgeting methods for anyone who wants to ‘live well’ (whatever that looks like for you) now, not just in the future. That said, sensibly you’ll be looking after future you as you go, because you’ll want to live well ‘now’ when you’re older, too.

5. ‘Pay yourself first’ budgeting

This is an easy method of budgeting that means you put a certain amount of money aside for ‘future’ (bills, mortgage, investments, super, etc) and the rest you can spend however you like. It may mean some weeks you eat 2-minute noodles so you can buy a designer outfit, but that’s how you’ll roll. There are no rules beyond the ‘pay yourself first’ rule.

It’s a quick and easy method of taking care of your future commitments so you can live more freely in the present. You can find out more about this method here.

6. Frugal or ‘no budget’ budgeting

This budgeting method works well with any of the above, but it can also operate as a stand-alone budget. It’s particularly suitable for anyone who really can’t stand numbers or hates having to track what they spend. They’d rather work on having the discipline to say no in the first place.

The principle is very simple: just don’t spend any money unless you absolutely have to. The lower you can keep your expenses, the more you’ll have left at the end of the month to save and invest.

This will help: 101 frugal tips to help you live a richer life

The frugal budgeter will always pay off any debt first, then work on spending as little as possible for the rest of the month. That’s it. That’s the budget.

Some people really get into frugal budgeting, trying to ‘beat’ the amount they spend month to month. Just be careful that this budgeting method doesn’t turn you into a cheapskate…

Fundamental principles for all budgeting methods

I hope this has meant you feel less scared of setting yourself a budget. Any budget should be tailor-made to suit you and the way you want to live. Rather than ‘missing out’ on things because you’re ‘on a budget’, your budget means you can happily say yes to what you want to do because, yep, you’re ‘on a budget’. You know you’ve got money to spend on X, because you’ve taken care of Y.

No matter which of the budgeting methods you choose, there are certain fundamental principles that apply. Without them, a budget isn’t worth much at all. Click on each principle to learn more: