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How to Choose a Budgeting System That’s Right for You
One of the first pieces of financial advice that most people receive is that they need a budget. Budgets are indeed powerful tools, but there are countless budgeting systems out there, and, frankly, not all of them are right for everyone. Almost every budgeting system has some stellar features paired with some drawbacks that make it a good choice for some people and a bad choice for others.
Why is budgeting important?
Let’s start with a look at what a budget is and why it matters.
A budget is simply an estimate of how much money you bring in and how much money you spend over a given period of time. In personal finance, this period is usually a month because that matches up well with the monthly bill cycle that many companies use.
There are three key parts to a budget. First, it includes an estimate of how much you’ll earn in a month — your pay from work and other sources of income. From that, you’ll subtract out all of your “fixed” bills — the ones you know you’ll have to pay and can either state precisely the amount or approximately how much it will be. You might also include portions of less-frequent bills, like 1/12th of an annual bill (like property taxes). The money left is your “discretionary” money for things that you can easily adjust.
The purpose of a budget is to figure out how much discretionary money you have and figure out how to use that money in a sensible way that doesn’t make you miserable but also ensures that you don’t run out of money by the end of the month (which results in credit card debt or payday loan debt).
The best budgeting systems
While there are many budgeting systems available, these are four currently recommended by The Simple Dollar:
- The envelope system
- Money in Excel
- You Need a Budget
Each one has some strong benefits and a few drawbacks. Let’s take a deeper look at each one.
The envelope system
With the envelope system, you use a number of physical envelopes for each “category” of money in your life. You might have an envelope for utilities, one for food and another for entertainment. When you’re paid, you take the money from your paycheck and physically put it in the different envelopes at your discretion; then, when you need money for those different purposes, you take money only from that specific envelope.
This is a very physical and tangible way to budget, which means it works very well for some. However, that’s also the big drawback of this system. It’s cash-based, which means that you need to handle all of your transactions in cash. If you pay for things by check, you’d take cash from an envelope and deposit it in your checking account. If you use a credit card, you have to take the amount of the purchase and move it into a credit card envelope. This works well for some people, but it can be very cumbersome for others.
Who is the envelope system best for?
The envelope system is best for people who understand their finances best through physically handling money.
Mint is a popular smartphone app that does most of the budgeting work for you, and it’s free. You simply link it to your online financial accounts and it pulls in all the transactions for you. You can label those transactions by putting them in a particular category and Mint creates nice budget views for you to examine and review.
What’s the drawback? Mint’s method of making money is through ads and offers so the app constantly encourages you to spend money that you might not have otherwise spent. These can be overwhelming sometimes. There are other alternatives to Mint, like Personal Capital, but it operates on a similar concept of trying to sell you on other products that you may not want.
Who is Mint best for?
Mint is best for people who simply want a free, simple to use budgeting tool.
The program is an extension of the popular Microsoft Excel spreadsheet program as an added bonus for Microsoft 365 subscribers. It offers a simple budgeting template, along with the powerful ability to automatically download transaction data from your banks, credit cards and financial institutions.
The big benefit of Money in Excel is flexibility, particularly for people who are familiar with spreadsheet use. If you’ve used Excel or other spreadsheet programs many times in the past, this turns Excel into a powerful engine for almost anything you might want to do in terms of budgeting. However, if you’re not already familiar with spreadsheet use, the learning curve can be pretty steep, and it really requires a desktop computer to get the most out of it.
Who is Money in Excel best for?
Money in Excel is best for spreadsheet users, particularly experienced ones.
You Need a Budget is hands down the best budgeting software package out there. It takes the features that make Mint so simple to use and expands that power, opening up tons of ways for you to view your budget, make plans for the future and see how those might pan out. It also does not inundate you with ads. It has great desktop and mobile versions of the software for pretty much any platform, and they all sync together wonderfully. It also operates on a sound budgeting philosophy integrated throughout the software.
So, what’s the catch here? You Need a Budget is paid software using a subscription model. Currently, it costs $11.99 a month, though if you pay for a full year in advance, that monthly rate is just $7. You Need a Budget is an incredibly good software, but you’ll pay for it.
Who is You Need a Budget best for?
You Need a Budget is best for people who want all the bells and whistles a budgeting program can offer and are willing to pay the monthly rate.
How do you choose the right budget?
How do you decide which budgeting option is right for you? The nice thing is that you can try a system if it seems like it might be compelling and then choose a different one later. This is particularly true for the envelope system and Mint, as they’re both essentially free.
If you’re familiar with using spreadsheets already, the flexibility of Money in Excel makes it a clear winner, especially if you’re already a Microsoft 365 user.
You Need a Budget is a good choice for someone who has found a little success trying budgets in the past with other systems, but found lots of little frustrations along the way. This is particularly true for people moving from other software budgeting packages like Mint, Personal Capital or Quicken. It’s the best budgeting software out there, but it’s not worth the cost if you’re not sold on and committed to budgeting and learning how to use it for the long haul.
Last Updated December 1, 2020 – Updated editorial review of budgeting systems to address new products.
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