Compare common budgeting methods, see who they may work best for, and choose an approach that fits you.
Quick takeaways
Creating and sticking to a budget is one of the first steps in achieving your financial goals. When you think of budgeting, you might think about restricting spending, but budgeting isn’t all about holding back. It’s about giving yourself permission to spend on what matters most to you.
What is a budgeting method?
A budgeting method is a structured framework for deciding how you spend and save your money. Methods vary in the level of detail and tracking they require, so the right choice depends on factors such as when you get paid, your spending habits, and your own personality and preferences.
The basic rule of budgeting is to spend less than you earn. If you live below your means and create a gap between what you spend and what you earn, you can build a foundation for solid financial habits.
Before
This method provides a simple framework for saving and spending, which is why it’s the recommended starting point from Principal®.
With this method, you break your take-home pay into:
- 50% needs (such as housing, groceries, utilities, insurance, and minimum debt payments)
- 30% wants (such as dining out, entertainment, hobbies)
- 20% savings or additional principal debt payments. In this example, the 20% savings bucket is in addition to the recommended 15% retirement plan contributions (including any employer match) per paycheck.
Based on analysis conducted by the Principal Financial Group®, July 2026. The estimate assumes a 40-year span of accumulating savings and the following facts; retirement at age 65; a 15% individual rate including employer contributions; Social Security providing 40 percent replacement of income; 4.5% withdrawal of retirement savings; 6 percent annual market returns; 2 percent annual inflation; and 3 percent annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 80 percent of salary. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pretax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs as savings depends on many factors, including lifestyle, Social Security replacement, and retirement age. It could include cash savings for emergencies or short-term goals, non-retirement investment accounts like brokerage accounts or 529 college savings plans, or additional principal payments to pay off debt sooner.
Pros
Cons
The envelope budgeting system helps you decide where your money will go before you spend it. You set aside a specific amount per month for each spending category. When a category runs out of money, you're done spending in that category until the next month, unless you intentionally move money from somewhere else.
Traditionally, people used cash envelopes for each category. Today, many people use budgeting apps, spreadsheets, or separate accounts to create digital versions of the same system. Those limits can make it easier to spot overspending before it becomes a problem.
Here’s an example of the envelope system for take-home pay of $3,000/month.
| Rent | $900 |
| Groceries | $500 |
| Utilities | $200 |
| Transportation | $300 |
| Dining out | $200 |
| Entertainment | $200 |
| Subscriptions | $100 |
| Travel savings | $200 |
That's $2,600 assigned to monthly spending, leaving $400 available for savings priorities such as building an emergency fund, paying down debt, saving for a future goal, or covering irregular expenses. This method may feel restrictive to some, but for visual learners or people who love to plan (or tend to overspend), it can work well.
Pros
Cons
Zero-based budgeting is a budgeting method in which every dollar of your paycheck has a purpose. That doesn't mean you spend every dollar. It means every dollar is accounted for—whether it's going toward bills, savings, investing, debt payments, or everyday expenses.
This can be a great option for detail-oriented people who want to feel totally in control.
Here’s an example of using zero-based budgeting for take-home pay of $3,000/month.
| Rent | $900 |
| Groceries | $500 |
| Utilities | $200 |
| Transportation | $300 |
| Dining out | $200 |
| Entertainment | $200 |
| Subscriptions | $100 |
| Insurance | $100 |
| Travel savings | $200 |
| Emergency fund savings | $150 |
| Extra debt payments | $150 |
| Total assigned | $3,000 |
| Remaining | $0 |
Pros
Cons
Pay-yourself-first budgeting flips the traditional budgeting approach. Instead of paying bills, covering expenses, and saving whatever is left over, you do the opposite: You move money toward savings and investment goals first, then spend the remaining money on needs and wants.
Here’s an example of pay-yourself-first budgeting with $3,000 in take-home pay.
- On payday, automatically transfer $300 to an IRA and $300 to an emergency savings account.
- This leaves $2,400 for everything else—needs and wants.
