How to Budget Your Money: Personal/Household Budget Plans Explained

Setting up a personal or household budget can help you manage your spending and meet your financial goals, but learning how to budget can be complicated. There is a wide variety of budgeting models and tools to choose from, with varying levels of complexity, and some require more hands-on effort and continual maintenance than others.

Which budgeting model is right for you? Are some budgeting tools better than others? How do you keep your budget on track after setting it up? We answer these questions below, detailing the budgeting models to consider, how to set up a budget, which budgeting tools are available, and how to stick to your new budget.

Personal Budgeting Models

There are several budgeting models to choose from; the model that works best for you will depend on your income, expenses, and financial goals. We explain the most common personal budgeting models, and which people they’re best for, below.

The Envelope System

The envelope system is a cash-based (and generally credit-avoiding) budgeting system that involves dividing your available funds into envelopes, jars, or another container — setting amounts aside for specific purposes. For example, you may have envelopes for your mortgage, utility bills, groceries, gas and automotive maintenance, entertainment, and insurance; you’ll divide your take-home pay after taxes between these envelopes, and spend only what is in each envelope until you refill it from your next paycheck.

You can divide your earnings monthly, weekly, or bi-weekly — whichever works best for you based on your pay schedule. You can also choose your own categories based on your current lifestyle and financial situation, making this method highly customizable.

  • Benefits:
    • Simple to understand
    • Flexible and customizable
    • Once each envelope is empty, you stop spending in that category until your next pay period, which can make it easy to stay on track with your savings goals.
  • Drawbacks:
    • Can be more difficult to track if you aren’t using physical cash, such as if you primarily pay your bills online (though there are online budgeting tools to help with this, discussed below)
    • Restrictive, and requires a high level of discipline; once you spend all of the money in one allotted category, you should not borrow from another category or spend more in that category until you get paid again
  • Best for: People looking for a simple and easy-to-understand budget; people looking to decrease their reliance on credit

The Incremental System

With an incremental budget, you use the previous year’s earnings and expenses to build a plan. Like many of the other systems listed here, incremental budgeting allows you to consider how much you need to spend, how much you spend on “wants,” and your savings goals. If you don’t expect your income to change much in the coming year, you can use last year’s expenses, savings, and earnings to get a clear, realistic idea of how much you will spend and save, both monthly and until you update your budget next year.

  • Benefits:
    • Relying on last year’s numbers simplifies the process of setting up the budget and gives you a clear, realistic starting point.
  • Drawbacks:
    • Inflexible; you typically only update it once per year to account for changes in your spending habits, cost of living, or income
    • To begin using this system, you either need to have already tracked your spending and saving for one year or must go through a year’s worth of statements (for all of your bank accounts, credit cards, investment accounts, etc.).
  • Best for: People with a predictable, steady income and established spending habits that shouldn’t change much over time

The No-Budget System

The “no-budget” budget is a very informal, flexible method of budgeting. You don’t need a spreadsheet or app for this system — just a checking account. With a “no-budget” system, you keep track of your checking account’s balance, making a mental note of your automatic debits, monthly debt payments, and savings. Any money left over after your required expenses is available for spending however you choose — on entertainment, dinners out with friends, travel, savings, etc.

While this is the most relaxed system, it does not necessarily encourage good spending or savings habits, since it doesn’t encourage you to say “no” to extra discretionary spending.

  • Benefits:
    • More flexible than other budgeting systems, since you won’t focus on sticking rigidly to spending categories
    • Requires minimal effort compared to other systems
  • Drawbacks:
    • Can be disorganized and difficult to track
    • Does not encourage better spending and saving habits
  • Best for: People who find budgeting tedious and do not want to spend a lot of time maintaining a budget, as well as those who do not want to feel restricted from “fun” spending

The “Pay Yourself First” System

Also known as the “reverse budget,” a pay-yourself-first budget prioritizes the following, in order:

  • Saving
  • Repayment of existing debts
  • Necessary spending
  • Discretionary spending

By making saving your top priority each time you get paid, you are “paying yourself” — setting aside money for your future and financial goals. With each paycheck, you’ll save first, then make payments toward your debts (like student loans or credit card and loan balances) and pay for bills and other necessities. Finally, you can make discretionary purchases with the funds left over after prioritizing the more important categories. This system requires little maintenance and no calculations after you set up your monthly savings amounts; you can even automate transfers to your savings account.

