1 50/30/20 rule
If your goal is to save and spend responsibly, then this may make sense for you. Typically ideal for budget beginners, students, and young professionals, this rule can help you make sure your important expenses are covered while allowing room for the things you enjoy. You create a reasonable budget that you can realistically adhere to over time in order to meet your financial objectives.
Advantages
- Offers you a simple, straightforward, and easy-to-use method
- Encourages you to save
- Adjusts easily as your goals change
- Promotes long-term financial savings
Disadvantages
- May not work if your income is lower because most of your funds will likely go to needs
- Can encourage overspending if your income is higher since you may have more discretionary spending than necessary
- Slows your progress if you have multiple goals
- Lacks clear guidelines on how to spend your extra money
2 80/20 rule
If you’d like an even simpler plan, then the 80/20 budget method may work best. Using this method, you don’t have to differentiate between your wants and needs. Instead, both categories are lumped together, and you don’t have to track as closely or differentiate. You start by first paying yourself 20% of your income, then you’re free to spend the rest on your needs and wants. This simple and beginner-friendly budget can help you save money and pay off debt early.
Advantages
- Consumes less of your time because it’s simple
- Offers you a flexible plan
- Helps you save money
Disadvantages
- Doesn’t work for everyone due to simplicity
- Lacks structure in tracking your spending
3 50/15/5 rule
You may prefer the 50/15/5 rule if you’re juggling multiple financial goals such as saving for retirement, a new car, and your child’s education. With this plan, you save for immediate and future needs before spending your income on anything else. But you don’t have to worry about micromanaging every penny. You can gain both control and confidence about your finances by analyzing how you save and spend in each category. This method works well for beginners who have straightforward financial situations.
Advantages
- Requires minimal tracking
- Helps you understand what you can afford
- Provides you with flexibility on your budget
- Encourages saving more for your retirement
- Helps prepares you for an emergency
Disadvantages
- Lacks detail about where you may be overspending or what to do with extra money
- Typically not suited for lower-income households who may need more than 50% of income for needs
- Can encourage wasteful spending among high-income households
- Doesn’t encourage building long-term, non-retirement savings
4 Envelope system
You can use the envelope system to track exactly how much you spend each month by tucking away cash in labeled envelopes for each expense category. During the month, you can look inside an envelope to see what you have left to spend. With this method, it’s very clear where you may be overspending. Once an envelope is empty, you’re done spending in that category until more money is added to the envelope. Using this method can help control your spending and allow you to achieve your financial goals.
Advantages
- Keeps you on track
- Enforces discipline
- Holds you accountable
- Makes it difficult for you to overspend
Disadvantages
- Requires taking cash out of your bank account
- Involves juggling cash
- Challenges you to only spend what you have
5 Zero-based budget
If you use zero-based budgeting, then every dollar of your monthly income has a purpose. Each month, your income minus your expenses equals zero, but that doesn’t mean your goal is to spend everything you earn. Important goals—such as saving money, paying off debt, or taking vacations—are all part of the plan. This strategy is designed so you think about how every dollar is spent.
Advantages
- Makes you very aware of your income and expenses
- Promotes building your savings
- Offers you flexibility
- Provides detail on your spending habits
Disadvantages
- Requires you to devote time for detailed planning
- Difficult to plan if your expenses vary
- Challenging if your income is unpredictable
Financial budgeting to reach your goals
Managing your finances involves making many decisions, including selecting the right budget. You need to decide which budget is best to help you reach your financial goals. Understanding how budgets work, as well as the advantages and disadvantages, can help put you on track to reach your financial goals now and during retirement.
