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4 Most Common Budgeting Methods, Including Their Pros and Cons

By Sabrina Loh

When many people think of the word ‘budget’, they immediately think of a strict and restrictive punishment that steals the fun out of life. And others think it’s a terrifying word that forces them to confront their spending habits.

Yes, it can be confronting.

But the truth is, budgets can be the complete opposite of all of these things when you set them up correctly.

You get to call the shots on where your money goes so budgets can support your unique lifestyle, goals, and circumstances — and not in the one-sided way that it’s stereotypically portrayed.

Take exercise for example. There are many different ways to stay in shape — some prefer lifting weights at the gym, and some prefer yoga. But there is no single technique that is more superior to the other.

Once you’ve found a workout that suits you, you’ll no longer dread exercising regularly and fall into a comfortable routine.

Just like exercise, there are many different ways to budget. It may require some trial and error, but when you find the one that suits your specific circumstances and lifestyle, you’ll feel supported and believe that you can do this.

More importantly, the right budget will allow you to stay consistent.

Whichever one of these budgeting methods you choose, you’ll be saving more and spending less.

Why budgeting is important

4 Most popular budgeting methods:

Method 1: Pay-yourself-first budget

Method 2: 50/20/30

Method 3: Zero-based budget

Method 4: The envelope budget

The Bottom Line

— “Whichever one of these budgeting methods you choose, you’ll be saving more and spending less.”

Before we dive into the different budgeting techniques, here’s a reminder of why budgeting is important:

  • You’ll stop spending what you don’t have

When you don’t have a budget, nothing is preventing you from spending beyond your means. Before you know it, you’re drowning in debt or struggling to make ends meet. With a budget, you’ll never find yourself in this precarious position.

  • You can spend guilt-free

Too many people think a budget has to be restrictive, and this misunderstanding is the reason why budgets sometimes fail. By allocating money in your budget to spend on things that you enjoy, you can enjoy these expenses guilt-free, without breaking the bank.

  • It keeps you on track for your financial goals

Whether it’s saving for retirement, a two-week vacation around Europe, or buying a house, budgeting puts you on the path towards achieving your financial goals.

  • It helps you be prepared for an emergency

Life is full of uncertainties. You’ll never know when your car breaks down or when you need an emergency visit to the dentist. Budgeting allows to have funds readily available, should the need arise.

  • It prevents you from feeling overwhelmed

Nobody likes panicking when a huge bill arrives or constantly worrying about how you’re going to make ends meet. It’s overwhelming. But a budget ensures that you’ll always be prepared to meet your financial obligations every single time.

4 Most popular budgeting methods:

Method 1: Pay-yourself-first budget

Most people think of savings as an afterthought but with the pay-yourself-first method (also known as reverse budgeting), savings are prioritised. This is the opposite of most budgets that are built around your expenses.

Do the math and determine how much is a realistic percentage of your income to save each month. Let’s say that amount is 30% of your take-home pay.

Once your salary has been credited to your account, automatically ‘pay yourself first’ by saving 30% of your income. Of that 30% you can decide what type of savings to allocate it to. For example, 15% for retirement, 5% for your emergency fund, 15% for vacation fund. We recommend setting up an automatic monthly transfer to your savings account.

For the remaining 70%, you can freely spend it however you like on your wants and needs.

Pros: This budgeting technique is very low-maintenance and easy to maintain because you can automate the transfers and there’s no need to track every single expense. Most importantly, it prioritises savings first.

Cons: This technique may not be suitable for those who aren’t ready to prioritise savings, such as those who have too much debt to pay off. It can also encourage undisciplined spending when you can spend the balance however you like, when there may be an opportunity to continue refining your spending habits.

Method 2: 50/20/30

The idea is to spend 50% of your income on your needs (rent, debt repayments, bills, etc), 20% on savings (emergency fund, retirement, etc), and 30% on wants (shopping, entertainment, etc).

Your needs consist of things that are essential to your survival, like rent, mortgage, minimum debt repayments, bills, transportation, and groceries.

Anything that you can live without but you’d love to have falls under the wants category, such as movie tickets, shopping for new clothes, vacations, dining out, and Netflix subscription.

Savings consist of your retirement fund, emergency fund, and additional debt repayment.

Pros: The 50/20/30 method is straightforward to maintain. Instead of budgeting for a dozen categories, you only have to plan for three. It’s also very balanced in giving yourself 30% to spend guilt-free on your wants, while still putting away enough to save.

Cons: Since it’s not necessary to track every single expense, it can be easy to go overboard in some areas, for example spending too much on dining out and thus having too little for petrol. We recommend overestimating your categories to give yourself some wriggle room.

Method 3: Zero-based budget

The fundamental principle behind this method is simple — give every dollar a job.

This technique requires you to plan out your expenses as accurately as possible and calculate individual categories separately so that every single dollar is accounted for.

Let’s say your income is RM3,000.

RM800 goes to rent, RM200 for bills, RM300 for transportation, RM300 for food, RM100 for entertainment, RM400 for debt repayment, RM200 for miscellaneous, and RM700 to save.

Your total monthly spending and savings should equal your total income amount.

Pros: This method is extremely effective because it makes you intentional with every dollar and hyper-aware of your spending habits.

Cons: It can be time-consuming because it involves a lot of planning, and may not be suitable if your income and expenses tend to fluctuate often.

Method 4: The envelope budget

This budgeting method is similar to the zero-based budget, except that you do it all with cash.

Plan how much money to allocate to each category each month, then withdraw the necessary cash to keep in an envelope to use each month.

For example, you’ve allocated RM400 to your grocery shopping. Withdraw RM400 to keep in your grocery shopping envelope.

Whenever you go grocery shopping, take your grocery shopping envelope and pay for your items in cash. If you’ve run out of cash in that envelope, that’s all you’re allowed to spend in that month, unless you take cash from other envelopes.

However, cash transactions have become less popular because of the pandemic. Consider opening multiple bank accounts or e-wallets to serve as your digital ‘envelopes’.

Pros: This method prohibits overspending in any particular category, or else you’ll need to reallocate the money you had set aside for other categories. Studies have also shown that people spend 15% to 20% less when using cash.

Cons: Some people may feel uncomfortable carrying so much cash around with them. They may also accidentally leave an envelope at home. Cash may also not be accepted everywhere.

The Bottom Line

Budgets don’t have to be complicated and restrictive. When you choose the right budget for your unique circumstances and goals, your budget will work in your favour and support you.

Don’t be afraid to try different budgeting strategies. Even after you’ve found the one you like, it takes a few months and experimentation to settle into the new system.

Once you’ve found the right one, we promise you it’s worth it — it’ll become so much easier to stay on top of your financial commitments, reach your financial goals, and still have enough ‘fun money’ put aside for your wants.

And most importantly, you can stop feeling so financially overwhelmed and actually enjoy your money without going overboard.

Who knows, you may even start looking forward to budget days!

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