The Right Way to Plan a Monthly Budget
Monthly budgeting is a pillar of personal finance. By knowing where your money is going each month, and whether that allocation aligns with your goals, you can set yourself up for long term success.
Here’s two potential strategies and our personal take on which one you start using today.
The Envelope Method
The envelope method is a budgeting plan that divides your income into various spending “envelopes”.
Each envelope represents a major category of living expenses- rent/mortgage, utilities, insurance, etc. By setting a limit on each envelope, you effectively divide your available budget per month into manageable spending categories.
The idea here is to keep each category below its spending limit in order to keep pace with your overall budget.
The 50/30/20 Method
The 50/30/20 plan is similar to the envelope method, but it utilizes a broader approach. There are only 3 categories in this plan: needs, wants, and savings.
The most important part is to immediately (ideally automatically) deposit 20% of your income into savings. The remaining 80% is then divided among needs and wants based on the 50/30 allocation respectively.
For more specific details on this approach, check out NerdWallet’s 50/30/20 tool.
Our Recommendation: Start With the 50/30/20 Method
The most important part of the 50/30/20 method is also why it’s our favorite- savings.
This method forces you to plan your budgets after you’ve fulfilled your savings requirement. It might mean sacrificing on a few of your current wants, but we promise future you will be grateful.
The 50/30/20 approach also makes for an easier starting point than the envelope method. Rather than trying to plan each individual expense, starting with needs vs wants can be less intimidating.
We’re already a week into May, but that doesn’t mean it’s too late to work on this month’s plan. Take a look at what you’ve already spend and try and lay out a plan for the rest of the month based on one of the two methods above.
And share your progress with us!
