So you’ve decided to take control of your finances, get your budget in order and live
the life that you deserve, but you run into a problem.
There are so many different budgets to choose from that it’s almost impossible to figure
out which one is right for you.
Today, that’s what we’re going to try and figure out.
We’re going to be going over the 6 most common styles of budgeting, discussing the
pros and cons associated with each style, and hopefully making it easier for you to
make a decision on which to start with and use.
Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about
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So the 6 most common styles of budgeting are the percentage based budget (such as the 50/30/20
budget, the 6 jars budgeting method, and the 60% solution), the hard copy budget (such
as the cash-only budget), the comprehensive budget (such as a line item or zero-based
budget), the automatic budget (or the no-budget budget), the value based budget, and the reverse
budget.
You could also throw in a business budget or some sort of custom budget here but we’ll
just be focusing on the 6 most common styles of budgeting for personal finance today.
Just so you know, if at any point during this video you find yourself wanting more information
on any of these budgets you can check out my budgeting playlist which I’ve left a
link to in the description of this video to find more in-depth explanations regarding
each of these budgets.
Now let’s get started with the list.
One common style of budgeting is known as the percentage based budget.
The percentage-based budget comes in many forms.
T. Harv Eker’s 6 Jars budgeting method, Jim Rohn’s 70/10/10/10 budget, Richard Jenkins’
60% solution, and the 50/30/20 budget based on the book All Your Worth by Elizabeth Warren
are all popular examples of this style of budgeting.
On a basic level, their purposes are all the same.
They’re meant to help you allocate certain percentages of your money toward covering
all of your financial obligations and goals.
The percentages differ, of course, for example, under the 50/30/20 budget you simply divide
your income up into the 3 categories listed in the budget.
50% of your income goes toward covering your necessities, 30% goes toward your wants, and
20% goes toward your financial goals.
While in the 70/10/10/10 budget, 70% goes toward your needs, 10% goes toward your active
capital such as a savings account, another 10% goes toward passive capital like a 401K
or IRA, and the last 10% is given to charity.
However, despite these differences, the fundamental goals remain the same.
The primary advantage of these types of budgets lies in their simplicity.
For every dollar, you make you already know exactly how much money is going toward each
category in your budget.
And provided that you aren’t in dire straits financially and the percentages are accurately
applied to meet your goals any of these percentage-based budgets can work out very well.
The problems arise when the percentages aren’t applied accurately for your goals or when
you are in dire straits financially.
Let’s look at an example to illustrate how this could possibly work out for the worse:
Let’s say that John is 55 years old, has no retirement savings, makes $36,000 a year,
has a bought and paid for home and the following debts: $5,000 on a credit card at 15% interest,
$10,000 on a car loan at 5% interest, and $20,000 on a student loan at 4% interest.
The monthly minimum payments are $100 for the credit card, $186.43 for the car loan,
and $202.49 for the student loan.
In total, these minimum payments amount to nearly $500 a month, or about a sixth of John’s
total income.
If John were using the 50/30/20 budget (and assuming he didn’t adjust the numbers to
fit his situation) he would be putting $1,500 a month toward necessities, $900 a month toward
his wants and $600 a month toward his financial goals.
The $1,500 a month toward necessities is a certainly doable especially since his home
is paid for, the $900 a month toward wants is not half bad, the concern for John’s
case, in particular, is the $600 a month toward his financial goals.
With nearly $500 of that amount going toward paying down his debts, he isn’t left much
to put towards his investments which is a potentially scary issue given that he is 55
years old and has no savings put away for retirement.
In order to cover his necessities alone in retirement, John would need to have saved
roughly $450,000.
If he invested the remaining $100 a month of his financial goals money after paying
his minimum payments on his debts and earned an average return of 8% he would be financially
independent in about 43 years when he turns 98 which probably isn’t the time frame he’s
hoping for.
If he sold a bunch of things to paid off all of his debts and put the full $600 a month
toward his investing he would be financially independent in 22 years and 5 months when
he is 77, which is… better but probably still not the time frame he is hoping for.
However, if he adjusted his necessities a bit lower (say down to $1,200 a month instead
of $1,500) and put half of his wants towards his investments while still putting the full
$600 a month towards his investments he would be financially independent in just 15 years
when he turns 70.
