I know exactly how scary budgeting can be. You don’t know where to start, what budget categories are, or what different percentages you should be using for your budget.
It can be hard to get started, but once you do it will start to become easier! The more practice you put in, the easier it will become; soon you will have healthy money habits!
Let me start off by defining some budgeting words. We will them dive into the different types of budgets, and then the best payment type for sticking to a budget.
Elements of a Budget
Budget: The act of listing out your total income followed by all of your expenses.
Budget line: Each expense gets a line. Examples of expenses that get a separate budget line include rent or a mortgage, utilities, food, and more.
Budget categories: Expenses that can be grouped together. Examples of budget categories may include housing expenses, groceries, healthcare, and leisure.
Balanced budget: Each expense should only take up a certain percentage of your income. Having a balanced budget means that spending in each category would stay under that designated percentage.
When you get used to budgeting, you will feel like you got a raise! There are people who make $45,000 who have a greater net worth than people who make $100,000, and that is because they budget! You can do weekly budgets, monthly budgets, and/or yearly budgets.
There are four main budgeting methods: Zero-based budget, envelope system, 50/30/20 method, and the pay-yourself-first budget.
The zero-based budget is my personal favorite kind of budget and the one that I use. This budget method says that every single dollar that you bring in should have a name.
To actually create a zero-based budget, you would list your income at the top of the sheet and then list out each expense on a separate budget line. You may want to list each expense by which budget category it would go in.
For example, list each housing expense together. These expenses would include your rent or mortgage, utilities, and food. Your rent or mortgage should not be more than 25% of your income. Your utilities and food should not equal more than 10% of your budget total.
Your next budget category may be transportation expenses. If you have a car then you would list your car payments (if you have any), gas, and general repairs you know you will need on your car.
Each of these expenses would get a separate budget line.
Everything that you own that has an engine should not equal more than 50% of your income. This is because your cars, tractors, lawn mowers, etc go down in value each year.
If you came here looking for an answer to the question: Which payment type is best if you are trying to stick to a budget?
The best payment type to help you stick to a budget is a debit card! Your debit card allows you to see the money coming out of your account each time you make a purchase.
Putting all of your expenses on your credit card doesn’t let you see it coming out of your account!
This is why I do not suggest having credit cards. Credit cards can result in overdraft fees and insane amounts of debt from spending money you might not have and the interest that can result from that.
Envelope System Budget
The envelope system is my second favorite type of budget. If you use the envelope system, you would go to the ATM after each paycheck and withdraw the total amount that you get paid.
To use the envelope system, you still need to write down your total income and then list out your expenses on separate budget lines. You then go to the ATM and withdraw all of the money.
Then you get an envelope for each budget category and put the amount of money that you have allocated for that category into the envelope.
I suggest also writing the budget category on the front of the envelope so you can easily keep track.
Every time you go to the store, you pay with cash from that specific envelope. Once the envelope is empty, you cannot spend anymore in that budget category, unless you take it from another category.
The reason that I do not like the envelope system as much as the zero-based budget is that it does not take into account the expenses that you have to pay for digitally. Many times your rent or mortgage, and your utilities must be paid online.
Cash is the second best payment type to help you stick to a budget. Since you can still see it coming out of your account it works well. Once you are out of money in the envelope, you are done spending money! You literally cannot spend anymore.
50/30/20 Budgeting Method
The 50/30/20 method is a great way to break down each budget category by budget percentages.
This method says that you should spend 50% of your total income on your needs. Your needs include your rent or mortgage, utilities, (necessary) food, insurance, and healthcare.
Then you would allot 30% of your income towards your wants. Your wants may include clothing, eating out, and hobbies. Lastly, 20% of your total income should go towards savings.
If you are looking for budget percentages, then this is possibly the best budgeting method for you.
If you are putting 50% of your monthly income towards your needs including housing, insurance, and healthcare, you will be able to have a balanced budget.
If you are spending more than 50% of your monthly income on your needs, then you have two options.
You can either cut down your expenses by shopping at a different grocery store like Aldi or Walmart, shop for cheaper insurance, or move! Your other option is to cut down on your wants to make up for the overage in needs.
Your wants, I personally believe, should be the lowest category instead of savings. However, since I am sticking to the 50/30/20 method, I will explain why the method says that wants should be 30%.
Your wants are 30% of your total budget, because they allow you to enjoy life. Things like WiFi, clothing, entertainment, and eating out would all get a separate budget line in your budget.
You should never spend more than 30% on this budget category. If you are, I would suggest cutting down your expenses.
Eating out can be extremely expensive. The meals that you would get at a restaurant can be marked up as much as 50% or more!
I suggest spending some money on entertainment and clothing, because these are the two categories that will make life more fun.
Lastly, 20% of your income should go towards savings. Your savings is the 2nd most important budget line, because it can allow you to retire early, give to nonprofits, and help others.
Pay Yourself First Budget
This budgeting method is sort of a reverse budget. In this method, you list out your savings goal and then figure out your expenses based on the money you have leftover.
