The Three Types of Budgets Explained in 3 Minutes — Budgetry (2024)

Maybe you ran across this page by accident, or maybe you were searching for budgeting tips. Either way, if you have never set a budget before or just are not completely sold on the idea, you may be wondering why you should care about setting a budget. This might be especially true if you get your bills paid every month- I mean, what’s the use, right? Why change a system that works?

Well, let’s put it like this: if all of your bills are getting paid, your savings is growing each month, your 401K or other retirement account is on a steady incline, and you have a little wiggle room, you actually already have a budget. You just did not know it. If, on the other hand, those things are not done, you need a budget. Why? The answer to this could actually go on for hours, but I will keep it to a few short points:

• To make sure your bills are paid every month, and your family is cared for. That is the whole reason you are working hard, right?

• To start saving. We all know living paycheck to paycheck is just too stressful.

• To save for retirement. You do want to retire one day, right?

• To be able to afford family pizza night without feeling guilty. This alone sounds awesome.

All of that sounds wonderful, but it actually comes down to one thing- one fundational principle. A budget puts you in the driver’s seat of your finances. It means you stop playing catch up all the time. A budget puts you in control of your money instead of your money controlling you.

Introduction To Three Different Types Of Budgets

The very literal dictionary describes a budget as “an estimate of income and expenditure for a set period of time”. Okay, yes, that is technically what it is, but, goodness, that’s no fun at all. Let’s say it like this: a budget is a plan that tells your money where to go. You determine what needs to be paid and what extra things you want to do, and put your money to those things. Simple enough? In practice, a budget means writing down where your income is going to, i.e. utilities, car payment, and more.

If you Googled “types of budget”, the results would show an insane number of types of budgets available. Believe me, I wanted to see what would pop up for that search, so I Googled it myself. Even with all of those results, we are going to stick to three types of budgets that cover pretty much all personal finance on a basic level. Which of these types of budgets you choose really depends on your budget goals.

Saving up for Something Specific

If the whole reason you decided to look into budgets is because you want to save for something big, like a wedding, a car, or a home, the planning budget is a good choice from these three types of budgets. The entire purpose is to save for something specific. If this happens to be you, cool. Start with saving for your goal, but be open to the idea that you just might love the impact of a budget so much that you continue long after your goal is met.

Set Your Goal

To put a planning budget to work for you, you must first be clear on your goal. What are you trying to do? How much is it going to cost? When do you want to accomplish this goal? Be as clear about your goal as possible so you are not guessing later or find out that you have not saved enough. Divide that amount by the number of months you have to save. This is the amount you have to fit into your monthly budget.

Look at What Items You Could Cut Down on

Take a look at your itemized list. Is there going to be enough money left after paying all of your bills and your regular spending to save? If so, good for you. If not, join the club. I know very few people that can easily slide in an extra expense. Instead, we have two work and rework the numbers until they work for us.

Next, look at your bills- the money you have to pay out each month. You know these have to be paid, of course, but is there any way to cut down on them? We will go over ideas for this below.

Then, take a look at the amount you spend on non-necessities. If you take the emotion out of it, you can probably point out at least two or three things that you can cut down or out from your spending. They may not be things you want to give up, but you need to weigh their importance against the importance of your savings goal.

So, in summary, to create a planning budget, you:

• Determine your goal and how much you will need to save every month

• Look for ways to cut down what goes out each month

• Make your savings goal a priority and redirect what you shave off of other expenses to your savings goal

Let’s say I need to save $1200 for a vacation and I have 12 months to do it. When I take a look at my bills, what I spend out, and my income, I can easily see that there is no way I can afford that $100 each month unless I make some changes. So I dig in and discover that I can cut down $60 a month by taking lunch to work, $20 per month by staying away from the vending machine, and another $20 by making coffee at home instead of buying it elsewhere.

I now have my $100 and as long as I put that $100 up every month, I will have all of my vacation money at the end of the 12 months with just a few changes. This, to me, is one of the simplest types of budgets because you have a particular goal in mind. It is often much easier to save for one thing than it is to redo a whole budget, and that one big goal can keep you motivated when you want to give in to other financial temptations.

The problem solving budget is another simple budget, and it is pretty much what it says. For these types of budgets, you are trying to solve a specific problem area. You create this type of budget when you are spending more on one thing- maybe fast food- than you can afford. You might know that you need to focus on eating out, so you set a budget specifically for fast food. At its basic form, a problem solving budget is really just putting limits on areas you know you overspend.

This is, indeed, one of the simplest types of budgets, and it may be a great place for you to start. If you have never created a budget, feel overwhelmed to do so, or think you only overspend in one area, go ahead and begin with the problem solving budget. Pick one thing to focus on and stick to your limits. After a while, focus on another area, then another, and another until you are a budgeting machine.