And this is assuming that he earns nothing from social security of course.
If he did that would lower his, for lack of a better phrase, “out of pocket” costs
in retirement a bit thus making it even easier to become financially independent by the time
he wants to make that transition.
But as you can see depending on what other factors there are with his finances he may
want to consider paying off those debts and adjusting some of those figures between now
and retirement so that he can support himself when he leaves the workforce.
A second common style of budgeting is the hard copy budget.
The most popular version of this budget is the envelope or cash-only budget.
The primary purpose of this budget and its biggest strength is ensuring that you never
live on more than you make and that you can control your spending, particularly in areas
of the budget that are often budget-breaking.
After all, if you’re truly using a “cash-only” budget you simply can’t spend cash that
isn’t there and as a result, you’re going to have a much harder time going into debt.
To set up the budget you simply label a bunch of envelopes with the names of various things
you spend money on such as groceries, restaurants and eating out, entertainment, gas, clothing,
and so on.
Figure out how much you want to spend in each of those categories and write it down on the
envelope and fill the envelopes with the appropriate amounts when you get paid.
A couple of things I should note here is that if you get paid twice a month, you may only
be able to put half of the amount that you wrote on the envelope in there and that’s
fine, and most of the time people using this budget don’t have envelopes for things like
mortgage payments, insurance premiums, or cell phone bills because those expenses are
usually more stable and predictable, but you certainly can have envelopes for them if you
want.
And I should also clarify that while it's okay to adjust your budget amounts for each
envelope as you're going along because again you're not going to get it perfect right off
the bat, the key is to make sure that you don't start taking money out of the food envelope
in order to buy that nice pair of jeans you saw because then you're going to run out of
food money.
Or you're going to have to bring money from a different envelope into the food envelope
and then you're going to run out of money in that category and eventually it's just
an endless cycle where you're not actually controlling your spending and you’re probably
starting to rack up debt.
Which kind of defeats the purpose of using this budgeting style.
That’s really the only major con with this budgeting style as far as I can tell.
If having cash in those envelopes is going to tempt you to overspend and later beat yourself
up over it, then you may want to try another budgeting style… such as the automatic budget.
A third common style of budgeting is the automatic budget, sometimes known as the no-budget budget.
The purpose of this budgeting style is to automatically make as many of your financial
decisions for you as possible in order to give you the least amount of possible opportunities
to be your own worst enemy and break your budget.
This is done by setting up automatic payments for things like your mortgage, rent, cell
phone bill, savings and retirement contributions and anything else that you can automate.
Remember if you never actually see the money, it’s a lot harder to spend it on things
it wasn’t meant to be spent on.
The nice thing about this style of budgeting is that once it’s been properly set up you
know whatever money is left over is yours to spend on whatever you want, guilt free.
In a way, this style of budgeting is like the Hard Copy budget on steroids because it
takes the biggest con with that budgeting style and makes sure it is much less likely
to occur.
However, that isn’t to say that this budgeting style is without flaws.
If you’re going to use it long term you’re going to want to make sure that you have well
defined financial goals to shoot for.
This is mainly due to the fact that this style of budgeting is more hands-off by nature than
most styles.
It’s very easy to set things up and have everything going good initially and 10 years
zip by without any major troubles until you realize that your longer-term goals are going
to be hard to achieve if you didn’t start putting enough money towards them from the
beginning.
A fourth common style of budgeting is the zero-sum budget which is a budget that tries
to make your income minus your expenses equal zero each and every month.
Its purpose is to give every dollar a job on paper before the month begins so that there’s
no mystery or surprises that come up that you can’t handle.
It’s called a comprehensive budget because of the sheer amount of detail that goes into
it when it’s properly set up.
Everything from your mortgage payments, to your emergency fund, Christmas gifts, and
car tabs should be accounted for.
And you’re not done until you’ve given every dollar an assignment.
The biggest pro to this budget is obvious, there are no surprises that you can’t handle
and you know exactly where all of your money is going.
This makes it easier to figure out where you can cut expenses along with a whole host of
other things.
There’s a reason that I say everyone should, at the very least, try this budget.
There are a lot of benefits that it can give you, when it’s done properly, for a long
time to come even if you eventually switch to a different budgeting style.
