When was the last time you reviewed the various budgeting methods out there? If you’re like me, it was this morning. Over coffee. For fun.

But chances are you aren’t like me, and that isn’t what you find fun. You’d actually rather pull out your own teeth. 

Studies and surveys consistently show that the majority of Americans know they need to budget and yet don’t do it. I think this is because everyone thinks all budgeting is the same and won’t work for them.

Today I want to explore a few of the many methods for budgeting out there, in hopes you’ll find one you like. 

My goal is to get you excited about making smart money decisions. A budgeting system that works for your personality is a great step in that direction. 

Let’s dive in.

Forecast Based Budgeting

This is the traditional budgeting method. Odds are, when you think of “budgeting,” you’re thinking about this. 

At the beginning of each month, you lay out your planned income and expenses. Then you try your hardest to hit those numbers.

This is great for a lot of reasons but especially useful for its ability to look far into the future. There’s no reason you can’t budget a whole year in advance. In fact, most businesses do that.

Forecast Budgeting Is Like Predicting The Future

The closest thing you can have to a crystal ball is a forecast based budget. You sit down on day one and plan out all your financial decisions for the month. You know how much you’ll bring in, how much you’ll save, and how much you’ll spend.

Imagine knowing what your bank account will look like 3 months from now. That’s the power of a forecast based budget.

They allow you to operate in a future-based framework. You can see how your decisions will impact your future financial situation. In real-time.

Spent too much today? That means you’ll have to spend less a week from now.

The Future Doesn’t Always Pan Out

I’d be willing to bet this future-oriented thinking is why forecast based budgeting doesn’t pan out for most of us. We fall victim to the Optimism Bias, believing we’ll make more and spend less in the future.

If you struggle to get real with yourself about exactly what your financial situation looks like, forecast based budgeting won’t work. You’ll constantly overspend your projections, come up short on what you thought you’d bring in, and wind up disappointed.

It also doesn’t tend to work well for people who have highly variable incomes from month to month. If your future is unstable, it’s hard to budget based on it.

Envelope Budgeting

Ah, the Envelope Method. It’s been around as long as I can remember. My mom definitely used it growing up, and I wouldn’t be surprised if yours did too.

It’s a pretty straightforward method. You create envelopes for each of your budget categories (groceries, entertainment, etcetera), and put actual cash inside those envelopes.

You then spend in those categories out of their respective envelopes. When the cash is gone, you can’t spend any more money on that thing this month. 

Simple enough.

Envelope Budgeting Keeps It Simple

The primary benefit of an envelope system is its simplicity. In fact, the envelope method is basically a way of forcing you to stick to your forecast based budget.

At the beginning of the month, you have to decide how much cash to put in each envelope. That’s forecasting. The envelope method makes it real.

The simplicity in envelope budgeting lies in how it tracks your transactions. The dwindling cash reserve in each envelope requires you to think through every single purchase in real-time.

Simplicity Sometimes Means Missing Out

I don’t just mean missing out on things you want because you can’t afford them. That’s just life, especially as you get your financial house in order.

First, there’s the issue of what happens when your forecast fails. It's only January 13th, but your grocery envelope is empty. The envelope method doesn’t provide an easy way to cover this gap. There isn’t any flexibility there if you mess up your forecast.

Second, the simplicity of the envelope method is a little outdated. You miss out on the great perks and protections that come with using credit cards. You ultimately end up paying more for everything you buy, plus you have to carry a ton of cash around.

Zero Based Budgeting

Zero based budgeting is gaining popularity among budgeting circles. Which means you’ve probably never heard of it.

Touted by budgeting apps like You Need A Budget (YNAB) and Dave Ramsey’s Every Dollar App, zero based budgeting is a powerful framework.

Rather than starting from your predicted income for the month, you start from zero. You record all your expenses as negative transactions and your income as positive ones. Here’s the catch: your “available money” always has to equal, you guessed it, zero dollars.

Zero Based Budgets Fight Against Overspending

Zero based budgeting forces you to consider every single transaction. You can’t get complacent and just do what you did last month. Zero based budgets have no auto-pilot.

This can help prevent overspending and lifestyle creep. It’s easy for your expenses to gradually go up over time and, before you know it, you’re spending way more than you intended.

With a zero based budget, that’s a lot less likely. You have to justify every. Single. Transaction. It really makes you stop and think.

One little quirk that’s often hard for people to wrap their heads around is savings. In a traditional budget, the difference between your income and expenses is what you save. 

In a zero based budget, that number is zero. You have to log your savings as a transaction. It’s paying yourself, just like buying gas is paying Shell.

It’s Easy To Get Overwhelmed

Zero based budgets are powerful, but they’re definitely a lot. It’s very easy to get overwhelmed, to feel stuck, or to want to throw in the towel.

Especially if you can’t make things equal to zero at first. When you’re consistently ending up with a negative balance on your zero based budget, it stings. It can be easy to give in to that feeling and give up.

Instead, embrace the pain. Realize that your budget is trying to tell you something important. You need to be more intentional, more mindful.

Roll with the pain, adjust, and soon you’ll be in a much better place with your money.

Conclusion

This is not an all-inclusive list of different ways you can budget. In fact, budgeting is going to be a recurring theme of this site going forward. Just a little peek behind the curtain.

It would be easy to get stuck trying to decide which method of budgeting is best for you. We often use analysis and “research” as a way to procrastinate. We tell ourselves we need just a little more information, then we’ll get started. I know I’m guilty of that.

If you’re waiting on that missing info, stop waiting. Pick a budgeting method you think might work, and commit to trying it for 3 months. Find it isn’t working? Switch it up.

The most important thing isn’t that you’re perfect. It’s that you get started.