How to Choose the Right Budget System - NerdWallet (2024)

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Budgeting systems are designed to help you understand and evaluate your relationship with money. While all share a common goal, they often use distinct tactics to get you there.

We’ve narrowed down some options to help you find one that resonates. Use these recommendations as a guide.


How to Choose the Right Budget System - NerdWallet (1)

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4 budgeting methods to consider

1. Getting started: The 50/30/20 budget

What’s appealing about this system is that it gives you room to pay down debt, cover current costs and save for future expenses. It splits your income across three major categories: 50% goes to necessities, 30% to wants and 20% to savings and debt repayment. You can use it by itself or as a baseline for other flexible budgeting methods.

NerdWallet's budgeting app is based on the 50/30/20 approach.

2. Curb your spending: The envelope system, or 'cash stuffing'

If you need a rigid system to help you stop spending money frivolously or stay out of debt but don’t want to track every purchase, try this cash-based approach. You set a spending limit for each expense category, like groceries, then fill envelopes with the allotted cash you can spend in each (hence the "cash stuffing nickname that's often used on social media). Once an envelope is empty, you can’t spend any more money on that particular category for the month.

“Our brains are wired so that something tactile in front of you that you can smell and feel is more real than something on your phone or a number in your bank account,” says Daniel Chong, a certified financial planner in Irvine, California. “If you can’t seem to get a grasp on a certain spending category, then cash is king.”

The Goodbudget app is based on the envelope system, for those who like the method but don't want to deal with paper envelopes.

» MORE: Try this free budget worksheet

3. Build up your savings: Pay yourself first

Designed to align your spending and values, this “reverse” budget puts savings before immediate expenses. With this system, you decide how much to set aside from your monthly income for savings goals like retirement and an emergency fund, then use the rest for bills and other costs. That way you don’t have to crunch every number.

4. Make the most of every dollar: The zero-based budget

This budget suits overspenders and meticulous planners alike. It makes monitoring your spending clear. You take your monthly income and use every dollar in a deliberate way — like saving a certain amount for a trip and paying for utilities and groceries — until there are zero dollars left. But if you don’t strictly use cash as with the envelope system, you’ll have to log each expense to make sure you’re on budget. Budget apps such as YNAB and EveryDollar can help you follow a zero-based budget.

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How to choose the right budget system

Figure out where you are and what you value

If you don’t know which route to take, do a financial self-assessment. Your present financial state and goals can give you a clue. Perhaps you’re in debt and need a system to help you decrease spending or you want to learn how to balance expenses with saving for a down payment on a house. Once you know where you stand and what you hope to accomplish, pick an option that matches those needs.

How to Choose the Right Budget System - NerdWallet (2)

Decide how much effort you’re willing to devote

Consider how much time and maintenance a budgeting system involves before you get on board. Some have strict requirements, while others are more flexible. For example Excel spreadsheets and the zero-based budget demand frequent and detailed expense tracking. The pay-yourself-first system and apps that sync to your financial accounts require little upkeep.

How often should you budget? There’s no set rule, so go at your own pace. If you’re confident with your financial state, you can probably get away with reviewing your information once a month or a couple of times a year. Those who are still figuring out how to handle their money may want to check in weekly or after every purchase they make.

Compare manual and digital budgeting options

Determine whether you want to take a DIY approach to budgeting or seek technological assistance. Personal finance software can be convenient if the app or program lets you automate savings or access and update your information on the go. If it doesn’t automatically input and categorize your purchases or it's hard to use, it might not add much value.

For some, a hands-on approach, like with pen and paper, is best. Writing things down can help you retain information and feel connected to your budget. If you’re not comfortable linking your bank accounts to an electronic budgeting service, a physical method can save you worry, too.

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Still not sure which budget system is best for you?

Some experts say there’s no need to follow a specific budgeting system as long as you’re aware of important details like your income, debts, goals and general spending. If you live within your means and know you’re on track to reach your goals, then tracking every penny is probably overkill, says Catherine Hawley, a CFP in Monterey, California.

