From the rise of avocado toast, to the death of gyms and the end of cloth napkins, 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.’ Whatever you call it, it's about knowing your income and understanding the inflows and outflows of your money.”
Making a budget—and sticking to it—is job one for anyone who wants a well-ordered financial life. The new year is a season of resolutions and fresh starts, and that makes it a great time to review your existing budget plan or get started with a new budget if it’s something you’ve not done before.
How to budget: 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. Think of it as telling your money: "You're going to pay rent, you're buying groceries, and you—yes, you in the back—you're going to build up my savings."
That said, there are plenty of budget strategies to choose from. Let’s review five of the most common approaches to budgeting and examine who they are best for.
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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.
This rubric is great for providing basic guidance on how to save and spend. Fleming recommends this type of budget strategy for people who are looking for a fresh start—younger people starting to budget for the first time, or someone who is leaving a partnership and whose finances may be different as a single person.
Ryan A. Hughes, Founder & Portfolio Manager at Bull Oak Capital, cautions against this method in some cases. “It can be challenging in an environment where housing costs are high, especially in areas like the Bay Area, Southern California, New York, and other expensive urban areas. Your mortgage or rent can easily exceed 50% of your after-tax income.”
Hughes adds that while it’s not recommended, some households compromise by reducing the 30% bucket to offset the higher housing costs.
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, hence the name.
This is the method I personally use. We take all income for the current month and use that money to create a budget for the following month—since that money hits our account before we budget and spend it, there’s no guesswork necessary. When the new month arrives we know exactly what we’re able to spend on each budget category, and can adjust on the fly by reallocating funds if need be.
This method of planning things out a month in advance makes it a great option for those with unpredictable incomes since you’re always only working with money you’ve already got in the bank. Let’s consider a real-world example. If a single person with no dependents earns $4,000 per month, their total expenses including savings and debt should also equal $4,000. A rough budget might look like:
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Remember, this is just an example breakdown and actual costs will vary wildly depending on where you live. This budget would also look very different for someone who is married, must financially support children and/or parents, etc.
3. The envelope budget
The envelope system is a type of budgeting method that has been popularized by Dave Ramsey and 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. As such, this method takes a good bit of foresight and discipline.
Of course, this method also has its drawbacks. “The challenging part is that with our increasingly cashless society, it can be difficult to manage,” says David Blaylock, CFP, head of advice at Boston-based Origin, an employee financial wellness platform. Additionally, cash can easily get lost or stolen and doesn’t help build credit.
4. The pay yourself first budget
Let’s say you’re making ends meet, but spending so much on necessary expenses and the things you want now that you’re 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. Since you’re paying yourself first before allotting the remaining funds toward your other expenses, you may find that this method helps you build your savings more quickly. This method is sometimes referred to as the “Anti-budget” by Paula Pant of Afford Anything.
5. The values-based budget
If your word of the year is “intentionality,” you may find that values-based budgeting alignes with your goals. It’s all too easy sometimes to let money slip through our fingers on a whim, then look back and feel guilt or dissatisfaction about what was purchased.
The remedy to this dissatisfaction is creating a values-based budget. This option 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
Just as there are many different budgeting methods to try out, there are budgeting mistakes to be made. Budgets should be revised on a regular basis, especially during big life changes such as marriage, childbirth, divorce, moving, or a job layoff.
There are a few potential mistakes you should watch out for as you work to form new habits with your budget:
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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. Speaking of which…
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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 like You Need a Budget (YNAB) or Rocket Money to hold yourself accountable.
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Not revising your budget. Once you’ve been budgeting and tracking expenses for a while, you should take a look at your results and adjust behaviors where necessary. Do you find yourself spending more on dining out than you planned for? Did you lose a source of income? Don’t be discouraged by “failure.” Instead, use these moments as opportunities to tweak things for the future and keep yourself on track.
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Forgoing a budget because of a variable income. If you’re a freelancer, gig worker, or have a commission-based job, your monthly income likely varies month-to-month. That can make it tough to budget, but it doesn’t mean it’s impossible. Methods such as 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 make an adjustment. For example, if you already hit your limit on gas for the month but have an emergency and 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 to see which option works for your needs and lifestyle, 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.
Melanie Lockert contributed to this article.
