Which Budgeting System is Right for You?

Budgets need to be managed. That means keeping track of your spending on a fairly regular basis. Without some form of monitoring, you will have no way of knowing:

  • If your budget is realistic;
  • if you are working within your budget; or
  • if you will be successful in achieving your financial goals.

So once you create a budget, successfully sticking to your budget means tracking your spending.

Here are 7 different personal budgeting systems that can help you do that.

1. Cloud-based budgeting apps

Good for: People comfortable doing things digitally

Avoid if: You don’t trust budgeting apps with access to your banking information.

Nowadays there are tons of digital apps available to automatically keep track of how your budget is progressing through the month. Free apps like Mint.com automatically update all your spending and transactions by connecting directly to your bank accounts. You can also set bill payment notifications so you can avoid late payments. The app will then do all the hard work of categorizing your transactions and regular outgoings. Online budgeting tools are often cloud-based, which means you can access your information and make manual updates from any device.

The downside of cloud-based budgeting tools is that you have to entrust a third party with extremely sensitive personal information, such as your bank and credit card details. Not all apps are free, so you need to factor in and budget for the cost of using a subscription-based budgeting app.

No matter how good your budgeting tool is, you should always spend a little time going through the categorizations to make sure they are accurate. This will help to make sure that you’re getting an accurate picture of what you are spending and where each month.

2. Envelope budget system

Good for: People who prefer to pay with cash and tend to overspend.

Avoid if: You make most purchases electronically.

The envelope budget system is a great way to control your spending behaviours. You simply create an envelope for each of your spend categories, and as soon as you are paid you fill each envelope with the exact amount of cash you have allocated to that category. Then, whenever you want to spend any money throughout the month, you simply take the cash from the envelope, and you’re good to go. When you run out, you will need to either redistribute money from other categories or wait until the following month to spend extra.

EEBA (Easy Envelope Budget Aid), available at eebacanhelp.com, works as an online envelope or jar system. You decide on the categories and set a fixed budget limit monthly.  Each time you make a purchase you input your data.  EEBA keeps a running today of the amount spent by category.

3. Bucket or bank account budgeting

Good for: People who pay for things with credit cards, debit cards or online payment methods like PayPal.

Avoid if: Transferring money between multiple bank accounts is too confusing for you.

Your ‘jars’ don’t have to be physical piles of cash. You can use virtual jars by setting up different bank accounts for different purposes. We recommend you use low-fee online banking to avoid unnecessary bank fees.

Under this method, you set up 3-5 separate bank accounts for managing your money. Your accounts can be set up in any way that will help you stay within budget. A typical approach might be to have one account to pay living expenses and then have separate accounts to set funds aside for specific items like an emergency fund, vacation account, savings accounts, etc.

4. The quota budget approach

Good for: People who have a hard time visualizing what items or activities their budget translates into

Monthly budget targets can be hard to conceptualize in your mind – how many times can I afford to go out to eat this month?  How does my morning trip to Starbucks affect my budget?

The quota budget system is designed to transform total monthly spending limits into actionable daily or weekly targets. With a quota budget, you break down monthly budget targets into concrete, countable milestones that you can easily understand. For example:

1x weekly supermarket trip <$100
1x restaurant meal per month $75
Daily coffee spend $3
Weekly breakfast spend – 3 trips $15
1 monthly subscription to one streaming service (Netflix / HBO etc) $14
1 monthly dry cleaning – 3 items $22.50
Clothing purchases one month $200
1x monthly trip to the cinema with Zach $30
Gym membership $30

The idea is to transform all the big blocks of spend into activities or items you can understand. Once completed for the month, you can’t do that activity again.  Or if your grocery bill went over the $100 limit for the week by say, $20, you know you can only spend $80 next week to stay on track.

5. Pen ‘n’ paper

Good for: People who like to do things analogue and like to be hands-on with their budgeting.

If you’re someone who is most comfortable tracking things offline, then this could be the perfect system for you. Traditional paper budgeting is basically a case of filling out a table by hand with all of your monthly income and expenses. To successfully execute a paper-based budget, you need to be meticulous. Keep every receipt, or note down every transaction you make in a notebook that you carry around with you. No transaction is too small to go on the list.

The trick with a manual tracking approach is that you still need to compare the results to your original budget. That means adding everything up for the month and looking back at what you budgeting to spend, save or pay off for that month.

6. Computer spreadsheets

Good for: People who like to work with spreadsheets and keep a historical record of their budget results.

This is much like the pen and paper approach except that you record everything on a spreadsheet.  Our free downloadable Excel Budgeting Spreadsheet has a tracking tab to translate your total results each month. Simply duplicate the tab for each month. At the end of each day or week, take some time to add your daily spending to your monthly total for each category. Do it any less regularly, and you are very likely to leave out lots of small transactions, and your records won’t be accurate.

7. Payments first approach

Good for: People who don’t have a detailed budget but want to be sure they are living within their means

Using online banking or jars, under this budgeting approach, you make sure all your essential bills and expenses are paid out of each paycheque before any discretionary spending.  What’s left over is yours to prioritize.

If for example your hydro bill is $200 and you are paid weekly, you pay $50 each week towards your hydro bill. If your rent is $2200, you would set aside $550 each week in a separate account (or jar) to make sure you have the funds available to pay your rent next month.  If you need $600 a month for food, living costs, and other necessities, you put $150 into your living costs jar or bank account each week.

Once you have paid or set aside money for all your necessary expenses, you can spend what’s left.

The biggest advantage of this system is all your bills are paid, and you don’t run out of money at the end of the month.  By not tracking your non-essential spending, however, you are not necessarily spending your money wisely. You may not be paying off your debt or saving as much as you could or should.

One of the reasons budgets fail is that you don’t track your actual spending properly.  Choose the budgeting system that works best for you, and you are much more likely to be successful.