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?
Fiscal Fizzle 
I guess we, over here at What It’s Costin, do a line-item budget in which we have 30 categories or so that all get budgeted dollar amounts. Every couple of days we put in our receipts and monitor our spending to ensure that we’re staying on track. I’m interested in why you used a little negativity in your word choice when describing this method. Words like, “started out on,” and “passive.”
Cash envelopes are a good theory, but I’ve found that people generally don’t have the discipline to stick with only the money in their envelopes. They “have to” carry a credit/debit card for emergencies, and pretty often a Starbucks run they consider an emergency.
Loved it, Wojo!
Addendum: the reason I am curious about your opinion regarding line-item budgeting is that I think it’s compulsory for the day-to-day, month-to-month budgeting and spending of a household.
No negativity intended–I used “starting out” since it’s the most basic type of budget that most people are familiar with and it’s the one I started with. “Passive” because that was my experience in using it vs. an envelope budget–I would set up a budget and “compare” expenses vs. the budget during the month. I’ve found envelopes much more active, again–personal taste I guess.
We do the Gail VasOxlaide budget that she has online. It’s a bit of 1, 2, 3 ,4 and 6, 7. We do jars for bi-weekly expenses and envelopes for things down the road like christmas, vacations, glasses, b-days etc…
Cool! Thanks for pointing me to that–definitely have to check it out.
The envelopes are new this year for us and I think it’s helping preplan for expected non-monthly expenses. The jars help with allowances, entertainment money, gas money etc… Once the money is gone it’s gone. Still do things online and use interact a bit for convienience. Gail’s budget has all the items I need for the most part and adds it up fo me without having to create my own excel program.
Where do you find her budget? I searched for Gail but couldn’t find her.
Thanks, Julie
Name typo. Here’s her site:
http://www.gailvazoxlade.com/resources.html
I especially like the cash budget. It gets too easy to lose track of spending when it is in cash! One idea might be to use debit at least for those purchases so you still have a decent way to track your spending and sticking to your budget.
I’m on the fence about it. I really liked it when we did a couple of weeks of a “cash-only” budget, but I wouldn’t do it long-term like you point out. I like being able to track things automatically.
im self-employed- so use my nearly guaranteed income.that is my ave worst possible income,which i form as my budget all year round.
so when decent or good income comes in im building up capital over and above my budget.
on-line banking is a massive help–theres no reason why anyone should build up massive debt
Thanks for this overview. I feel like the first 3 budgets you named are also the most popular; most people I know do either the line-item or the percentages. I met one guy who used envelopes, which I was impressed with (although it scares me to carry that much cash around! What if I lose an envelope?)
Most modern systems use virtual “envelopes.” Works the same way, but much safer. We only use cash now for groceries, which is a problem area for us, and the cash helps control that.
I think my budget is the envelope system on paper. I printed an excel spreadsheet with the categories and budget amounts at the top as a guide. When I deposit or spend money I write the amount and new total on the page. At the end of the month anything leftover gets carried over to the next month. I like having it printed so when my husband ask what we have in savings or what he can spend on a house project I can tell him without having to wait for our computer to start.
Also he is self employed so we set up our budget a little differently. I started with our expenses, than figured out how much he would need to make to cover everything. I listed our expenses from most important to least important. When “payday” comes I go down the list adding to the catagories until our paycheck is gone. If all the expenses are covered and there’s extra leftover it gets left in the business savings account to cover the lower paychecks.
Definitely sounds like you do! I also had an Excel spreadsheet at one point, and it really kept things nice and simple. 🙂