The comprehensive budget is the monster of all the types of budgets. It takes more work, more time, more self discipline- but it will also yield the greatest results. This means a complete overhaul of your finances. On the ground level, it means setting limits for each and every thing you spend money on. On day one of your planning, you should create your ideal budget on paper.

It will take longer than an hour, though, to get these types of budgets working in practice. This is mostly because you will be working to cut down on a lot of areas. Do not let that overwhelm you, though, and do not think that this is just too much work. I promise, the work is very much work it. And I am going to tell you how to cut down your expenses next.

How Hard Is It To Set a Budget?

Truthfully, it is not really difficult to set a budget. It requires a bit of a time commitment, but it is not hard. It may be easy to get overwhelmed when the numbers do not line up, but take a breath and remember that you are in control. Those numbers have no power of you. With a budget, you can manipulate those numbers into what you need.

Pros And Cons Of Having a Budget

We touched upon some good reasons to have a budget above, but we are going to go into a little more depth here.

Pros Of Setting And Following a Budget

There are so many pros to setting up AND following a budget, but below are a few of them:

Know Where Your Money Goes

You no longer have to wonder where your paycheck went. I mean, don’t you just hate it when you think you have $100 left in your account, so you try to pay for something or buy something and your card is declined. First of all, that’s embarrassing, especially if it happens in front of others. (The funny thing is that pretty much everyone that is not super disciplined has faced this in the past, so it’s really not so embarrassing.)

Then, you are searching your brain for hours trying to figure out where that $100 went. You might even dig through your chaotic receipts to try to remember. When you finally do, you are frustrated at yourself for not paying more attention. Yep, I know- I have been there.

Save Up

You can save money. I am not talking about actually putting money into savings at this point. I am talking about actually cutting down on what is going out. Think about it. If your bills are paid on time each month, you skip a bunch of late fees- these fees can add up quickly. With discipline, you can pay off bills that charge interest. Also, when you really start looking at what you are paying out, it is pretty easy to find things you can live without. Often, we spend money on what may seem like harmless items, but they do not seem so harmless after you add up the total spent on them.

There is so much less stress. When your bills are paid on time and you reach the point that ordering a $20 pizza no longer means guilt or working over time, you will thank yourself. Your family will appreciate it, too.

You can save for things you really want to do, like a vacation, a home, a really awesome birthday present, returning to college or sending your kids to college, or funding your retirement. In fact, you can work your budget to save for anything you want to save for.

I will probably repeat this a few more times, but it is very important that you understand. Just putting a budget on paper is not going to put you in control of your finances, no matter how long you spend working it out. You have to actually follow the budget you set in order to see positive results. I do not mean that you cannot tweak areas as you see fit, but you cannot just continue spending like you were before. If you do not change your habits, your situation will remain the same.

Cons Of Setting a Budget

Nothing is all positive, so it is no surprise that there are downsides to budgeting. There are almost none, though.

It Can Be a Slow Process

The initial budgeting session takes time. The amount of time depends on how organized your financial documents are, how many distractions you have, and how many things you need to budget.

It may take a few months to “get it right”, so to speak. There is always a chance that you will forget to budget something in when you do the initial budgeting session. This is totally expected. I have forgotten to add in fuel for my car before, and we know that’s a necessity if I want to get anywhere. Do not be angry with yourself if you forget something. Your mind will be very busy trying to turn chaos into an effective plan. Do not expect yourself to remember it all the first go round.

It Requires Strong Will

You have to have a stronger will than your temptation. There are going to be things you do not want to let go of, but if those things are causing financial difficulty, you have to. I am not telling you that you have to stand in temptation’s face and deny it. I am saying to find a way to avoid it as much as you can. For example, if McDonald’s is your weaknesses and you drive by it every day, change your route. There may be some pushback from your family. That’s okay. We will be going over ways to involve the family in a moment.

How to Begin a Budget

1. Organize Your Items

There are multiple types of budgets, but they all start at the same spot. You first need to gather your bills, checking and savings account statements, any investment documents you might have, check stubs if you get physical ones, receipts, a calculator, writing utensil and a highlighter, and any other money related paper work you have.

If you are a fairly organized person, the gathering phase may only take a few minutes. For others, it could take weeks. This all depends on how spread out your stuff is and how hard you have to work to find it.

2. Make Time To Do Your Budget

After you have everything you need in one spot, you need to set aside a few hours to work. It may not take all of that time, but plan that much to be safe. If you have children, either do it while they are in school or send them out of the house for the day. Grandmom might be happy to spend the day with them. Turn the ringer and text notifications off on your phone.

