Budgeting Methods Getting Attention

It may be tempting to focus on one type of budgeting method when teaching students about budgeting, perhaps what works best for us, or what is fairly easy to adopt. Budgets are meant to help us stay on track for whatever our goals are, but with different goals, come different needs, and budgeting is therefore not one size fits all. Given that only 47% of Americans actually keep a budget (according to a 2020 National Foundation for Credit Counseling survey), helping people find the right method for them might help that figure increase over time.

This review of the five most common budgeting methods is a good resource not only because they are described in one document, but because it ties budgeting method to different goals and types of people. (RealSimple) Here is a summary of each.

Many teach the 50-30-20 method of budgeting, which is appropriate because it is good for beginners. It is simple, with only three categories (needs-wants-savings), takes little time to manage/track, and there is less guilt involved in splurging on “wants” as long as you stay within your twenty percent. However, during the pandemic, this method may not have been the best. At a minimum, the percentages may have had to change, putting more into needs/savings if income was reduced or uncertainty about the future income increased.  

Go Banking Rates offers more help for people using this and other similar budgeting methods by explaining the difference between fixed and variable expenses in great detail with lots of examples.

Zero-sum budgeting is much more detailed and time consuming. In effect, every dollar of income is “spent” or assigned to a category. It can vary from month to month, and should include categories that cover paying down debt, if necessary, and saving for irregular expenses like insurance payments or travel or other large purchases. If you tend to spend too much, this method might help identify where the money is going and help reign in the spending.

            (CNBC goes into a bit more detail)

The line-item budget is a traditional method of budgeting. You create a spreadsheet with every category of income and spending, and fill in the figures based on experience. It easily allows you to follow trends in spending categories over time. The detail may help someone control spending, but the detail and time required to maintain it might lead others to give up the process altogether.

The envelope method is a real old-school method based in times when people were dealing mostly with cash, although it is possible to create a digital version. (Dave Ramsey likes this method.) It is helpful for people who are easily tempted to overspend. By using a cash-based system, and having an envelope of cash set aside when you are paid for every category of spending during the pay period, you can’t overspend if you keep your hands out of other envelopes once the envelope for a designated spending category is empty (and you don’t pull out a credit card.) I have reverted to this system in my personal life whenever times (and cash) were tight.

The fifth system listed in this article is a hybrid system. Pick and choose the features of any budgeting method and merge them into a unique system that will work best for your circumstances.

A different method was included in a Motley Fool article suggesting alternatives to the envelope method. One of them, “the 5-minute-a day budget” looked a bit different from others I have seen. (I think an app like Mint might make this one a bit easier to implement.) It will take much more than five minutes to set up, but only a few minutes per day to track and make adjustments.

• Make a list of all your monthly bills, (automate them), and note the date they will be paid.
• Check your checking account balance daily. Check what has been deposited or withdrawn against your master list and see what else will be paid from the account before more funds are deposited, to make sure the balance will cover the upcoming payments.
• Decide on a cash cushion to leave in the checking account, and move any surplus to savings.
• Wash, rinse, repeat daily.

The methods listed here so far are forward-looking budgets, helping people set and reach financial goals. Some may reflect historic spending, but another more unusual method called “backward budgeting” was explained in a second RealSimple article. This method has you look back at last week’s spending to set a budget for next week. It ends up being more “realistic” than people using a forward budgeting method, and looking back over several months versus one week will help you catch the more infrequent expenditures and plan for them in the future. The article noted a downside to backward budgeting: while more realistic, folks using it tended to spend more over time.

Buy Now Pay Later: a Game Changer or Budget Buster?

By now you have probably seen the this option pop up when purchasing something online, allowing you to spread the payments for whatever it is you are buying into smaller payments over several weeks. More BNPL firms are popping up, and more retailers are offering them. How do they work in terms of credit reporting? What are the costs of missing payments? This NYT article breaks it down, or you can read more about BNPL in the recent NGPF blog What’s New With Managing Credit. It might be important to include this in any budget discussion.

Budget versus Financial Plan

In a nutshell, budgeting is all about keeping your current spending within certain limits, described in this NYT article as “guardrails.” To be effective, it needs to be maintained and adjusted. A financial plan, on the other hand, it about reaching longer term financial goals. Your budget may have line items for a variety of savings goals, paying down debt, etc. Determining how much to devote to a budget for these items, and how and where to invest these funds is what your financial plan tackles. This process is also dynamic, as your life circumstances change (marriage, kids, new jobs, etc.) your goals may change as well.

Budgeting Apps

Regardless of budgeting method selected, I can see students' eyes roll at the suggestion of using pen and paper or a spreadsheet to get the job done and asking “is there an app for that?” For a current list of highly-rated budgeting apps with descriptions, NerdWallet names its top seven, listed below. You can match your preferred budgeting method to an appropriate app.

• PocketGuard, for a simplified budgeting snapshot
• Mint, for budgeting and credit monitoring
• YNAB and EveryDollar, for zero-based budgeting
• Goodbudget, for shared envelope-budgeting
• Honeydue, for budgeting with your partner
• Personal Capital, for tracking wealth and spending

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.