When you hear people talk about budgeting, maybe you think, “That’s fine for some people, but I’m not the kind of person who budgets.”
Despite the appearance that everybody has more of their ducks in a row than you do—the reverse is true. Nobody is born knowing how to budget. You must learn budgeting strategies, make mistakes with your money, and keep improving over time.
Many surveys and polls reveal that the majority of people feel anxiety over money rather than confidence or peace. That’s because it’s a lifelong practice, not something you master overnight.
In this blog article, we’ll cover some of the most common budgeting strategies and how they can help you move toward financial freedom.
Understanding Budget Categories
The term budget might feel a little more approachable if we just said, “a simple plan to spend less than you bring in.”
Budgets can be like cars. Some are small, efficient, and maybe a little beat up, while others are fancy, fast, and intimidating. There are lots of “right ways” to budget your money and that doesn’t make one superior to another.
Whether your income is fixed, irregular, or just smaller than you’d like, there are basic principles that you should know and follow to keep the budget working.
Most budgets are broken into broad categories, including:
- Needs: There are essentials such as rent or mortgage, utilities, groceries, gas or transportation, and healthcare. You might have other expenses that classify as “needs,” but they shouldn’t include optional stuff like Netflix.
- Wants: There are expenses such as dining out, entertainment, hobbies, and any shopping that isn’t an actual necessity.
- Savings: This category is for money you hold onto for a specific purpose such as an emergency fund, car or house down payment, or retirement and investments.
- Debt payments: Whatever you may have used the debt to buy, the repayments are a critical part of your budget. Credit cards, personal loans, buy-now-pay-later transactions, and other types of credit repayments fit in this category.
An early focus for new budgeters is to prioritize needs and cut down on the number of wants. Then, you can begin saving that extra money or using it to pay down your debts faster, which saves you even more money because you pay less interest.
How to Budget Money on Any Income
One of the most common mistakes that keep people from running a successful budget is making decisions without defining whether the purchase is a “want” or a “need.”
A good way to understand the difference is to print out your most recent bank statement or list of card purchases and mark each transaction using two colors of pen: green for needs and yellow or red for wants. You can also do this using a budgeting app or spreadsheet tool such as Google Sheets.
Tally up the total amounts spent on wants and needs for the last month. Do those numbers surprise you? That’s ok; most people feel that way if they’re new to looking closely at spending.
Your next step is to finish separating out your month’s spending to look for any savings, investments, and debt payments.
Armed with these numbers you can make decisions about your financial goals:
- How much money do you bring in each month?
- Are you spending more than you make?
- What “want” expenses could you cut back on?
- Are there “needs” that could be reclassified as “wants” and reduced?
- How much money would you like to save every month?
- What kinds of big purchases would you like to save up for?
Most people spend their money in cycles or patterns. They might increase spending and credit card purchases around the holidays or maybe dine out every payday.
When you analyze your monthly spending, you can identify these patterns and decide whether they’re helping or hurting your long-term financial goals.
In the next section, we’ll cover some common budgeting strategies or systems that can help you make smarter choices about spending and saving money.
Budgeting Strategies for Success
The best budget for you is the budget that you follow consistently. That said, there are some proven budgeting strategies that we recommend, especially if you’re new to budgeting.
At first it’s a good idea to follow the budget strategy as closely as possible. After you get familiar with the budget, you can make adjustments to fit your lifestyle and preferences.
Each budgeting strategy shares things in common with the others. You may even blend aspects of each into your own custom budgeting approach.
Traditional Budgeting
In its most stripped down version, a traditional budgeting strategy begins by calculating your monthly income—all of it. This might come from a steady paycheck, side gigs, used items you’re planning to sell.
While you might not have the exact number, an approximate number will do. If in doubt, estimate downwards—i.e., assume the lowest income.
Then, track your spending habits. You can review previous bank statements, and use an app like Kudzu or a simple spreadsheet to categorize your expenses. Again, try to be as specific with these numbers as possible.
By categories, think of items like:
- Rent
- Utilities
- Groceries
- Entertainment
- Monthly subscriptions
- Health
These will vary according to your lifestyle, so make sure you stick to your own expenses, and not anyone else’s.
Once you have all this laid out, put your expenses next to your income and set a spending limit for each category. Our tip: Always set aside some of your income towards savings—essential to build an emergency fund and plan for your future.
Proportional Budgeting
Many people struggle to answer the question, “How much should I spend on each category of my budget?” The answer varies based on factors such as the cost of living in your region, your income, and your long-term financial goals.
Proportional budgeting gives you a good starting point, usually expressed as 50/30/20.
This means that 50% of your monthly income should go toward essential expenses (needs). 30% can go toward discretionary spending (wants). And 20% of your money should go toward saving money, paying down debt, and charitable donations.
It’s a good exercise to take the breakdown of your monthly spending and see how it compares to a 50/30/20 budget. You might discover that you’re spending 60% of your income on needs and 35% on debt repayment—leaving only 5% for wants.
Proportional budgeting may not work very well if your income fluctuates, as it does for gig workers and freelancers. That doesn’t mean you can’t make it work, but you should build your budget based on the minimum amount of money you bring in, not the maximum.
Envelope System
The envelope system is based on the idea that it’s best to use as little willpower as possible to maintain your budget.
Envelope budgeters take their money and divide it into separate envelopes for each category such as groceries, transportation, entertainment, debt payments, etc. The idea is that once you’ve spent all the money in an envelope, you’re done spending on that category until the next month or your next paycheck.
This strategy works well for people who get paid in cash or like using cash. But don’t let that stop you from trying it. There are apps that can help you create virtual envelopes for your budget and help track your spending for each category.
Zero-Based Budget
This type of budget is very precise. A zero-based budget means that every dollar of income that you bring in is assigned a job.
At the end of the month, there isn’t any extra left over. This doesn’t mean you’re broke and have no money.
It means that you decided where the money was going ahead of time. Any extra money that didn’t go toward a need or a want would either go toward paying off debt or into a savings account.
Zero-based budgeting works well for goal-driven people who like to know where every dollar is going. They make a plan and update it every time something unexpected happens.
Other Strategies
Budgeting strategies are almost endless. You could also try pay-yourself-first and cash-only budgeting ,or mix and match to find what works for you.
You may have also heard people talk about “loud budgeting” on social media. In loud budgeting, you courageously talk about the choices you’re making with your money to friends and family. It’s not really a strategy for how you spend money, it’s more of an attitude toward money and making wise money choices.
That could sound like, “Hey, I can’t go out to dinner with you tomorrow because we’re saving up for a vacation,” or “Let’s watch the game from home instead of buying tickets. We’re using any extra money to pay down credit cards this month.”
The internet is filled with ordinary people who’ve used creative budgeting and lifestyle choices to achieve financial freedom. There are also communities for people who are learning to budget wisely.
It helps if you can find some friends to go on this journey with you.
A Strong Budget Will Improve Your Life
The purpose of a budget isn’t to be good at budgeting—budgeting is a means to an end.
A well-run budget will reduce your stress, increase your financial stability, and unlock new opportunities in your career and life.
Some people see budgeting as a fun monthly hobby, while others think of it as a dreaded chore. Wherever you stand across that spectrum, at Kudzu we’re committed to helping you make budgeting a pain-free part of your life.
Once you start growing your financial skills, the momentum can take you places you hadn’t even thought about.
Kudzu is here to help you reach your financial goals and achieve the life you dream about. Budgeting is just the first step.
