I’ve tried many, many different budgeting strategies, budgeting apps, and budgeting programs. (It’s just one of the perks or sometimes one of the drawbacks of being a financial writer obsessed with finding the best budgeting system out there.)
I’ve learned that finding the right budgeting strategy for you really depends on your goals, your stage in life, and whether or not you need to change your habits. So, below I’ve listed four different budgeting strategies to try this year with an explanation of who they might serve best.
The Cash Envelope System
The cash envelope system is an old classic. There’s a reason so many people use it or have used it before. With the cash envelope system, you do most or all of your day to day spending with cash. You can set your monthly bills, like your mortgage, car insurance, and more to auto deduct.
However, everyday spending like groceries, eating out, clothing purchases, and more come from your cash spending.
The cash envelope system is good for these situations:
- People who are deeply in debt and need to learn how to control their spending.
- Those who don’t have access to credit cards or live in locations where credit cards aren’t easily accepted.
- People who are single and don’t have to share envelopes with a spouse.
- Anyone who simply like using cash way better than debit cards or credit cards.
I used the cash envelope system with great success when my husband and I lived abroad in Grenada, West Indies. For three years, I took cash out of the ATM at the beginning of the month and used it to pay for all of our bills.
Grenada has a very cash-based economy, though. I paid for our apartment rent with cash. I paid for my long term car rental with cash. And, I paid for everything else with cash, including dinners out, fun activities with friends, and more. There just wasn’t someone with a card reader on the island willing to take a credit card so you could buy a coconut!
These days, I have two kids, mounting financial responsibilities, and seemingly endless amounts of unexpected expenses. So, I don’t use a cash envelope system anymore. Instead, I use my debit card all month, but I make sure I have all the money I need for the month before it starts using YNAB.
If you want envelope based budgeting but don’t want to carry around cash, QubeMoney is an option that might be appealing. QubeMoney is an envelope budgeting app layered on top of a real bank account. Your envelopes are called “qubes” and after you get paid (into your QubeMoney bank account), you pick how much goes into each qube. You also get a debit card linked to those qubes and before every transaction, you go into the app and pick a qube to use and the app handles the rest. It’s worth a look if you want to use this method but are skeptical about carrying actual cash. (here is our full QubeMoney review)
If you like printable worksheets, here are 10 free budget printables to check out.
The “You Need a Budget” System
You Need a Budget, also known as YNAB, is a budgeting system that you use online with your phone or your computer. Much like the cash envelope system, you decide at the beginning of the month how you want to spend your money. That’s why I sometimes call this budgeting system the “One Month Ahead” system too.
Once you sync your bank account, YNAB tells you what you have available to spend. Then, you allocate that amount to your budget categories. With the cash envelope system, you can move cash between envelopes if you’re running low. However, with YNAB, you do all of this digitally.
For example, I knew I had to get the headlights on my car fixed. I allocated $200 towards that expense, which I thought was more than generous. It turns out, the repair cost me $389! I was very much not expecting that. Luckily, instead of feeling guilty, I simply moved money from my “fun money” and “babysitting” categories and put it into my car repair category.
Sure, this means I don’t get date night this month, but that’s #adulting for you.
Keep in mind that YNAB does require a monthly fee and you can learn more about the features and community in our You Need a Budget review. However, I’ve used a ton of budgeting systems, and I tend to get irritated when the app is free but full of ads. So, I’m happy to pay $7 a month for my YNAB subscription, but if you don’t want to pay that, here are four YNAB alternatives.
The 50/30/20 Budgeting System
The 50/30/20 budgeting system (one of our first money ratios) at its core is advice on how to split up your earnings every month. This plan suggests that you spend 50% of your take home, after tax pay on needs. Needs include your mortgage payment, your bills, and even the minimum payments on your credit card (since it could hurt your credit if you fail to pay them.)
Then, 30% of your take home, after tax pay should be used on wants. For example, a need might be a new winter coat, but a want might be a new purse that you saw in the mall and absolutely love. Wants would also include new throw pillows, your gym membership, and dining out – basically, anything that isn’t imperative.
Lastly, 20% of your take home pay should be used for debt repayment and saving. So, if you’re in credit card debt, you can use this 20% to pay above the minimum. You can also use it to create an emergency fund or save towards future goals, like an engagement ring, wedding or retirement savings.
You can use the 50/30/20 in conjunction with budgeting software or budget apps. I personally don’t use this because my husband and I are aggressively paying back his medical school loans. This takes up about 35% of our budget each month and so the ratios don’t work for my personal situation. However, they could be a good guideline for people who are looking to start a budget and want to know roughly how it should be allocated.
The Multi-Bank Account Budgeting System
Many different folks have been writing about the benefits of budgeting using multiple bank accounts. Jim has written about using them as banking firewalls to protect your secure accounts from the less secure ones. Others have written about having a dozen savings accounts, before simplifying their finances.
I have to say, at first I thought this was overkill, but I understand it better now. These bloggers are using their bank accounts like digital envelopes. Instead of using one bank account and allocating money to each category like I do in YNAB, they are instead finding discipline through having completely separate accounts.
For example, one blogger wrote about how they have a separate debit card just for dining out. Every time they go out to eat, they use only that card. That really prevents them from overspending. Another great idea was having a separate account for large expenses that come infrequently like property taxes or the car insurance bill every 6 months. This helps them to get a substantial amount of money out of sight and out of mind until they need it.
Ultimately, there are many different ways to budget your money.
What type of budgeting strategy do you currently use?
Have you always used that strategy or have you switched for various reasons?
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Wes Shannon, CFP® says
As a financial planning professional™, I thought this was a very informative article. I especially appreciate you showing what budgets fit what stages of life. Keep up the good work.
Bill Dwight says
We see a lot of families using prepaid cards loaded with budgeted amounts as digital version of the classic cash envelope system. The advantages: Make online payments.
Track your spending history automatically with an electronic audit trail.
Detect unauthorized usage immediately with activity alerts.
Recover from loss or theft. Just lock the card, file a claim for any unauthorized purchases, and order a replacement — no harm no foul.
It’s a variant of your last option with no risk of overdrafts (if you pick the right prepaid card program). Overdrafts on bank debit cards can be surprisingly tricky to avoid – like the loophole that overdrafts from recurring charges (think Spotify, Netflix) are not protected by Regulation E.