The 6 Styles of Budgeting Explained | How to Make A Budget

So you’ve decided to take control of your
finances, get your budget in order and live the life that you deserve, but you run into
a problem. There are so many different budgets to choose
from that it’s almost impossible to figure out which one is right for you. Today, that’s what we’re going to try
and figure out. We’re going to be going over the 6 most
common styles of budgeting, discussing the pros and cons associated with each style,
and hopefully making it easier for you to make a decision on which to start with and
use. Hey everyone Daniel here and welcome to Next
Level Life a channel where you can learn about investing, debt, retirement, and many other
financial topics besides, because, let’s face it, the school’s aren’t going to teach
it for us. So if any of those topics sound interesting
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leave a comment below letting me know what topics you’d like me to cover in future
videos. So the 6 most common styles of budgeting are
the percentage based budget (such as the 50/30/20 budget, the 6 jars budgeting method, and the
60% solution), the hard copy budget (such as the cash-only budget), the comprehensive
budget (such as a line item or zero-based budget), the automatic budget (or the no-budget
budget), the value based budget, and the reverse budget. You could also throw in a business budget
or some sort of custom budget here but we’ll just be focusing on the 6 most common styles
of budgeting for personal finance today. Just so you know, if at any point during this
video you find yourself wanting more information on any of these budgets you can check out
my budgeting playlist which I’ve left a link to in the description of this video to
find more in-depth explanations regarding each of these budgets. Now let’s get started with the list. One common style of budgeting is known as
the percentage based budget. The percentage-based budget comes in many
forms. T. Harv Eker’s 6 Jars budgeting method,
Jim Rohn’s 70/10/10/10 budget, Richard Jenkins’ 60% solution, and the 50/30/20 budget based
on the book All Your Worth by Elizabeth Warren are all popular examples of this style of
budgeting. On a basic level, their purposes are all the
same. They’re meant to help you allocate certain
percentages of your money toward covering all of your financial obligations and goals. The percentages differ, of course, for example,
under the 50/30/20 budget you simply divide your income up into the 3 categories listed
in the budget. 50% of your income goes toward covering your
necessities, 30% goes toward your wants, and 20% goes toward your financial goals. While in the 70/10/10/10 budget, 70% goes
toward your needs, 10% goes toward your active capital such as a savings account, another
10% goes toward passive capital like a 401K or IRA, and the last 10% is given to charity. However, despite these differences, the fundamental
goals remain the same. The primary advantage of these types of budgets
lies in their simplicity. For every dollar, you make you already know
exactly how much money is going toward each category in your budget. And provided that you aren’t in dire straits
financially and the percentages are accurately applied to meet your goals any of these percentage-based
budgets can work out very well. The problems arise when the percentages aren’t
applied accurately for your goals or when you are in dire straits financially. Let’s look at an example to illustrate how
this could possibly work out for the worse: Let’s say that John is 55 years old, has
no retirement savings, makes $36,000 a year, has a bought and paid for home and the following
debts: $5,000 on a credit card at 15% interest, $10,000 on a car loan at 5% interest, and
$20,000 on a student loan at 4% interest. The monthly minimum payments are $100 for
the credit card, $186.43 for the car loan, and $202.49 for the student loan. In total, these minimum payments amount to
nearly $500 a month, or about a sixth of John’s total income. If John were using the 50/30/20 budget (and
assuming he didn’t adjust the numbers to fit his situation) he would be putting $1,500
a month toward necessities, $900 a month toward his wants and $600 a month toward his financial
goals. The $1,500 a month toward necessities is a
certainly doable especially since his home is paid for, the $900 a month toward wants
is not half bad, the concern for John’s case, in particular, is the $600 a month toward
his financial goals. With nearly $500 of that amount going toward
paying down his debts, he isn’t left much to put towards his investments which is a
potentially scary issue given that he is 55 years old and has no savings put away for
retirement. In order to cover his necessities alone in
retirement, John would need to have saved roughly $450,000. If he invested the remaining $100 a month
of his financial goals money after paying his minimum payments on his debts and earned
an average return of 8% he would be financially independent in about 43 years when he turns
98 which probably isn’t the time frame he’s hoping for. If he sold a bunch of things to paid off all
of his debts and put the full $600 a month toward his investing he would be financially
independent in 22 years and 5 months when he is 77, which is… better but probably
still not the time frame he is hoping for. However, if he adjusted his necessities a
bit lower (say down to $1,200 a month instead of $1,500) and put half of his wants towards
his investments while still putting the full $600 a month towards his investments he would
be financially independent in just 15 years when he turns 70. And this is assuming that he earns nothing
from social security of course. If he did that would lower his, for lack of
a better phrase, “out of pocket” costs in retirement a bit thus making it even easier
to become financially independent by the time he wants to make that transition. But as you can see depending on what other
factors there are with his finances he may want to consider paying off those debts and
adjusting some of those figures between now and retirement so that he can support himself
when he leaves the workforce. A second common style of budgeting is the
hard copy budget. The most popular version of this budget is
the envelope or cash-only budget. The primary purpose of this budget and its
biggest strength is ensuring that you never live on more than you make and that you can
control your spending, particularly in areas of the budget that are often budget-breaking. After all, if you’re truly using a “cash-only”
budget you simply can’t spend cash that isn’t there and as a result, you’re going
to have a much harder time going into debt. To set up the budget you simply label a bunch
of envelopes with the names of various things you spend money on such as groceries, restaurants
and eating out, entertainment, gas, clothing, and so on. Figure out how much you want to spend in each
of those categories and write it down on the envelope and fill the envelopes with the appropriate
amounts when you get paid. A couple of things I should note here is that
if you get paid twice a month, you may only be able to put half of the amount that you
wrote on the envelope in there and that’s fine, and most of the time people using this
budget don’t have envelopes for things like mortgage payments, insurance premiums, or
cell phone bills because those expenses are usually more stable and predictable, but you
certainly can have envelopes for them if you want. And I should also clarify that while it’s
okay to adjust your budget amounts for each envelope as you’re going along because again
you’re not going to get it perfect right off the bat, the key is to make sure that you
don’t start taking money out of the food envelope in order to buy that nice pair of jeans you
saw because then you’re going to run out of food money. Or you’re going to have to bring money from
a different envelope into the food envelope and then you’re going to run out of money
in that category and eventually it’s just an endless cycle where you’re not actually
controlling your spending and you’re probably starting to rack up debt. Which kind of defeats the purpose of using
this budgeting style. That’s really the only major con with this
budgeting style as far as I can tell. If having cash in those envelopes is going
to tempt you to overspend and later beat yourself up over it, then you may want to try another
budgeting style… such as the automatic budget. A third common style of budgeting is the automatic
budget, sometimes known as the no-budget budget. The purpose of this budgeting style is to