  • Benefits:
    • Encourages future preparedness and allows you to build an emergency fund steadily
    • Discourages discretionary spending until all of your more important financial needs are covered
    • Structured, but easy to follow; doesn’t require you to calculate percentages
  • Drawbacks:
    • Doesn’t allow you to prioritize debt repayment first, which may be more important to you short-term if you have loans or credit cards that are accruing high interest each month
  • Best for: People who do not have existing high debts; “Type B” personalities who want to improve their saving habits, but do not want to create a labor-intensive, itemized budget

The Proportional System

You can choose any percentages you wish in the proportional system, but three commonly used proportional models are:

  • 50/30/20 model:
    • 50% needs (housing, food, etc.)
    • 30% wants (hobbies, vacations, etc.)
    • 20% savings or debt repayment
  • 80/20 model:
    • 80% spending (bills and all other living expenses)
    • 20% savings
  • 60% solution:
    • 60% living expenses (mortgage or rent, groceries, utilities, etc.)
    • 10% “fun money” (dining out, concert and movie tickets, etc.)
    • 30% savings (retirement, short-term goals, and long-term goals)

A proportional system is similar to the envelope system, but with fewer categories, usually separating your available funds into necessary expenses, discretionary expenses, and savings goals.

  • Benefits:
    • Simple to understand
    • Highly customizable; there is a wide variety of proportions to choose from, from restrictive plans with aggressive savings to “live in the moment” spend-heavy models
  • Drawbacks:
    • Requires you to be very honest about distinguishing wants from needs, which can be difficult for people who have never used a budget
  • Best for: People who are new to budgeting and do not want to set up an elaborate system; people looking for a very customizable budget which will be easy to follow and adapt as they progress in their career

The Traditional “Line-Item” System

A traditional budget uses a notebook or spreadsheet to track all of your monthly expenses individually as “line-items.” This system is commonly used in business but can work for your personal budget, too.

You’ll make a list of every expense that you must pay monthly, plus a category for your savings plan and investments. You may include broad categories, but each category should contain lines for individual expenses; for example, your utility category would include lines for your gas, garbage collection, power, and water bills.

  • Benefits:
    • Easy to create, either on paper or in a spreadsheet
    • Highly detailed
    • Since you’ll adjust your budget manually each month, you easily can account for things like changes in income (if you work a variable schedule and are paid hourly) or fluctuating expenses
  • Drawbacks:
    • Time-consuming; traditional budgeting requires a lot of upkeep and effort, especially if your spending and expenses vary every month
    • Helps you track your expenses, but doesn’t provide benchmarks for your savings goals
  • Best for: People who are new to budgeting and want a system that is easy to create and will give them a clear understanding of their current financial situation

The Values-Based System

The values-based budget is similar to the “pay yourself first” system in that it focuses on setting your priorities; however, the values-based system allows you to set your own priorities rather than following a prescribed system. The first step in a values-based budget is to determine what is most important to you. For example:

  • If one of your priorities is to have a comfortable retirement, but you’re currently saving 10% of your take-home pay each month in a retirement fund, you may want to cut other spending and increase that monthly contribution.
  • If your goal is to be debt-free, but you’re currently making minimum payments on your debt, create a plan to pay off that debt more aggressively.
  • If one of your priorities is to travel, but you currently spend 5% of your income on travel and 15% on everyday entertainment, cut back on movie tickets and events to create a travel fund.

You’ll evaluate your current spending and determine whether your spending habits align with your priorities. Make changes as necessary to align your budget with your values (while still prioritizing your essential expenses, such as housing and transportation).

