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The 5 Ways to Budget

Home >> Budget & Save >> A Spending Plan: Step-by-Step

The dreaded budget……We all hate doing it but we also know how necessary it is. A deep understanding of how you get your money and where it goes is absolutely necessary if you are going to win with money. 

Talk to any successful person or business and you’ll realize that all of them understand how they make their money, how they spend their money, and they have a plan in place for growing their income, reducing their expenses and increasing their savings and/or profitability.

In other words, they have a budget.

If you fail to plan, you are planning to fail

A budget is more than a table or file you fill out once a year because you know you should. A budget is a roadmap that reflects your income constraint, your priorities, your values and your desires. It allows you to develop specific step-by-step financial goals to get you from where you are to where you want to be.

But the budget is NOT the first step in winning with money! Saving is. The very first thing you should do once you have an income is start saving at least 10%. Do you get a 10% match for your 401k contributions? Then contribute the 10%. Only get a 5% match? Then contribute the 5% and save another 5% in an external account. If you can save more, do it.  

Now that you are actively saving, let’s dig into the various ways to build your budget so you can find the approach that works for you.



  • A budget is a roadmap that reflects your income constraint, priorities, values and desires.
    • It allows you to develop specific step-by-step goals to get you from where you are to where you want to be.
  • 2 main budgeting techniques set the foundation for building a budget
    • The Traditional Budget  (Bottoms up)
    • Proportional Budgeting (Top down)
  • 3 types of Pseudo Budgets
    • Zero-Based Budgeting
    • The Envelope System
    • Values-Based Budgeting

The Traditional Budget

This is the OG budget. It involves pulling the last 3-6 months of actual income and expenses, categorizing them into different line items, and then

Income – Expenses = Savings

Categorizing the last 3-6 months of actuals is what makes this approach very time consuming. However, there are two ways to cut down on the time:

  •  Once you go through that pain, and you develop a good understanding of how much you usually spend in each category, you can skip this part.

  • Instead of having a line item for every little thing, you can combine multiple expenses into one line item.

Instead of having a line for food, gas and clothes, have one line item for general living expenses or something similar. As I detail in my spending plan vs budget article, I combine food, clothes, gas, personal spending and eating out into one line item because that is how I spend. I take my budgeted amount for all of those and put it into a spending account each time I get paid. I spend on whatever i want with that money knowing that if i overspend on any one category, I will have to reduce one of the others. 

Depending on your personality and time constraints, you may or may not want to use this approach. If you’re just looking for a “super easy way to kind of track your spending” but don’t really care about maximizing your savings or planning out the next 12-24 months of your financial life, then this approach is not for you. You want to check out the proportional budgets. Just keep in mind that the value gained from doing a budget is usually proportional to the thought and effort you put in.

On the other hand, if you are getting into budgeting for the first time, you’re really serious about maximizing your savings, you have a spending problem or you have the time to spend, this is the best approach.

It gives you much better insight into your habits and allows you to identify the areas that you need to focus on in order to maximize your savings and achieve whatever goals you work into the budget. I go in-depth on this method here.

  • Gives you detailed insight into your spending habits
  • Allows you to pinpoint specific areas of focus – for those who have spending problems
  • You can build a roadmap to your desired financial future where you can create specific goals and milestones
  • Allows you to incorporate other techniques (zero-based budgeting, values-based budgeting & others)
  • Takes waaayyyy too much time, especially if you’re going to compare your budget to what you actually spend.
  • Because of the detail and time commitment, it’s harder to stick to your budget
  • It’s easy to lose sight of the big picture because of the focus on the nitty gritty details

The Proportional Budget

Whereas the traditional method is a bottom-up approach, proportional budgeting is a top-down approach.

You take your income and apply %’s for saving, spending on needs and spending on wants. For example, you could say

  • 20% of income = saving
  • 65% of income = needs
  • 15% of income = wants

This saves a ton of time but you also loose pretty much all insight into your spending habits and the ability to develop specific goals.

Not to mention, how do you come up with your percentages?

Don’t you have to know how much you are currently spending in each category?

And in order to determine what you are currently spending in each category, don’t you have to know the amount of each line item making up each category?

So, if you already have to do this work, why not just go through the traditional budgeting method? write the details down right now and take advantage of the extra information and flexibility it provides.

In other words, If done properly, proportional budgeting is not going to save you as much time as you think. It will definitely save you some time but less than you think.

the one plus of proportional budgeting is the fact that it pulls the savings rate to the forefront of the decision making process. It forces you to pay yourself first, which is great! But then we quickly find ourselves back in the same position as before.

Let’s say you want to increase your savings rate. You have to take it from either the wants or the needs. You’re most likely going to take it from the wants.

What good is it to say I’m going to decrease my spending on wants?

OK, how are you going to do that? Are you going to do that by reducing your TV, your cell phone, gym membership….?