automatically make as many of your financial decisions for you as possible in order to
give you the least amount of possible opportunities to be your own worst enemy and break your
budget. This is done by setting up automatic payments
for things like your mortgage, rent, cell phone bill, savings and retirement contributions
and anything else that you can automate. Remember if you never actually see the money,
it’s a lot harder to spend it on things it wasn’t meant to be spent on. The nice thing about this style of budgeting
is that once it’s been properly set up you know whatever money is left over is yours
to spend on whatever you want, guilt free. In a way, this style of budgeting is like
the Hard Copy budget on steroids because it takes the biggest con with that budgeting
style and makes sure it is much less likely to occur. However, that isn’t to say that this budgeting
style is without flaws. If you’re going to use it long term you’re
going to want to make sure that you have well defined financial goals to shoot for. This is mainly due to the fact that this style
of budgeting is more hands-off by nature than most styles. It’s very easy to set things up and have
everything going good initially and 10 years zip by without any major troubles until you
realize that your longer-term goals are going to be hard to achieve if you didn’t start
putting enough money towards them from the beginning. A fourth common style of budgeting is the
zero-sum budget which is a budget that tries to make your income minus your expenses equal
zero each and every month. Its purpose is to give every dollar a job
on paper before the month begins so that there’s no mystery or surprises that come up that
you can’t handle. It’s called a comprehensive budget because
of the sheer amount of detail that goes into it when it’s properly set up. Everything from your mortgage payments, to
your emergency fund, Christmas gifts, and car tabs should be accounted for. And you’re not done until you’ve given
every dollar an assignment. The biggest pro to this budget is obvious,
there are no surprises that you can’t handle and you know exactly where all of your money
is going. This makes it easier to figure out where you
can cut expenses along with a whole host of other things. There’s a reason that I say everyone should,
at the very least, try this budget. There are a lot of benefits that it can give
you, when it’s done properly, for a long time to come even if you eventually switch
to a different budgeting style. The biggest con to this budget is probably
the level of detail associated with creating it. It can be quite a daunting task the first
time you sit down and do it, but there are many apps and spreadsheet templates out there
to help make that first go easier for you, and if you’re doing the budget electronically
it’s pretty easy to add and remove line items each month as you go along. A fifth common style of budgeting is known
as reverse budgeting. Reverse budgeting takes a savings first approach
by forcing you to figure out how much money you need to save each month to cover your
future financial goals and then blow the rest of your money on whatever you want guilt-free. This budget obviously has many similarities
to some of the other budgeting styles, the main thing that distinguishes it is its focus
on paying yourself first. The strongest pro to this is that, compared
to the other budgeting styles anyway, you’re less likely to find yourself in a position
where you don’t have enough money to cover your long term future because the first, and
most important, thing that you figure out with this budget every month is how much you
need to save in order to cover your future financial goals and commitments (assuming,
of course, you don’t just set this budget and forget it, which does happen sometimes). The con to using this style of budgeting is
that especially in the beginning you may find yourself living on a shoestring budget after
your savings have been made. This usually happens if your savings goals
are very lofty and need to be available to you in a short time period, or because you
simply aren’t making much money. Thankfully, what this can do for you is get
you to focus on ways of improving your offensive strategy so that you can earn more money and
improve your standard of living. So depending on how you look at this it may
or may not be a major con long-term. A sixth common style of budgeting is known
as values based budgeting. It’s set up in a very similar way to the
zero-sum budget except with the primary goal being to direct the majority of you’re spending
towards things that you actually care about. As a result it, if done properly, is very
good at helping you to cut unnecessary costs, while simultaneously increasing your enjoyment
in regards to the money that you do spend in addition to having probable positive effects
on your general mood and happiness outside of the times when you’re actively spending
money or working on your budget. Now I should mention that while you will likely
waste less money with this budget, at least in comparison to less detailed budgets like
percentage-based budgets, that doesn’t always mean that you’ll technically spend less
each month (although you might if you value saving and investing for your future very
highly), you’ll likely just be spending more on the things you actually care about. This is because when using this budget you
force yourself to look at all of yourself expenses and figure out if they are worth
spending money on in the first place. If they are, then you can continue to spend
that money. You can also take this one step further and
figure out if you can find a way to spend less on that thing without lowering your enjoyment
of it and its highly recommended because, again, we don’t want to waste money if for
no other reason than it means we have less to do the things we want to do, but you’re
still spending the money. A couple of other pros to this style of budgeting
is that it is extremely adaptable, allowing you to take ideas from other budgeting styles
and integrate it into this budget, without giving up the level of detail and knowledge
that you can gain from more comprehensive budgets like the zero-sum budget. There are three major potential cons to this
style of budgeting as I see it: They are the larger time commitment it takes to get the
budget set up in that first month you use it, the potential initial discouragement when
you look at your initial financial situation and the possibility of not having your future
fully secured if you don’t put enough money towards it right now similar to the automatic
budget One thing that I do want to note about these
cons is that, similar to the other budgeting styles I’ve mentioned, they all have workarounds. The time commitment can be worked around by
using a template that someone else has already made for you that you only need to spend a
few minutes modifying to fit your needs. The future being properly funded and secured
issue can be solved by educating yourself on how much you’re likely to need when that
time comes and working backward to figure out how much needs to be saved in order to
meet that goal (essentially taking the main idea from the reverse budget and using it
as part of your budget here), and the potential (and I want to stress potential) initial discouragement
that you may experience if you find that you don’t have enough money left over every
month to tackle all the things you want to do can be worked around by taking advantage
of the opportunities that are already there for you. Whether that be by you paying down debts (if
you have them) so that you have more of your money staying in your pocket instead of someone
else’s every month, or getting a part-time job, investing, or starting a side hustle
to earn some extra income whether actively, passively, or both, and finding ways to get
what you want to get out of the things you want to have, do, and be in a more cost-effective
way, or heck even all of the above. Remember… there are always options. So don’t ever let that initial discouragement
stop you from reaching your own version of financial success. But that’ll do it for me today once again
if you enjoyed this video be sure to smash that like button if you haven’t already,
subscribe, and hit that Bell next to my name so that you’ll be notified of all my future
uploads. I generally upload every single Monday, and
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with them and let’s really get this information out there and start our own Financial revolution.

