To many, budgeting is a tedious task of number crunching and filling out spreadsheets. To some, it brings about a sense of existential dread and the sad realization that money never seems to stick around for long.

But budgeting, when you think about it, is nothing more than personal accounting. And accounting is derived from accountability. “If you are going to be rich,” says Robert Kiyosaki, author of the bestselling Rich Dad Poor Dad series, “you need to be accountable for your money.”

Budgeting then plays a huge role in your financial security. If you’re going to be rich — or at the very least well past living paycheck to paycheck — then it’s important for you to know where every penny goes and what purchases are worth the expenditure.

In this in-depth guide, I am going to walk you through how you can successfully budget and achieve financial security with the right tools and processes.

What makes a successful budget?

A successful budget should do one thing and one thing only: drive financially sound decisions. How does a budget achieve this? Through accurate and “granular” categories, by following a budgeting strategy that is simple to implement, and by using tools that make the budgeting process seamless to your day-to-day life.

In other words, a good budget informs the budgeter whether a potential purchase is feasible or whether adjustments will need to be made.

At its best, a budget acts as your own set of “checks and balances.” It ensures you aren’t spending money where you shouldn’t be and identifies areas where you can afford to “live a little.” When done correctly, budgeting feels less like a constraint and more like a free pass to go about your life without fear of overdrawing your account or forgetting a huge bill.

Let me demonstrate with an example. Before budgeting, a typical trip to Target consisted of me and my wife walking into the store with a modest list of things we needed — cat food, moisturizer, diapers, etc. We’d grab a cart and begin to peruse the aisles, checking things off the list as we go.

But then they’d come across an endcap with a shiny new kitchen appliance we absolutely “needed.” Then we’d remember that our boys needed new shirts (oh good, they’re on clearance!). Don’t forget about that box of the really good granola cereal you can only find at Target…

Eventually, we’d leave the store with our bags full and our credit card debt just a tad bit bigger than before.

Nowadays, after we’ve learned to budget, a Target run looks drastically different. First, before we even walk into the store we know exactly how much money we have allocated for our various spending categories ($84 set aside for household items, $17 for pet supplies, and $32 of wiggle room, aka “allowance”). Knowing these numbers changes our spending decisions. Instead of saying, “Oh we’ll figure it out,” to every potential purchase we ask, “Will this fit the budget?”

If we ever go over budget, which still happens, we readjust and continue with the same mindset for all of our purchases.

Now imagine this strategy extrapolated to everything: bills, trips to the grocery store, Christmas gifts. Imagine knowing exactly what every dollar in your bank account is set aside to do.

That is the power of budgeting. And yes, it feels oh so good. Let’s talk about the necessities of a successful budget.

Accurate Spending Categories

Imagine for a second a cake recipe that simply says “Mix together the wet ingredients with the dry ingredients and bake.” Unless Paul Hollywood has just handed you one of his notorious technical challenges, chances are you’d question the sanity of the recipe writer. While it’s true that a cake consists of a mixture of wet and dry ingredients, simply stating the fact doesn’t help you in your baking endeavor: you need granularity.

In budgeting, this is where categories come into play. A successful forward-looking budget has enough granularity — categories — to cover the majority of your purchasing habits but not too many to overwhelm you when it comes time to sit down and divvy up your recent paycheck (more on that in a bit).

The amount of granularity affects our ego depletion or the “temporary reduction in the self’s capacity or willingness to engage in volitional action caused by prior exercise of volition,” (Baumeister et al. 1998).

In layman’s terms, the longer we have to decide where to categorize a purchase the less likely we will continue to budget in the future. It’s a fine balance we must achieve between understanding where our money is going without hindering our ability to budget in the first place.

How to determine your spending categories

I organize my budget into 8 main categories:

Asset Builder
Credit Card Payments
Debt Payments
Reimbursements
Fixed Expenses
Living Expenses
Short Term Expenses
Just for Fun

Each of these categories is divided into more granular subcategories that cover everything from auto maintenance to dog insurance to mortgage payments (49 subcategories in total). I didn’t arrive at these subcategories out of the blue.

To determine your budget categories, just start by categorizing your day-to-day purchases, bill payments, and other financial obligations. Jot down potential categories you might use in your own budget. Combine categories that appear too granular (such as having a category for “Dogfood” and another for “Dog grooming,” instead combine these into “Dog expenses”).

Set these aside for later.

Budgeting your savings

You might have noticed I have a category called “Asset Builder.” I have a friend who has a saying: The rich get richer because they buy assets, the poor stay the same because they don’t. He says it a bit more eloquently than that but the sentiment is still the same. The purpose of budgeting isn’t just to account for where you spend your money but also to protect the money you earn to save for future long-term use. In other words, savings.

When you build out your budget I want you to literally assign your first category to your savings goals (more on that in a bit). Keeping this category at the top also reinforces the idea to “pay yourself first.”

Pay yourself first is a savings strategy that means before you put aside your income for things like utilities, bills, and other needs, you “pay” yourself by setting aside money into investment accounts, savings accounts, 529 plans, life insurance, etc.