  • Benefits:
    • Personalized to your values and priorities
    • Encourages better spending habits by reminding you of your values and goals
    • Focuses on your happiness and well-being, not just money and bills
  • Drawbacks:
    • Can be difficult or time-consuming to set up, depending on how much soul-searching you need to do to find your priorities
    • Can encourage overspending in non-essential categories if you don’t prioritize your necessary expenses highly enough
  • Best for: People who feel like they don’t have money for what they truly want, or wish to prioritize personal satisfaction as well as good money management

The Zero-Based System

Zero-based budgeting means that when you subtract your expenses from your income, you get zero. This method of budgeting gives each dollar you earn a purpose, whether that is paying bills, allowing some “fun money,” paying off existing debt, or saving for short- and long-term goals. This system considers saving as a necessary “expense” and makes it a mandatory activity each month, encouraging you to make progress toward your savings goals rather than spending frivolously and only saving what (if anything) is leftover.

  • Benefits:
    • Helps you make a habit of saving money each time you get paid
    • Helps prevent overspending on “wants”
    • Organized and efficient; makes use of every dollar
  • Drawbacks:
    • Rigid; does not leave you with any “extra” money at the end of the month or pay period
    • Can be time-consuming, since you will need to track every dollar you spend
  • Best for: People who are willing to take a hands-on, intensive approach to budgeting, as well those who want to know exactly where every bit of their money is going

Setting Up a Budget

After deciding which budgeting system is right for you, you’ll want to take stock of your finances and set up a tracking system for your budget. While our descriptions of each budgeting system above will give you an idea of how to set up the system you choose, there are some tips and tools to keep in mind when setting up any new budgeting system.

Elements of a Budget

Regardless of which budgeting model you choose, your budget will consider the following elements:

  • Take-home monthly income
  • Basic, necessary monthly household and living expenses (such as housing and monthly food costs)
  • Current debts and repayment plans (Note: Our related research details how to pay off debt with low income.)
  • Average monthly spending on “wants” and unnecessary expenses
  • Investments
  • Shorter-term savings goals, such as saving for a down payment, an international vacation, or a home upgrade
  • Longer-term savings goals, such as retirement funds

After choosing which budgeting system you’ll use, gather as much detail as you can about each of these elements, such as bank statements, billing statements, receipts, and documentation of your current investments or savings. You’ll need a clear, accurate picture of your finances to ensure that the budget you set up will be functional in practice.

Budgeting Tools

There are several ways to keep your spending and goals on track using budgeting tools. Common methods of organizing your budget include spreadsheets, computer programs, and budgeting websites/apps.

Spreadsheets

You can download a template or create your own spreadsheet in Microsoft Excel, Google Sheets, or another spreadsheet program of your choice to keep track of your new budget.

Creating your own spreadsheet is the most labor-intensive of the computer budgeting tools. However, it gives you complete control over your budgeting system and how you want to visualize it, and it does save time compared to pen and paper since you can automate calculations and easily copy and paste elements of your spreadsheet rather than continually rewriting.

Keep the elements of a budget listed above in mind if you choose to set up your own budgeting spreadsheet. Your spreadsheet should include information about your income (monthly and during each pay period), your monthly bills, your discretionary spending, your savings accounts and goals, your investments, and your debts.

For examples of the information and categories you’ll want to include, The Federal Trade Commission offers a worksheet to help you establish a basic monthly budget.

Computer Software

Several companies offer budgeting software, ranging from simple to robust, which allows you to connect your financial accounts or enter your transactions, track your earnings and spending, create charts and visual aids, and more.

  • Buddi: Free, open-source software created for those with little or no financial expertise
  • GnuCash: Free, checkbook-style budgeting software
  • Microsoft Money Plus Sunset Deluxe: Free software for basic, manual budgeting
  • Quicken: About $35 to $100 per year; links with your bank and credit card accounts for easier tracking; also available for iOS and Android
  • Tiller: About $60 per year; integrates with Google Sheets or Microsoft Excel to provide automatically-updated spreadsheets
  • You Need a Budget: About $12 monthly or $84 annually; also available for iOS and Android

Apps/Websites

If you don’t want to set up your own budget tracking spreadsheet or prefer the convenience of mobile access over software, several apps and websites offer budgeting tools to keep track of your personal finances. They typically offer customizable budgets that you set up when you join and can adjust at any time, so you can follow whichever budgeting model you’d like. (We’ve noted exceptions that use a particular budgeting model below.)