13 thoughts on “The 6 Styles of Budgeting Explained | How to Make A Budget

  • Would like a video on taxes once you retire FIRE to pay least taxes. And best way for a parent can leave money to kids following death. Thx great vid as always!

  • I track where my money is going to determine if I’m spending money on things that don’t matter, making impulse purchases, or wasting money without even realising it… last year I wasted $5,980 on McDonald's,entertainment,shopping, and Uber. I Don’t use card because you don’t see the money being taken out of your account whereas using cash it makes me spend less money because you think of all the hours spend making that money… I put the name of all my expenses on an envelope and put the money in cash into it and that's what I use to pay for everything For e.g. going out $40 monthly once the $40 is gone for the month I'm done going out. I also started putting money aside for a Rainy Day Fund (emergency fund), if something unexpectedly comes up this is where I can turn too so I won’t be in a position where I don’t have the money ($50-100). I use $150 monthly to pay for things ( use a app called Pocketbook to help me with my spending). I’m focusing on a goal, yearly goal, then break it into monthly goal, then daily goals for example investing in high income skills, skills which generate high income but I didn't know where to start. I want to have multiple streams of income by 23-25. Right now I'm learning about Asset and Liability and has gotten addicted to saving the right way.

    “those who don't manage their money will always work for those who do. Do not save what is left after spending, but spend what is left after saving”

  • I just have 6 months emergency fund and all bills on auto-pay and from every pay check 15% is put into a global index fund, whatever is left after a comfortable lifestyle is just saved and goes towards saving to big ticket purchases like camper-van and such.

  • Hello. I am subscribed to your channel. Very nice as always. I share your passion for financial freedom. I just wanted you to make a video on how you make your videos including the editing tools you use. Thanks

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