Types of Budgets: Ways to Create a Personal Budget

types of budgetsThe key to financial success is spending less than you make.

How do you accomplish this?  The best way is to create and follow a budget, as this is the only way you know where you money is going.

There are many types of budgets that exist today; it does not have to be a one size fits all option and it does not have to be painful.

You can select a budget type that works with your personality and style.

While there are many different types of personal budgets, I counted at least ten when I was looking around; I am going to cover three of the most common ones and the ones that I believe will bring you the most success.

Zero Sum Budget

In this budget you subtract your expenses from your income to try and get down to zero dollars left at the end of the month.  This is the most detailed of the budgets where you allocate out each spending category and go back and reallocate if you go over in one category.  This budget is great for you if you like details and want to know exactly where all your money went.  This is also the one you will want to go with if you are spending more than you make and want to cut back on expenses.  You will need this level of detail if you are going to figure out where you need to stop spending.

The Three Step Budget

This method was created by Andrew Tobias.  Step one is to destroy all credit cards, then invest 20% of your earnings and live on the remaining 80%.  Pretty straight forward – no need to follow specific categories, just don’t overspend your 80%.  This is great for you if you want to have an idea of what to spend, but not be strapped down to categories.

Broad Percentage Allocations

I am making this a big umbrella for a budget type that involves different broad percentages that are a bit more detailed than the three step budget.  There are a few different versions of this one out there, most notably the 60% solution from Richard Jenkins and the Balanced Money Formula from Elizabeth Warren.  The basic idea is that you allocate a large percentage to your needs such as housing, then a percentage to savings and a percentage to wants.   This gives you more guidelines for your spending but does not overwhelm you with details on exactly which category gets the money.  This is a good solution if you want a bit more structure, but still want to avoid over detailed categories.

Which One to Select for Yourself?

This is where you really need to understand your personality.  Are you a details person?  Then the zero sum budget might be for you.  Prefer to just worry about two categories?  Then the three step budget is for you.  A broad percentage allocation might be great if you do want to be more specific on where you are spending your money, but don’t necessarily want to worry about how much exactly is going to groceries.  Just keep in mind that if you select a general percentage plan you still need to make sure you are not going over your percentages each month, so you do need set aside time to update your finance software.

Ultimately the most important thing for you to do is to select a budgeting type and then stick with it.  You will find financial success in continually sticking to a budget that allows you to spend less than you make – no matter what that budget type is.  So pick one and get going!

Roger @ The Chicago Financial Planner says April 10, 2013

Excellent post and good examples. In the end you are correct that it is important for people to select the budgeting methodology that works best for them and that they are likely to stick with.

    Andrea says April 11, 2013

    Thank you Roger!

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