The best system for you depends on what you’re trying to accomplish. Before picking a new or different budgeting method, figure out where your money is going so you know what areas need your attention. Perhaps you’re in debt and need a system to decrease spending or you want to save for a down payment on a house. Once you have an idea of your spending habits, align it with your goals and where you can make changes. No single budgeting method is best for everyone, so it’s important to compare each and determine what works best for you in your current circumstance.
1. Proportional Budgets | 50-30-20 rule
Best Suited For: Prioritizing Needs over Wants
Proportional budgets give you loose guidelines on how to spend and save your money.
There are different variations. For example, in the 80/20 budget, you spend 80% of your income, and save 20%. In the 50/30/20 budget, you spend 50% on necessary items (needs), 30% on discretionary expenses (wants), and put 20% toward debt and savings.
This method is good for those who don’t want to follow a super strict line-item budget, or spend tons of time updating their spending while allowing you to figure out how much to put away, and how much to spend.
General Rules of Thumb:
Needs - The Necessities
Mortgage / Rent
Utilities
Groceries
Insurance
Childcare
Healthcare expenses
Wants - The Nice to haves
Dining out
Streaming services
Gifts
Travel
Entertainment
Savings & Debt - Non-mortgage Debt and Saving Initiatives
Credit Card Payment
Student Loans
Personal Loans
Retirement Funds
Categorizing your needs correctly is important to understand your bare budget to live. Make sure to reference your goals and see if you can achieve them with your proportioned budget.
2. Pay Yourself First
Best Suited For: Prioritizing Savings and Debt Payments
Paying yourself first puts the focus on your savings. Prioritize on contributing the max amounts to your savings or debt payments and then you're free to spend the rest of your paycheck as you please.
This budgeting method is good for those who are left wondering where all their money went at the end of the month, and don’t want to follow a strict budget. The best rule of thumb is to pay off as much debt as quickly as possible. There are different strategies in paying off debt -paying off the most expensive loan first, snowball method, consolidating multiple debt etc..
If you’re in the red each month, reduce your expenses or earn more so that you have money to spare for savings.
The better part of 2021 saw inflation rising steadily, with the Consumer Price Index (CPI) up 6.8% year over year as of November. Higher prices mean you may need to be more strategic about spending to stretch your income. Learning how to budget for periods of higher inflation can help you rethink the way you spend and potentially find money to save.
3. Zero-Sum Budgeting
Best Suited For: Making Every Dollar Count
Every dollar needs to be accounted for. At the end of the month, your budget should equal zero. If you have $500 left at the end of the month, you need to give that $500 a job.
This budgeting method is good for those who often have money left at the end of the month. It can be easy to spend money left in the bank so put it to good use.
4. Envelope System
Best Suited For: Disciplining Spending
This budgeting method is usually based around using cash only.
You figure out the major expense categories you need cash for, such as groceries, gas, dining out, entertainment, fun, etc., grab envelopes for your categories, and then figure out how much money you can allocate for each.
Then divide your cash up between the envelopes each month. When your cash is gone, you can’t spend more. It’s that simple, and it forces you to get creative if you’re running low.
This method is good for those who have problems controlling their spending with credit or debit cards, don’t realize how much they’re spending or who aren't on top of their credit card payments. This is great when you first start budgeting to curb bad spending habits.
As a long term solution, it's best to switch back to credit cards to benefit from their rewards system.
Choosing a System that's Right for You
The important thing is to create your own personal budget specific to your goals and personality rather than trying to conform to someone else. If certain methods have components that appeal to you, consider adopting a hybrid system.
For example, you can start with a proportional budget method where you're spending 60% of your income. Set up an envelope system within your spending allowance and use cash envelopes for each category.
Remember, budgets are flexible and iterative. You can save aggressively for a period of time to hit a specific goal like maxing your RRSP (registered retirement plan) or TFSAs (tax free savings account). As your debt, goals and habits change so will your method.