Pay-yourself-first budgeting typically works well for people who want to keep it simple, particularly those who prefer automation and don’t have an issue with overspending. If savings transfers happen automatically and your spending stays within what you can afford to pay off each month, you can spend less time tracking every purchase while still making progress toward your financial goals.
Pros
Cons
Values-based budgeting focuses less on specific spending categories and more on aligning your money with what's most important to you. Simply put: Spend more on your personal priorities and less on everything else.
This approach typically works well for big-picture thinkers who want flexibility rather than strict spending categories. For example, someone who values travel may choose to spend more on trips and less on rent. Someone focused on financial independence may prioritize savings and investing over discretionary purchases.
Rather than serving as a stand-alone budgeting system, values-based budgeting often works best as an overlay on another method.
The 70/20/10 rule is a budgeting framework that divides your take-home pay into three buckets:
- 70% for everyday expenses (both essentials and discretionary spending)
- 20% for savings and investments
- 10% for debt repayment, charitable giving, or other financial goals
The right choice depends on your financial priorities.
The 50/30/20 rule creates a distinction between necessities and discretionary spending. It can help you understand whether you're spending more than you'd like on wants and may provide a little more structure for managing day-to-day expenses.
The 70/20/10 rule combines most spending into a single bucket and reserves a dedicated portion for debt repayment, charitable giving, or other goals outside of traditional savings and investing.
Here’s a quick comparison.
| 70/20/10 | 50/30/20 |
| 70% toward needs and wants together | 50% toward needs |
| 20% toward savings and investments (in addition to workplace retirement plan contributions) | 30% toward wants |
| 10% toward debt repayment, donations, or other financial goals | 20% toward savings, investments (in addition to workplace retirement plan contributions), debt repayment, or other financial goals |
| May be better for those prioritizing debt repayment, charitable giving, or other financial goals alongside savings | May be better for those who want to find more balance between living now and saving for the future |
There’s no single method that’s best for everyone. It’s all about finding what fits your personality and financial situation—plus, learning what you can stick with consistently.
Use this comparison chart to find a starting point.
| Method | Description | Effort level | May be best for |
|---|---|---|---|
| 50/30/20 | 50% of take-home pay goes toward needs, 30% goes toward wants, and 20% goes toward investments or savings outside of a workplace retirement plan | Medium | Beginner budgeters with predictable income who want structure without complexity |
| Envelope system | Assign cash amounts to envelopes (physical or digital) and stop spending when the envelope is empty | High | Visual learners and those who tend to overspend |
| Zero-based | Allocate your take-home pay between your spending and saving categories so the remainder is $0 | High | Detail-oriented budgeters who want maximum control. May work well for those with variable incomes to allow for extra savings in high-earning months to offset slower months |
| Pay-yourself-first | Move a set amount of your take-home pay toward savings before spending the rest freely | Low | Savings-focused budgeters who like automation |
| Values-based | Align spending with personal priorities and values. May work in combination with other methods | Low | Big-picture thinkers who want to align spending with priorities |
| 70/20/10 | 70% of take-home pay goes toward needs and wants together, 20% goes toward savings and investments, and 10% goes toward debt repayment, donations, or other savings goals | Medium | Aggressive savers who want to prioritize reaching their savings goals |
A few simple habits can help you stay consistent with any budgeting method:
- Automate savings, investing, bill payments, and debt payments. When money moves toward your goals automatically, you have less to manage month-to-month.
- Find the tools you’ll stick with whether that's a dedicated budgeting app, spreadsheet, or your banking app.
- Revisit your budget regularly as your life changes. In addition to tracking your budget monthly, check in on your spending categories twice a year—during mid- and year-end financial check-ins—and adjust for things like a new job, a move, changing expenses, or new financial goals.
- Connect your budget to long-term goals such as an emergency fund, home purchase, or retirement savings.
You can bring these options to life in countless ways. Maybe one method is perfect for you as outlined, maybe it’ll take some trial and error to find your match, or maybe you’ll find yourself working through various methods as your life changes.