I highly suggest calculating your total needs before you start this method. This way you will not suffer overdraft fees and other issues.
If you calculate your total needs and still have money leftover then put that extra money towards your savings!
This method is best for people who are very determined to reach a savings goal.
How to Budget
Write Down Your Total Monthly Income
Writing down your total monthly income is the key to starting your budget. Whether you are making $1,000 per month or $100,000 per month, write it down at the top of the paper or Excel document.
Write Down Your Budget Categories
Listing out your budget categories is the second step in budgeting. These budget categories may include housing expenses, food, insurance, entertainment, etc. Try to leave a few lines in between each of these when you write them down.
Under Each Budget Category, List Your Expenses
Categorize each of your expenses. If you are making rent or mortgage payments each month, you will likely list these under “housing” along with utilities. Food would likely include essential groceries. You would then continue down your list of categories, filling in each expense.
Decide Your Budgeting Method
We listed out the 4 different budgeting methods; 50/30/20 budget, envelope system, zero-based budget, and the pay yourself first budgeting method. Decide which one you want to try! You can always change these in future months.
Meal planning can help you save money on groceries. Think about foods that can go in multiple dinners. Chicken is my favorite ingredient to buy when I go to the store. It is relatively cheap but it is very versatile.
Look for Alternatives
When I say “look for alternatives”, I mean look for different ways to save money. Maybe you currently have Verizon cell phone service, try switching to T-Mobile or Visible. You could also just call Verizon and ask for a discount.
Have Weekly Budget Meetings
Having weekly budget meetings is very important when you are starting to budget. During your weekly budget meetings, look to see how you are doing with your budget. Are any categories a little underfunded or overfunded? Adjust them 🙂
This is my personal favorite part this how to budget section. Any money that you do not spend in a specific month should go to your savings account. I personally love seeing my savings account grow, so that is why I like budgeting.
Which payment type is best when sticking to a budget?
Today we live in a world where cash is slowly going away. Debit cards, credit cards, Apple Pay, Samsung Pay, and Google Pay are taking over. But why is this happening?
What are the benefits of not carrying cash? Are there any negatives of debit and credit cards?
So how do debit cards work? Debit cards are issued by a bank or credit union.
They allow you to take cash out of your account, shop online, shop in store, and most importantly help you stick to a budget.
Most debit cards have a spending limit for each day. This is a security precaution that ensures that if you lose the debit card, the person with the card won’t be able to spend a great amount of money.
This is my favorite payment method, because it is the most practical option. Cash is another great payment method to help you stick to a budget, but you cannot pay your rent or utilities with cash.
Advantages to Debit Cards
Advantages of Debit Cards
- Great way to help you stick to a budget
- Just as secure as a credit card
- More secure than cash
- See money coming out of your account automatically
- Offer rewards points
Disadvantages of Debit Cards
- Harder to Dispute Charges
- ATM fees are annoying
- Easily sign up for subscriptions
Let’s go into a little bit more detail about the advantages and disadvantages of using a debit card.
Debit cards are a great payment method if you are trying to stick to a budget, because you can see the money coming out of your account almost immediately.
Once the money in your budget runs out, you will not be able to spend anymore. This is a way to stay within your budget!
Debit cards are just as secure as a credit card. Visa, MasterCard, American Express, and all of the other card distributors say that debit cards are just as protected as credit cards.
They will protect you up to a certain amount no matter which type of card you use. If the card is fraudulently used, you will get your money back.
Debit cards are, however, more secure than cash. When you lose your debit card, you will be able to either lock it or cancel it.
If the card is used before you realize you lost it, the purchase will not count. If you lose your cash, it is gone. I hate carrying cash because of this fact.
Some debit cards, much like credit cards, offer the user rewards points. This is a newer incentive that banks and credit unions are offering to help keep debit card use up.
My bank offers 10 cents on every dollar that I spend over $10. While these rewards points will certainly not make you rich, they add up in the long run. Look for a bank or credit union that offers this awesome feature on their debit card!
Biggest Disadvantages of Debit Cards
If you lose your debit card and it is used, you will be able to get your money back, but you it may take a little while to actually get it.
I always suggest having at least two different bank accounts with enough money in them to last you a week.
This is so that if you lose one of your one debit card, you will still be able to buy the necessities while you are waiting for a new card and waiting to get your money back.
Another disadvantage to using a debit card is that a lot of banks charge ATM fees!
Bankrate.com says that the average ATM fee is $4.72 and climbing. Who wants to pay these fees? Look at this post where I listed a few banks that will reimburse you those fees.
McKinsey Research says that almost 50% of all online shoppers subscribe to a video streaming service. Some of these services include Netflix, Hulu, Amazon Prime, Youtube TV, and Philo.
People sign up for these things and then forget that they are paying for these things and just never cancel them.
Advantages to Credit Cards
Advantages of Credit Cards
- Get Rewards Points
- Secure payments
- No true cap on what you can spend
Disadvantages of Credit cards
- No cap on what you can spend
- Have to pay it off in full every month
- Can’t see the money come out of account
Let’s break down the advantages and disadvantages of using credit cards.