Popular budgeting apps and websites include:

  • Albert: Free, or starting around $4 per month for Albert Genius, which includes financial coaching
  • Clarity Money: Free to join and use
  • EveryDollar: Free, or about $130 per year if you connect your financial accounts
  • Goodbudget: Free for a basic account; $6 monthly or $50 annually for a Plus account; uses the envelope budgeting system
  • Mint: Free to join and use
  • Mvelopes: About $6 to $60 per month, depending on whether you want financial coaching; uses the envelope budgeting system
  • PocketGuard: Free for a basic account; PocketGuard Plus, which is more customizable, costs about $5 monthly, $11 quarterly, or $35 annually
  • Qapital: $3 to $12 per month, depending on desired services; focus on saving for priorities
  • Simple: Free to join and use; includes integrated online banking with no minimum opening deposit
  • Simplifi by Quicken: Starting at about $4 monthly or $40 annually
  • Wally: Free to join and use

Sticking to a Budget

Once you set up your budget, you’ll need to adjust your habits to stick to the budget. This may mean spending less so you can save more, or simply getting used to keeping track of your expenses and savings progress. Keep the following tips in mind to stay on target after setting up your budget.

Take Advantage of Technology

Using a pen and paper is the traditional way of keeping a budget, but advancements in technology can make it easier for your budget to stay on track. You can build your own spreadsheet, use a computer program that links with your bank account, or track your spending on a website or app. Taking a few minutes to figure out a specific program or app can end up saving you time in the long run. (We discuss the available budgeting tools in further detail in the “Budgeting Tools” section above.)

Be Realistic

Don’t expect perfection from your budget immediately. If your savings goals require you to cut your spending, it can take time to adjust to those changes and begin meeting your monthly benchmarks. Setting a budget that is too restrictive or savings goals that are too lofty based on your current expenses and income can lead you to stop following your budget. You can avoid this pitfall by being honest with yourself and setting realistic goals when creating your budget.

You should also consider unexpected expenses like emergency home or car repairs when setting up your budget. In some months, you may need to use money from your savings or put less money toward your savings to deal with unexpected expenses. Acknowledging the potential for these expenses early in the process and being mentally prepared for them can help you keep the rest of your budget on track, even when you need to make small changes to deal with such circumstances.

Know Your Limits

In addition to being realistic about your finances, you should be realistic about yourself. If you don’t have a lot of time to put into maintaining your budget or do not want to put in a lot of time, choose a less complicated budgeting model and find budgeting tools that can help you take a “set it and forget it” approach. If you hate math, choose a model that doesn’t require you to make heavy calculations. Or, if you’re passionate about your personal finances and want to take a hands-on approach to your budget, you can choose a more personalized method and create your own spreadsheets and visual aids to keep track of your progress.

Budgeting is a very personal activity, and recognizing your own needs and interests when setting up your budget will help you maintain it in the long-run.

In Summary

There is a variety of models and tools you can use to make your personal budget to easy to understand, set up, and manage. Personal budgeting models include:

  • Simple budgets like the envelope system, the no-budget system, and the proportional system
  • Somewhat more hands-on budgets like the incremental system, the “pay yourself first” system, and the values-based system
  • Highly detailed budgets like the traditional “line-item” system and the zero-based system

Regardless of which system you use, your budget should account for your income, necessary living expenses, discretionary expenses, short-term savings goals, and long-term savings goals. The type of budget that will work best for you or your household will depend on how much effort you’re willing to put in and what your financial goals are.

With any budgeting model, you can increase your budget’s chances of success by being realistic about your earnings and spending, knowing your limits, and taking advantage of budgeting tools like spreadsheets, computer software, websites, and apps.