In my case, I tend to freak out a little about setting my phone to full silence if my husband or children are not with me. If something happens, I want to be sure they can reach me. I tell them to only call in case of emergency, and set only their numbers or the babysitter’s to ring out loud.

3. Find Enough Space

You need a big surface to work from because it is much easier if you can spread out instead of having to dig through a pile when you need something. A large desk or dining room table would work well. Even your living room floor.

Now, it is time to get to work. You can do so with either pen and paper, a spreadsheet, or a budgeting app. These apps are very useful budget toolsthat can not only help you get your finances into some sort of organized system, but many of them include a graph or chart that will give you a visual of where your money is going. Personally, I start with pen and paper, then move everything to a digital system later.

4. Make Lists of Your Spendings

You are going to make a very simple list right now of everything that you spend on a monthly basis. If you buy a coffee every morning, you do not need to list “Coffee” 30 times. Just multiple the cost by 30 to see how much you spend in a month. Work through as many expenditures that you can remember. This will give you a very good idea of what’s going on with your money.

Have you noticed any surprises yet? Maybe your coffee is costing you three times more than you thought, or you spend more on gas than you realized. Having an itemized list in front of you can often open your eyes to some really unexpected things.

If you have gathered your items, chosen your space to work, chosen your method, and completed your itemized list, it is time to choose between the different types of budgets.

Effective Ways To Cut Down Your Expenses

Here are some ideas to get your creativity flowing:

Budgeting Apps

There are tons of apps out there, but here are a few for you to start your research:

• Mint
• You Need a Budget
• PocketGuard
• Mvelopes
• Prism
• Wally

You can find free memberships and free trials with most budgeting apps, so give a few a spin and see which is best for you.

How to Stick With Your Budget

Ultimately, sticking with your budget will rely on you making the right moves. However, about a decade ago, I read a book by Mindy Starnes Clark called The House That Cleans Itself. If I learned nothing else from that book, one piece of her advice has stuck with me all this time. She said, “First, change the house to fit the behavior. Then, change the behavior to fit the house.” Her point was that it is much easier to rearrange furniture than it is to change lifelong habits. I believe that this principle works well in budgeting, too.

After you have your ideal budget in hand, set everything on auto pay that you possibly can. At the same time, set up automatic savings and investing plans. If all of this happens before your paycheck even reaches you, there is not a lot of temptation to fight.

For everything you cannot do automatically, take the cash out of your account. Cards are way too tempting. Cash is a bit harder to let go of, so get that cash in your wallet and take it straight home. Before you do another thing, place the allotted amount for each category into an envelope that is labeled for that category. So if you have $100 budgeted for groceries, place $100 inside of an envelope labeled “Groceries”. When it is time to go grocery shopping, take only your grocery envelope with you. This puts an actual physical limit on you. Trust me, it works.

Getting the Family on Board

I said I would tell you how to get the family on board, so here we are. I am not going to say that I can give you all the answers, but I can give you some ideas that you can tweak to fit your own family. The first thing to do is to explain what you are doing and why. Make it clear that you are not trying to ruin all the fun, and that through this budget, you can actually do more once it gets rolling.

They may still not like it. I have always found goal charts and celebrations to be effective. If we are saving for vacation, we have a goal section on the wall that helps everyone remember why we are working so hard. I also hang a goal thermometer so that they can see their efforts and sacrifices making a difference.

If your children still whine and complain, too bad. A lot of parents tend to forget that they are the boss, not the children. Yes, it is better when everyone agrees because the process is just a lot smoother. I also like to use times like these as life training for when they are older. However, if they cannot get on board willingly, they can do so unhappily because one way or another, our finances are going to get straightened out.

A Few Last Tips and Thoughts

First of all, do not expect massive change overnight because it will not happen. If you follow your budget though, you will begin to see small changes. Those will eventually add up to a big difference.

Remember that you can always start with one of the simplest types of budgets and move up when you are comfortable.

Set up one location to deal with bills and budgeting. It does not have to be a whole office, but it does need to be easy to get to. When a bill comes in the mail, take it to the budgeting space. If your kids need money for a field trip, put the reminder in the budgeting space. Make a weekly or bi-weekly appointment with yourself to handle any budgeting needs.

This last tip will seem completely unrelated, but it really is not. Take some time to purge and declutter your home. When there is a mess, it is hard to keep up with library books or other rentals. Hello, fines! Also, many people end up buying the same household items over and over either because they get lost or they get ruined thanks to disorganization. You do not have to do it all in a day, but start working your way through your home.

Stick with your budget even when it is tough. Celebrate milestones, too, so that it is not always about the work.