The biggest con to this budget is probably the level of detail associated with creating
it.
It can be quite a daunting task the first time you sit down and do it, but there are
many apps and spreadsheet templates out there to help make that first go easier for you,
and if you’re doing the budget electronically it’s pretty easy to add and remove line
items each month as you go along.
A fifth common style of budgeting is known as reverse budgeting.
Reverse budgeting takes a savings first approach by forcing you to figure out how much money
you need to save each month to cover your future financial goals and then blow the rest
of your money on whatever you want guilt-free.
This budget obviously has many similarities to some of the other budgeting styles, the
main thing that distinguishes it is its focus on paying yourself first.
The strongest pro to this is that, compared to the other budgeting styles anyway, you’re
less likely to find yourself in a position where you don’t have enough money to cover
your long term future because the first, and most important, thing that you figure out
with this budget every month is how much you need to save in order to cover your future
financial goals and commitments (assuming, of course, you don’t just set this budget
and forget it, which does happen sometimes).
The con to using this style of budgeting is that especially in the beginning you may find
yourself living on a shoestring budget after your savings have been made.
This usually happens if your savings goals are very lofty and need to be available to
you in a short time period, or because you simply aren’t making much money.
Thankfully, what this can do for you is get you to focus on ways of improving your offensive
strategy so that you can earn more money and improve your standard of living.
So depending on how you look at this it may or may not be a major con long-term.
A sixth common style of budgeting is known as values based budgeting.
It’s set up in a very similar way to the zero-sum budget except with the primary goal
being to direct the majority of you’re spending towards things that you actually care about.
As a result it, if done properly, is very good at helping you to cut unnecessary costs,
while simultaneously increasing your enjoyment in regards to the money that you do spend
in addition to having probable positive effects on your general mood and happiness outside
of the times when you’re actively spending money or working on your budget.
Now I should mention that while you will likely waste less money with this budget, at least
in comparison to less detailed budgets like percentage-based budgets, that doesn’t always
mean that you’ll technically spend less each month (although you might if you value
saving and investing for your future very highly), you’ll likely just be spending
more on the things you actually care about.
This is because when using this budget you force yourself to look at all of yourself
expenses and figure out if they are worth spending money on in the first place.
If they are, then you can continue to spend that money.
You can also take this one step further and figure out if you can find a way to spend
less on that thing without lowering your enjoyment of it and its highly recommended because,
again, we don’t want to waste money if for no other reason than it means we have less
to do the things we want to do, but you’re still spending the money.
A couple of other pros to this style of budgeting is that it is extremely adaptable, allowing
you to take ideas from other budgeting styles and integrate it into this budget, without
giving up the level of detail and knowledge that you can gain from more comprehensive
budgets like the zero-sum budget.
There are three major potential cons to this style of budgeting as I see it: They are the
larger time commitment it takes to get the budget set up in that first month you use
it, the potential initial discouragement when you look at your initial financial situation
and the possibility of not having your future fully secured if you don’t put enough money
towards it right now similar to the automatic budget
One thing that I do want to note about these cons is that, similar to the other budgeting
styles I’ve mentioned, they all have workarounds.
The time commitment can be worked around by using a template that someone else has already
made for you that you only need to spend a few minutes modifying to fit your needs.
The future being properly funded and secured issue can be solved by educating yourself
on how much you’re likely to need when that time comes and working backward to figure
out how much needs to be saved in order to meet that goal (essentially taking the main
idea from the reverse budget and using it as part of your budget here), and the potential
(and I want to stress potential) initial discouragement that you may experience if you find that you
don’t have enough money left over every month to tackle all the things you want to
do can be worked around by taking advantage of the opportunities that are already there
for you.
Whether that be by you paying down debts (if you have them) so that you have more of your
money staying in your pocket instead of someone else’s every month, or getting a part-time
job, investing, or starting a side hustle to earn some extra income whether actively,
passively, or both, and finding ways to get what you want to get out of the things you
want to have, do, and be in a more cost-effective way, or heck even all of the above.
Remember… there are always options.
So don’t ever let that initial discouragement stop you from reaching your own version of
financial success.
But that'll do it for me today once again if you enjoyed this video be sure to smash
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