One area of personal finance that rightfully gets a lot of attention is budgeting, the art of directing how your money should be used. I used to think that there were only a few ways to budget, but I can now name at least seven! Here are the various types of budgets you might use:
- Line item budget: This is the typical spreadsheet budget that most of us started out on. Each estimated item gets a line and an amount, with the total hopefully adding up to less than your planned income. This is an example of a “passive” budget, where actual expenditures might be compared to budgeted amounts weekly or monthly, but always after the expense already occurs.
- Envelope (zero-sum) budget: My personal choice, envelope budgeting is an “active” process that works by assigning income to various virtual “containers.” Money is spent from these containers with a theoretical $0 limit, which makes it difficult to go over-budget in any particular category. Saving for irregular expenses and short-term goals is also easier to grasp with this kind of budget.
- Percentage budget: A favorite among those who enjoy rules of thumb, the percentage budget assigns amounts for expenses based on a percentage of income. One example of such a budget might call for: 50% “needs,” 30% “wants,” and 20% “savings.” Another type might call out specific spending categories, for example: 35% “housing,” 15% “transportation,” etc.
- Cash budget: A lot of people still like using cash for most purchases for the direct connection it provides to spending actual money on something. One of the problems with a cash-rich system is how easy it is to lose track of what amounts should to be allotted to what needs. Whether it’s in your head or on paper, somehow all that cash should be budgeted and accounted for.
- Capital budget: This is something that companies often use to plan their long-term investments and expenses. On the home front, one of the suggestions I make most often to other people (in fact, one of the first posts on this blog) is about having a wish list for everything you “want” to buy. This is a great example of long-term “capital” planning.
- Event budget: You might not realize it, but you create a mini-budget every time you plan for a vacation, a new baby, buying a house, or moving. Each “event” has multiple expenses associated with it–both required and optional, large and small. Being able to make decisions on a micro-level has profound effects on your overall budget and financial health.
- Category budget: Like an event budget, you might find that a complicated or problematic category needs additional detail. One example in our own budget is the “subscription” category, where we budget for 5-10 sub-categories and are able to spot changes or make decisions about trimming unneeded services.
Can you think of other types of budgets you’ve used in the past?