A lot of credit cards give you rewards points on any purchase that you make. They typically give you between 1% and 5% back on every purchase you make.
You are basically saving up to 5% on every purchase. This will certainly not make you rich, but it is a good way to save a little bit of money. Debit cards also do this!
Credit cards are a very secure payment method that is backed up by Visa, MasterCard, American Express, and other card distributors.
These companies will give you your money back if the card number is stolen. These companies do this for debit cards as well.
The last advantage to using a credit card is that you can spend as much as you want without worrying about an overdraft fee.
Overdraft fees are as much as $35 or more! That is crazy.
Using a credit card will eliminate the chance of an overdraft. Debit cards, however, usually get declined if you are going to go over on your account.
There are certainly many disadvantages to using credit cards. As I mentioned above, you can spend as much as you would like on your credit card. This can be very dangerous!
The typical annual percentage rate of a credit card is over 24%!
If you do not pay your card off in full every month then you will not be getting those rewards! You will be paying your 24+% APR. This is never worth it!
Speaking of a crazy annual percentage rate, you have to pay your card off in full every single month or else you can expect to see that money added to your account.
Who wants to pay that? Just stick with a debit card to avoid these extra fees.
Lastly, credit cards are the worst payment type if you are trying to stick to a budget, because you cannot see the money coming out of your account right away.
You have to make sure you are tracking every purchase that you make and be sure that you stick under what you have in your account.
Cash as a Payment Method
Advantages of Cash
- Easy to track every dollar
- No chance to overdraft
- Very convenient
- Typically spend less money
Disadvantages of Cash
- Not secure
- Not always practical
Cash is the second best payment type if you are trying to stick to a budget.
If you are using the envelope system, you can easily put the cash into separate envelopes for each budget category or budget line. This will help you to visually see how much money you have left for each category.
Sometimes it is hard to remember to check your bank account every day to see how much you have left to spend.
It is impossible to overdraft from your bank account when you are using cash. Since the cash is already out of your account, you won’t have to worry about overdrafting your account or not being able to pay off your credit card in full each month.
There are very few brick-and-mortar stores that do not accept cash. This makes cash the most convenient payment type.
Not all restaurants and stores take debit or credit cards but most accept cash. Why not carry cash around?
I will answer that question! Cash is the least secure option of all. Once you lose cash, you are most likely not going to get it back. There is no tracking code or anything on the cash so as soon as it falls out of your pocket or wallet you can’t get it back.
Cash is not always practical, which is my number one reason that I do not usually use cash. You can’t pay rent or your mortgage, utilities, or other automatic payments with cash.
You have to be careful to know exactly how much you are taking out and make sure that it does not go over what you need in your account.
Apple Pay, Samsung Pay, Google Pay
Advantages of Mobile Payments
- Very secure
- Easy to use
Disadvantages of Mobile Payments
- Can overdraft
- Not everywhere takes this method
- If you lose your phone, you lose your card
Mobile payments are a relatively new technology that I recently got more into. Personally, I use Samsung Pay, because I have read that it is the most secure payment option out there.
Since the card number that is given to the payment terminal changes each time that you pay with one of the mobile payment options, you will never have to worry about it getting copied.
Anytime that I need to pay for something, I simply take out my phone, unlock it, and pay! It is very convenient and easy to use in most stores.
So what are the disadvantages of using mobile payments?
Much like using a credit or debit card, you can overdraft on your account or spend more than you can afford. It is easy to take more out of your account than you can afford when you are using your phone to make your purchases.
Not every store takes mobile payments, because it is still a relatively new technology. You can very rarely pay with this method at restaurants specifically. The waiter or waitress usually just takes your credit card, debit card or cash. This can be a pain at times.
Lastly, if you lose your phone, you will not be able to make any purchases if you rely on mobile payments. This makes losing your phone even more of an issue than it is already would be.
You can lock your phone from a computer but it is an extra step. Hopefully, you keep the physical card away from your phone so that you can still make purchases.
To Sum It Up
- Zero Based Budget
- Best for people who are trying to get on track. Put your extra money towards savings. Every dollar has a name.
- Envelope System
- Best for people who have struggled with debt in the past. Use this method to help you get back on track.
- 50/30/20 Method
- 50% of your income goes towards needs, 30% of your income goes towards wants, 20% goes towards savings. Use this method to break down all of your budget categories.
- Pay Yourself First Budget
- Always calculate your needs before you use this budgeting method. This is best for people who are disciplined and have a savings goal.
There are many different budgeting methods. Whether you do a zero-based budget, envelope system, 50/30/20 method, or a pay yourself first budget, it is possible to budget! List out your budget line items in order of budget categories and adjust each month until it works best for you!
There are also many different payment methods that you can use while on a budget. If you are looking for the most practical option, I suggest using a debit card to help you stick to a budget.
If you are able to control yourself, a credit card may be the best option. If you struggle with overdrafting your account try cash! if you are into new technology consider mobile payments as a secure option.