Skip to content

Which budgeting technique is right for you?

Feb. 06, 2021
7 min read
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.

Editor’s note: This is a recurring post, regularly updated with new information.

Budgeting may not be the most exciting activity for a lot of people, but it is one of the most important for your financial health.

When you hear “budgeting,” you may think of a tedious process of creating a spreadsheet to figure out how much you’ve spent during the month. But it’s more than just a spreadsheet. Budgeting is a powerful personal finance tool that helps you:

  • Identify excessive spending
  • Calculate how much your emergency fund should be and how much income to save for the future
  • Be aware of upcoming expenses so that you can apply for new credit cards when you know you’ll be able to meet the minimum spending requirements
  • Stay within your financial lane so that you can accomplish your goals (like traveling the world)

There’s no one-size-fits-all approach when it comes to budgeting. It may take some trial and error to figure out what works best for you. Even if you’ve been budgeting for years, it’s good to consider whether a new technique might be useful. And if you’re creating a budget for the first time, use these four budgeting techniques as guidance to help you get started on the right foot.

Related: The best apps for money management

Traditional budget

(Photo by Kemal Taner/Shutterstock)

With a traditional budget, your goal is to figure out how much you’re spending and where your money is going. The idea is to build a budget around your lifestyle using this simple formula: income - expenses = net income.

To create a traditional budget, you’ll need to calculate how much you earn and how much you spend. If you use credit cards to pay for most of your expenses, this will be easy. You can download your spending activity from the last few months and consolidate everything into one Excel sheet.

Here’s an example:

Income: $4,000 (after taxes)

Sign up for our daily newsletter

Total Expenses: $3,200

Net Income: $800

Based on this example, that's a savings of 20% of the monthly income (the general recommendation). This excess can be set aside for emergencies, used to pay off debt, or invested. If you want to increase your savings, you’ll have to figure out how to reduce your expenses.

Categorizing your expenses can give you a blueprint of your spending habits and help you spot unnecessary or excessive purchases. If you find your expenses are frequently going over the amount you’ve budgeted, you can identify which categories might be problematic (restaurants, entertainment or hobbies, for example) and work on spending less in those categories in future months.
Related: Ways to use a credit card responsibly

This method may take a little more time than the others, but if you like detail and want more insight into your spending habits, the traditional budget might be for you.

Zero-based budget

The zero-based budget allocates every dollar of your income into buckets. A zero-based budget is based on a different formula: income - expenses = 0 (hence, the name). In this format, your savings are treated like an expense.

Income: $4,000

Total Expenses: $4,000

Net Income: $0

Similar to building a traditional budget, start by compiling your expenses into one spreadsheet. Next, label each expense – but this time, be more specific.

Don’t forget to include infrequent expenses that may not come up every month, but still need to be accounted for -- such as insurance, car repairs, holiday gifts and new clothes. You’ll either need to include a miscellaneous expense category as a catch-all or have sinking funds, where you set aside money every month for these types of expenses so you’re not caught off-guard when they pop up.

The zero-based budget is best for people who (a) have plenty of time to budget and (b) want as much detail into their spending habits as possible.

50/30/20 budget

If time is a concern, the 50/30/20 budget might be better for you.

The 50/30/20 budget splits your expenses three ways: 50% for needs (such as rent and groceries), 30% for wants (Amazon shopping, anyone?), and 20% for saving. No need to set individual limits for every expense. The goal is to stay within the percentages.

Sticking with our example, you’ll see that the 50/30/20 budget is much simpler.

Income: $4,000

Needs: $2,000 (50%)

Wants: $1,200 (30%)

Savings: $800 (20%)

When you start using this technique, you’ll need to define your “needs” and “wants.” Needs should be vital to your livelihood, like rent, utilities, groceries, bills, and so on. If Netflix is a staple in your life, sure – throw it in. But keep in mind the total size of your necessities bucket doesn’t change. If you make room for Netflix, you’re taking away from something else that might actually be important.

If you’re prudent and want to reap the rewards of saving down the road, you can flip this budget to a 50/20/30 format. You’ll save 30% of your income each month and spend up to 20% on whatever you please.

Or maybe you’re not a point in life where saving 30% or 20% of your income is feasible. Things such as medical expenses, child care, mortgage and/or car payments may be part of your “needs,” pushing you over 50%. Or you have debt to pay off. You can easily adjust this method to be 70/20/10 or whatever percentages work best for you.

Related: How I saved up for my dream wedding – reader success story

80/20 budget

If you want to take the simplest budgeting route possible, the 80/20 budget is best for you. It divides your income into two segments: 80% for life expenses (needs and wants) and 20% for saving.

Income: $4,000

Expenses: $3,200 (80%)

Savings: $800 (20%)

All you need to do is add up receipts, credit card statements, etc. and make sure your expenses are no more than 80% of your income. Save the rest.

It's simple, it’s quick, and it ensures you’re still saving money – without the granular spending limits. The drawback to this method is the lack of structure. If you’re consistently overspending, it may be hard to determine where exactly to cut back without a more detail-oriented analysis of your expenses.

Bottom line

Keeping a budget doesn’t have to be overly complicated or time-consuming.

