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5 Different Types of Budgets Explained

By Edited Apr 7, 2016 0 0

It is very important to budget your finances. You need to know how much you have coming in and how much is going out. If you don't know this, then you will end up not having enough money to pay for your bills or your regular living expenses.

Meanwhile, there are many different types of budgets and you need to find out which one is the right one for you. It is important that you create a budget in order to keep your finances in order. Let's take a look, therefore, at some of the different types of budgets that are out there.

#1. The Zero Sum Budget

A zero sum budget works on the premise that every dollar you have coming in must go somewhere. And you need to decide what these "somewheres" actually are. Some of the usual things include your mortgage or rent payments, your utilities, your savings, your debt repayments, your shopping bill and any luxuries like nights out or clothing.

If you have any money left from your income, you need to adapt your budget so that it is completely used up. Perhaps you can increase how much you pay back on your debts, or maybe you can increase your savings for instance.

#2. Percentages Budgeting

With percentages budgeting, you allot a percentage of your income to each of your bills. It is recommended that you spend 25% on your mortgage or rent, 12% for personal items, 10% on your utilities and 15% on debt payments.

The other 38% can go to such things as insurance, transportation and other elements, or you can decide to increase the individual percentages. This type of budgeting works really well if you have a variable income, particularly because you have that 38% leeway in your budget.

#3. Envelope Budgeting

With envelope budgeting, you assign a certain amount of money to each category of bills you have, with each category being one envelope. It is incredibly important that you assign at least the amount necessary to cover the bills in that category, and that the total of the individual envelopes never exceeds your monthly income.

The main idea behind the envelope budgeting system is that you may be able to save a bit of money if you don't spend everything that is in an envelope. For instance, you may assign $100 a month for dining out, but if you skip a month, you will have an extra $100 that is just yours to do with as you wish.

#4. The 60/40 Budget or 80/20 Plan

With these two budgets, you allot 60% (or 80%, depending on which of the two plans you choose) to your outgoings and the remaining 40% (or 20%) goes directly into your savings. This type of budget focuses strongly on saving for your future, which is very important.

However, with the 60/40 budget in particular, you will notice that you have to really think about how you send your money and that it will be quite tight. This is perhaps why more people opt for the 80/20 plan instead.

5. The 50/30/20 Plan

The 50/30/20 plan was created by a Harvard economist and is gaining in popularity. In this plan, you look at your take-home pay or net income, after you have paid taxes and health insurance premiums. Half of this money (50 percent) should go towards your essential expenses (housing, utilities, groceries, transportation and so on).

Then, 30% goes to discretionary and fun items, like nights out, vacations, clothing and more. And the final 20% should go to your savings and debt payments (not including your mortgage). This plan works for many people because it gives them a reasonable amount of money to do with as they see fit, while at the same time saving a lot of money too.

The downside, however, is that in order to spend just 50% of your money on essential expenses, you may find you have to downsize your home and really cut on various costs, which is something that very few are able and willing to do.


These are some of the most popular budgeting formats for individuals. Clearly, each of these is very different from others and it is important to consider which one works best for you. What you must, at all times, remember is that you need to have sufficient money for your essential bills.

Additionally, you should always try to save money as well, even if it is just a few dollars a month. A final thing to remember is that you should regularly review your budget. You must think about whether or not it is working for you and whether you would actually be able to bring your cash outflow down by choosing a different system.




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