“You don’t need to know that your electric bill was exactly $83.82 last month. You just need to know that you’re kind of within some general parameters, and I think that can actually be a relief to people,” she says.

How to Choose the Right Budget System - NerdWallet (2024)


How to Choose the Right Budget System - NerdWallet? ›

Start with a financial self-assessment. Once you know where you stand and what you hope to accomplish, pick a budgeting system that works for you. We recommend the 50/30/20 system, which splits your income across three major categories: 50% goes to necessities, 30% to wants and 20% to savings and debt repayment.

How to choose the right budget system? ›

How to Choose a Personal Budgeting Method
  1. Take stock of your current financial status and priorities. Evaluate whether your current situation lines up with your future goals. ...
  2. Decide what you're willing to do. ...
  3. Take a digital or manual approach. ...
  4. Choose a budget that matches your financial goals.

What is the 50 20 30 rule? ›

One of the most common types of percentage-based budgets is the 50/30/20 rule. The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings. Learn more about the 50/30/20 budget rule and if it's right for you.

What is the 70/20/10 rule money? ›

The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.

What is the 75 15 10 rule? ›

In his free webinar last week, Market Briefs CEO Jaspreet Singh alerted me to a variation: the popular 75-15-10 rule. Singh called it leading your money. This iteration calls for you to put 75% of after-tax income to daily expenses, 15% to investing and 10% to savings.

Is the 50/30/20 rule realistic? ›

For many people, the 50/30/20 rule works extremely well—it provides significant room in your budget for discretionary spending while setting aside income to pay down debt and save. But the exact breakdown between “needs,” “wants” and savings may not be ideal for everyone.

What are the 4 budgeting systems? ›

There are four common types of budgets that companies use: (1) incremental, (2) activity-based, (3) value proposition, and (4) zero-based. These four budgeting methods each have their own advantages and disadvantages, which will be discussed in more detail in this guide. Source: CFI's Budgeting & Forecasting Course.

Is $4000 a good savings? ›

Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.

What is the 40 40 20 budget rule? ›

The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.

Is the 50 30 20 rule outdated? ›

However, the key difference is it moves 10% from the "savings" bucket to the "needs" bucket. "People may be unable to use the 50/30/20 budget right now because their needs are more than 50% of their income," Kendall Meade, a certified financial planner at SoFi, said in an email.

What is the #1 rule of budgeting? ›

The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).

Is the 30% rule outdated? ›

The 30% Rule Is Outdated

To start, averages, by definition, do not take into account the huge variations in what individuals do. Second, the financial obligations of today are vastly different than they were when the 30% rule was created.

What is the 60 40 budget rule? ›

Save 20% of your income and spend the remaining 80% on everything else. 60/40. Allocate 60% of your income for fixed expenses like your rent or mortgage and 40% for variable expenses like groceries, entertainment and travel.

What is the 20 10 rule tell you about debt? ›

The 20/10 rule follows the logic that no more than 20% of your annual net income should be spent on consumer debt and no more than 10% of your monthly net income should be used to pay debt repayments.

What is Rule 72 in accounting? ›

The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double.

What is Rule of 72 in financial accounting? ›

It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.

What is the difference between 50 30 20 and zero based budgeting? ›

The 50/30/20 rule is a budgeting strategy that divides your income into three buckets: 50% for needs, 30% for wants and 20% for savings and debt payoff. What Is a Zero-Based Budget? A zero-based budget has you give every dollar you earn a job so that no money is left unaccounted for.

What are the 5 basics to any budget? ›

What Are the 5 Basic Elements of a Budget?
  • Income. The first place that you should start when thinking about your budget is your income. ...
  • Fixed Expenses. ...
  • Debt. ...
  • Flexible and Unplanned Expenses. ...
  • Savings.

What type of budget is good? ›

The 50/30/20 budget

A good goal is spending 50% of your income on needs; 30% on wants; and 20% on savings and debt paydown beyond minimums. (Your budget may look different if you're just starting out or live in a high-cost area.)


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