Four Budget Types Explained

Budgeting is one of those things everyone should try at least once to better understand their income and expenses — and most of us benefit from doing it consistently, month to month. But there are many budgeting methods, and that variety can be confusing the first time you sit down. This video walks through four common approaches, with the benefits and trade-offs of each, so you can find the one that fits.

Video transcript

Hi everyone. I want to talk a little bit about budgeting today and some of the different types. Budgeting is one of those things everybody should do at least once to better understand their finances and expenses, and most of us should probably do it consistently on a month-to-month basis. But there are a lot of different budget types out there, and it can be quite confusing for someone sitting down to do their budget for the very first time. I wanted to walk through some of those different budgets today, and talk about the benefits, pros, and cons to help you get started on the right foot.

The zero-dollar budget

This one can find a home for most everybody, regardless of your attitudes toward spending or money. The idea is that you take your monthly income, subtract out your expenses before the month even begins, and you’re left with zero dollars — every dollar you bring in is already accounted for before the budget period starts. One benefit is that it forces you to pre-plan and be intentional about where your money is going, like long-term investments and charitable giving. The downside is that it’s quite time-intensive: you have to sit down before the period begins, think through your expenses, meticulously assign each category so it balances to zero, and then track those expenses to see how you ended up.

The 50/30/20 budget

This is great for beginners because instead of a dozen or more categories, you only have three. The 50 is for necessary expenses you can’t live without — mortgage, groceries, utilities. The 30 is for non-essential wants. The 20 is for long-term saving, or paying down debt if you have it. The downside is that if you live somewhere with a high cost of living, or you’re coming to the table with a lot of debt, that 20% category gets squeezed and the plan can be shot before it begins.

The envelope budget

This is perhaps the most restrictive. It takes the principles of the zero-dollar budget and uses physical cash in envelopes or jars to separate your categories. You put the money in at the beginning of each month, and that’s what you have to spend. It forces you to take a hard look at your spending, and it’s very easy to tell when you’re overspending because the cash disappears fast. The downside is that it can feel strange if you’re used to not carrying cash, and it can be inconvenient in a digital world.

The no-budget (anti-budget)

This is more of a guideline than a strict set of rules. You start with your monthly income, pre-subtract your required expenses, and everything left over is extra spending you can choose freely. You do need to keep track of recurring required expenses so you have enough in your checking account when bills come due. The downside is that it’s easy to coast from one month to the next without making changes, and if you’re not thinking long-term you can miss financial objectives. One nice thing is that the money you have available is simply what’s in your checking account at any given time.

There are a lot of great reasons to budget — mental health, managing debt, long-term planning. But here’s what I know from experience: it’s genuinely difficult to live a disciplined life and lean into a budget month after month. There’s no single budget that everybody should use, so I’d encourage you to experiment. Maybe a mix of pieces from each of these works best for you and your family. In closing: stick to your budget. You’ll be glad for the sacrifices you’re making now as you progress toward your financial objectives in the years to come.