No matter which budgeting technique you choose, the important part is to follow through with tracking your spending and making sure you’re achieving your savings goals. Whether you’re detail-oriented and prefer the zero-based technique or you want something simple like the 80/20 method, make sure your method matches your time and preferences.

At the end of the day, the goal is to maximize every dollar you earn – so any budget is better than no budget.

Related: The emotional psychology around money with behavioral finance expert Michael Liersch

Featured image by Getty Images
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Top offers from our partners

How we chose these cards

Our points-obsessed staff uses a plethora of credit cards on a daily basis. If anyone on our team wouldn’t recommend it to a friend or a family member, we wouldn’t recommend it on The Points Guy either. Our opinions are our own, and have not been reviewed, approved, or endorsed by our advertising partners.
See all best card offers

TPG featured card

Best card for premium perks while traveling
TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review

Rewards

2 - 10X points
10XEarn unlimited 10X miles on hotels and rental cars booked through Capital One Travel
5X5X miles on flights booked through Capital One Travel.
2X2 Miles per dollar on every purchase, every day

Intro offer

75,000 bonus miles
Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel

Annual Fee

$395

Recommended Credit

740-850
Excellent
Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

Why We Chose It

The Capital One Venture X card is one of the best all-round travel credit cards ever launched. Not only is it offering a tremendous welcome bonus, but cardholders can earn tons of miles on everyday spending and receive a 10,000-mile anniversary bonus to boot. Its annual fee is $395, but cardholders can count on up to $300 in statement credits toward travel booked through Capital One Travel each year and other valuable benefits like access to Priority Pass lounges and Capital One’s own growing family of airport lounges.

Pros

  • Excellent welcome offer worth 75,000 miles after you spend $4,000 on purchases in the first three months.
  • Up to $300 in annual travel statement credits toward bookings make through Capital One Travel.
  • 10,000 bonus miles (worth $100 toward travel) each account anniversary.

Cons

  • The $395 annual fee might be expensive for some, but this card’s benefits provide much more value than that.
  • If you don’t travel frequently, this might not be the best card for you.
  • Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel
  • Receive up to $300 back annually as statement credits for bookings through Capital One Travel, where you'll get Capital One's best prices on thousands of options
  • Get 10,000 bonus miles (equal to $100 towards travel) every year, starting on your first anniversary
  • Earn unlimited 10X miles on hotels and rental cars booked through Capital One Travel and 5X miles on flights booked through Capital One Travel
  • Earn unlimited 2X miles on all other purchases
  • Unlimited complimentary access for you and two guests to 1,400+ lounges, including Capital One Lounges and our Partner Lounge Network
  • Receive up to a $100 credit for Global Entry or TSA PreCheck®
  • Use your Venture X miles to easily cover travel expenses, including flights, hotels, rental cars and more—you can even transfer your miles to your choice of 15+ travel loyalty programs
  • Named editors' choice for "Best New Credit Card of 2021" by The Points Guy
  • Earn 10 miles per dollar when you book on Turo, the world's largest car sharing marketplace, through May 16, 2023
Best card for premium perks while traveling
TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review

Rewards Rate

10XEarn unlimited 10X miles on hotels and rental cars booked through Capital One Travel
5X5X miles on flights booked through Capital One Travel.
2X2 Miles per dollar on every purchase, every day
  • Intro Offer
    Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel

    75,000 bonus miles
  • Annual Fee

    $395
  • Recommended Credit
    Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

    740-850
    Excellent

Why We Chose It

The Capital One Venture X card is one of the best all-round travel credit cards ever launched. Not only is it offering a tremendous welcome bonus, but cardholders can earn tons of miles on everyday spending and receive a 10,000-mile anniversary bonus to boot. Its annual fee is $395, but cardholders can count on up to $300 in statement credits toward travel booked through Capital One Travel each year and other valuable benefits like access to Priority Pass lounges and Capital One’s own growing family of airport lounges.

Pros

  • Excellent welcome offer worth 75,000 miles after you spend $4,000 on purchases in the first three months.
  • Up to $300 in annual travel statement credits toward bookings make through Capital One Travel.
  • 10,000 bonus miles (worth $100 toward travel) each account anniversary.

Cons

  • The $395 annual fee might be expensive for some, but this card’s benefits provide much more value than that.
  • If you don’t travel frequently, this might not be the best card for you.
  • Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel
  • Receive up to $300 back annually as statement credits for bookings through Capital One Travel, where you'll get Capital One's best prices on thousands of options
  • Get 10,000 bonus miles (equal to $100 towards travel) every year, starting on your first anniversary
  • Earn unlimited 10X miles on hotels and rental cars booked through Capital One Travel and 5X miles on flights booked through Capital One Travel
  • Earn unlimited 2X miles on all other purchases
  • Unlimited complimentary access for you and two guests to 1,400+ lounges, including Capital One Lounges and our Partner Lounge Network
  • Receive up to a $100 credit for Global Entry or TSA PreCheck®
  • Use your Venture X miles to easily cover travel expenses, including flights, hotels, rental cars and more—you can even transfer your miles to your choice of 15+ travel loyalty programs
  • Named editors' choice for "Best New Credit Card of 2021" by The Points Guy
  • Earn 10 miles per dollar when you book on Turo, the world's largest car sharing marketplace, through May 16, 2023