The Two Ways to Budget Your Money

By James Kerr on

Life has brought you to a point where it's time to figure out your finances. You want to make a plan and progress toward your financial goals. What should you do?

This is a common problem. You're not alone and much software has been created to help you. All the apps will let you search your transactions, view current balances, and give you trends about your past spending behavior. Focusing on the past and present like this can be immensely helpful and might be all you need.

But if you want to plan for the future and have an answer to a question like, "how much can I spend today and still be working toward my goals", then you'll need budget software that supports it.

There are countless budget apps, but when you take a closer look, you'll see all of them use one of two main budgeting approaches:

  1. Zero-Based Budgeting
  2. Calendar-Based Budgeting

Let's start by defining zero-based budgeting since it's popular and most of the apps winning "budget app of the year" are using this system.

Zero-Based Budgeting

You start with the money you have in your account right now. Not the money you plan to make, but what you have today.

Then you create digital envelopes to hold a portion of that money and give it a purpose. Some apps call these categories or buckets, but it's essentially a digital envelope you put money into. You can even think of them as small, virtual bank accounts each with a balance and a purpose.

Next you try to think of every type of thing you could possibly spend money on this month and create envelopes for each. You assign the money you have into the envelopes so that each dollar in your checking account now has purpose. You do this until the amount that is "unassigned" is zero. Hence the name.

Apps that use this system are a dime a dozen: YNAB, Monarch, Copilot, EveryDollar, Good Budget, Lunch Money, Origin.

Calendar-Based Budgeting

The second method is calendar-based budgeting. It's rooted in a system created by Japanese housewives in 1904 called Kakeibo which means "household ledger".

With this system, you look at a whole year. You create repeating schedules on a calendar for income, expenses, and savings that are predictable and known. Things like your regular paycheck, rent, insurance, phone bill, subscriptions, memberships, and tuition.

If you've already committed to pay for something on a specified date for a specified amount, it goes on the calendar. A significant portion of one's spending qualifies as this.

You then calculate the totals for the year and run this simple formula the ladies in the 1900s came up with: income - savings - expenses = what's left.

That "what's left" money is essentially the only "envelope" in this system. It's the amount of money that you have some level of choice over how it gets spent. Average this out and now you have a spending target for the month, week, or even day.

There are fewer apps that embrace this method, but here are a few: Daily Budget, Weekly, and Tend Cash.

Difficulties with Zero-Based Budgeting

Despite its popularity, there are some difficulties people run into with the zero-based system.

  1. If you're living paycheck to paycheck, you'll need to save pretty hard just to get started with this system, since you need to actually have the money at the beginning of the month before you can assign it.
  2. You'll often be wondering if you have enough categories or if you have too many.
  3. You'll need to re-assign your new money every time you get paid.
  4. When your real spending differs from how much you allotted in a category, you'll need to move money from another category to cover that negative balance.

This ends up creating quite a lot of maintenance, yet almost all major budget apps work this way.

Most people I talk to (and I ask everyone I know how they budget) naturally discover a calendar-based system when they begin budgeting. They identify their known bills, subtract them from their income, and see what's left. It's much like the "fixed" and "variable" costs commonly taught in business schools.

If you're interested in trying out a calendar-based system, you've landed on a good website. Take a look at the homepage.