I get asked all the time about which budgeting type is best. I’m a big fan of expense tracking, but of course, as with everything in life, what’s best for me may not necessarily be the best for you.
In this article, you can find out the different budgeting types, what’s good about each of them and incorporate it in your financial life.
The tl;dr version is:
- Use the Cash Envelope System if… You’re paying off debt / Recovering from bad credit card swiping habit
- Use expense-tracking method if… You like making notes and knowing where your money went – expense-tracking (manual or app)
- Use Excel budget spreadsheet if… You are a spreadsheet geek
- Use the 50/30/20 Rule if… You’re lazy to track expenses
Which of the 4 describes you best? Start with that one. Using the one(s) that works better for your personality will make budgeting habit easier, thus helping you achieve specific goals (ie paying off debt) sooner.
Here’s the expanded version of each budgeting type:
#1 – Use the Cash Envelope System if… You’re paying off debt / Recovering from bad credit card swiping habit
What is it: A cash-only budgeting type
How it works: You stuff literal cash in literal envelopes, each earmarked for different expense categories, and only spend from there. If the money is gone, the spending stops. For example,
- RM500 for Groceries
- RM100 for Eating Out
- RM100 for Entertainment
And so on. You can allocate a spending limit for every category, or just the categories you have a spending problem with. It works as a hard stop.
For obvious reasons, the Cash Envelope method works really well for natural spenders.
You can find a lot of resources for the Cash Envelope method. I suggest going on a Youtube binge – you can see how individuals and families use and tweak this budgeting type to suit their life.
Not really into this budgeting type? Well, perhaps…
#2 – Use expense-tracking method if… You like making notes and knowing where your money went – expense-tracking (manual or app)
What is it: Record and track every cent, categorising them under its relevant expense categories.
How it works: You review the data and make spending adjustments in the following months. I like it because there’s an element of shock factor that tends to work for behavioural change. For example, if Eating Out category exceeded [amount you’re comfortable with] last month, then you may make time for meal planning and prepping next month.
This is my preferred budgeting type, but I know its (1) hard to pick an app that suits you (there are SO MANY to choose from), and (2) the habit can be hard to stick to.
Read tips that worked for me in How Expense Tracking Looks Like (As Someone Who Doesn’t Budget) article.
One step above: If you enjoy micromanaging and want to know EXACTLY which money went where and making sure your data and bank account tallies, you can read up the principles behind Zero-based Budgeting. The tagline is ‘give every dollar a job’. It’s a bit too intense for me but whatever works.
#3 – Use Excel budget spreadsheet if… You are a spreadsheet geek
What is it: Excel spreadsheet
How it works: Similar to expense tracking in #2, but fully customised to your liking.
No expense-tracking apps or platforms are good enough for you, or have enough personalisation, so you do it yourself via Excel spreadsheet. You complain about it but secretly love doing the formatting merge cells all (you may ‘cheat’ by downloading a budget spreadsheet then customising it yourself).
Tip: Bet you didn’t know Google has a free Monthly budget template. Go to Google Sheets and find it in the Template Gallery.
#4 – Use the 50/30/20 Rule if… You’re lazy to track expenses
What it is: A simple breakdown of how you should divide your salary/income
How it works: Allocate 50% of your salary for needs, 30% for wants, and 20% for savings. You ‘pay yourself first’ by transferring xx% of your salary to your savings/ retirements/ emergency/ investment accounts.
AFTER you paid yourself first, then you calculate and pay for life’s necessities (Food+ Transportation+ Accommodation+ Miscellaneous Needs etc), and then only spend the rest on whatever you want.
The ratio is completely adjustable; for example, you might want a higher savings rate, so you might do 50% savings, 25% needs and 25% wants. I know some personal finance Instagrammers especially like to show their high savings rate!
Which budgeting types do you use?
Do you fit squarely into one of the budgeting types explained above, or do you use a little bit of each? What are your top tips in making and sticking to a budget?
Let me know in the comments section!