Just saying you’re going to do something doesn’t make it happen. You have to actually do it. And to do “it”, you have to know what you’re going to do. 

So, my question to you is WHY NOT JUST WRITE DOWN THE DETAILS RIGHT NOW? while you’re doing your budget. That way you don’t forget and have to figure it out again later.

  • Time saver – But not as much as you think unless you half ass it
  • Allows you to isolate and target a savings rate – so do all other methods. You choose to save first or not
  • You lose insights from your spending habits – not good for those with spending problems
  • It’s not enough to say your going to decrease your wants or needs. You need to know how you’re going to accomplish it which requires doing the most of the work involved in traditional budgeting anyway

Pseudo Budgets

It’s common to see a tweak made to real budgeting methods talked about as an entirely new way of budgeting.

I call these pseudo-budgets because they’re truly either a spending plan or there is such a small adjustment made to existing methods, that they should be considered a little something extra you can incorporate into your budget.

Don’t get me wrong, they are valid and useful adjustments but they’re not entirely new budgeting methods.


  • Zero-based budgeting

Is this really a new budgeting method? I don’t think it is but it also allows you to focus on the pay yourself first strategy so I’m all for it.

As mentioned earlier, traditional budgeting relies on Income – expenses = savings. This means that you can save whatever is left over from income after spending. 

Zero based budgeting says hell nah! we’re gonna move the savings part to the left and you end up with

Income – Savings – Expenses = 0

If you end up with a negative balance (Income – Savings – Expenses < 0), then you need to work in a plan to either increase your income, reduce your spending, reduce your savings or some combination of the three

If you end up with a positive balance (Income – Savings – Expenses > 0), then you increase your savings

The reason I don’t consider zero based budgeting a separate budget methodology is that you can use zero based budgeting with both a traditional budget and a proportional budget.


  • The envelope system

I get a good laugh when I hear people refer to this as a budgeting methodology. I picture creating a line-item budget on a piece of paper, cutting out each line-item and putting the slivers of paper into separate envelopes.

No, this is the spending plan to implement a traditional budget.

  • Each time you get paid, you use cash for all spending that is not already handled through an automatic debit to your account (groceries, gas, a spend on whatever the hell you want allowance, birthdays/holidays, travel etc.)
  • You put the budgeted amounts for each of those items into their own envelope.
  • When it comes time to go get groceries, for example, you take the cash out of your groceries envelope and go get groceries.
  • If you spend less than what you budgeted for groceries, you determine where you want to allocate the surplus. More savings and paying down debt are usually the smartest use of that money but you can do whatever the hell you’d like with it.

There’s no doubt that it’s a helpful way of implementing your budget in the real world, especially for those who have spending problems. But let’s not kid ourselves. It’s not a budgeting method in and of itself.


  • Values based budgeting

The idea here is that you incorporate your personal values into what you spend your money on.

Similar to the Zero-based budgeting, values based budgeting should be part of every budget, in my opinion. But It’s not a separate budgeting scheme. It’s just a little “extra” that can be added to the thought-provoking process that is a budget.

First, account for savings and needs (rent/mortgage, food, utilities and any legally required expenses such as debt payments or child support). Then think about what you value in life and allocate your hard-earned cash to those activities.

Items such as a car payment, cell phone, gym membership, TV, internet, travel etc., are not needs. I know most of us have been raised to think they are but you can get along just fine without them. They are choices/wants, and if they are your choices, based on your personal values, then that’s fine. It’s your money and you are free to do whatever you want with it.

Spread the Wealth!

Donating and giving away your money is great but I’m talking about the sharing of financial knowledge and the application of that knowledge. With friends and family, but most of all with your children, if you have any.

With money being involved in nearly every aspect of life, I am flabbergasted that basic financial skills are not taught in our schools.

That means it’s up the parents.

I know we’re all short on time and the last thing we want when we’re trying to finish our budget is for our little why-bots to come ask us 100 questions.

But we only get a handful of teachable moments so taking advantage of them is important. Don’t go into too much detail but a very high level

  • I’m coming up with a plan that will allow us to do fun things this year
  • This is how much we make
  • These are aaaaalllll the things we spend our money on – point out a couple specifics like how much rent/mortgage or the car payment is
  • This is how much we save – mention that it’s important to save at least 20% of your income and to ALWAYS save first and then spend
Check out Money for Kids

Obviously that particular example is geared towards younger children. The Kids Money section is full of ideas about how to teach your kids basic financial concepts based on their age along with some fun activities that will really help it stick.

The more we show excitement for sound financial management and actually demonstrate this through our own actions, the more likely it is to become a part of who our children are as well. And this will go much further in rebuilding a sense of sound finance into our society than just giving away your money.

“Give a man a fish and you’ll feed him for a day. But teach a man to fish and you will feed him for a life time” ~ Unknown

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