This is the money you want to keep around for the long haul and should take top priority on your budget.

A quick word on unexpected expenses

When life throws an unexpected curveball, we can best fend off the financial consequences by being prepared. Unexpected expenses happen but there are ways we can dampen their impact or better yet, absorb the blow entirely.

The first thing you can do is include a “Rainy Day” or emergency fund line item in your budget. The worst thing you can do is just assume you’ll deal with any unexpected expenses on the fly. In your budget, we’ll be sure to set aside a small amount each paycheck to help fund this line item.

Second, the next best thing you can do is roll with the punches. Far too often, we see people get stressed out because of an unexpected expense such as a car repair or medical bill. It most likely means that they won’t be able to order take-out for the next few weeks. The only thing you can do in these situations is to adopt a “next best move” mindset and adjust along the way. Life happens, expect the unexpected (expense).

A third thing you can do is try and reduce your risk of unexpected expenses is by budgeting! That’s right, simply tracking your purchases over a long period of time gives you a good sense of what to expect. I’ve been actively budgeting for over 18 months now and it’s a rarity for a yearly subscription to pop up “out of nowhere.”

To summarize, don’t expect your budget to be the end-all, be-all. You will adjust along the way when the unexpected happens.

Four Budgeting Strategies

Now that we have the building blocks in place, let’s talk about budgeting strategies. In this section, I will introduce four strategies you can implement. It’s okay to test all of them out for a period of time and figure out what works best for you. It’s also entirely possible to create hybrid strategies by combining two or more.

Whatever the case, the goal for sticking to a budgeting strategy is to help automate your allocation and spending decisions. Remember that “ego depletion” thing we talked about? Yeah, we want budgeting to feel second nature, not a drag. Here are the four strategies we will cover:

Envelope Method
50/30/20 Method
5 Category Method
Zero-Dollar Method

Envelope Method

The Envelope Method is a budgeting technique that requires you to physically put cash in envelopes designated for different purposes. For example, if you need to run out to the grocery store, you look inside your “Grocery” envelope and take what you need. Once an envelope runs dry you have a decision to make: go without until the next paycheck or shuffle money around from different envelopes.

This method works well because it forces you to live within your means, and the physical act of moving money from one envelope to another is a powerful motivator. However, the Envelope Method requires more upfront work as you will need to track spending habits manually or on an Excel spreadsheet, which can be time-consuming.

This method is a great way to practice living within your means before taking on one of the more advanced budgeting methods below.

50/30/20 Method

The next simple budgeting method is the 50/30/20 Method. The 50/30/20 Method is a tried and true budgeting technique that has been around for a long time. With this method, you allocate money to three categories: Mandatory expenses (50%), discretionary spending (30%), and savings or debt repayment (20%). This system focuses on the idea of living within your means while still having some stress-free fun.

Along with the Envelope Method, the 50/30/20 Method requires a little bit of leg-work to track and manage. However, to simplify matters you can always set up three individual accounts for each of the three categories, each with its own debit/credit card. That way when you make a purchase or set up automatic withdraws (example: rent payments), you can easily distinguish which category it belongs to selecting the right account.

However, the 50/30/20 Method isn’t a perfect system. Because the categories are high-level, it’s difficult to know and understand your spending habits due to the lack of granularity. In other words, if you notice month over month that your discretionary spending exceeds 30%, it may be difficult to identify the culprit.

Nevertheless, the 50/30/20 Method will help you to save and spend in the right proportion for whatever stage of life you’re in.

5 Category Method

Slightly more advanced than the 50/30/20 Method is the 5 Category Method. As the name implies, you select five of the most important categories to you and predetermine the percentage to allocate to each. For example, you may divvy up each paycheck with the following five categories:

Housing — 30%
Living expenses — 25%
Transportation — 20%
Debt payoff — 15%
Discretionary spending — 10%

The Five Category Budget can be a great way to stay accountable for your finances. It’s better than the 50/30/20 because it allows you more flexibility in case of emergencies and gives you something concrete to measure monthly progress against. It also allows you to make smart decisions about how much debt repayment is necessary and when certain things like discretionary spending or savings should take precedence.

This method is ideal for those who have some wiggle room in their finances after paying for basic needs (housing, food) and are in the process of paying down debt. After the debt is eliminated, you can allocate its percentage elsewhere or convert your category to savings instead.

Zero-Dollar Method

This is the budgeting method I personally use. Fair warning, it requires the most effort but the rewards speak for themselves. The concept is simple, you take every dollar that lands in your bank account and assign it a “job.” Some dollars might go to rent, others to pet supplies. Either way, you keep divvying up every dollar until you have, well, zero dollars left to allocate.

The idea of giving each of your dollars its own “job” can feel overwhelming at first but it’s actually easy and effortless once the habit becomes second nature. (It also becomes super simple with the right software, more on that soon.) Zero-dollar budgeting can help you avoid the temptation of impulse purchases by ensuring that every dollar has been accounted for beforehand.

I mentioned earlier what a Target run used to look like before my wife and I adopted zero-dollar budgeting. Now, instead of looking at our bank account and seeing one number, we pull up our budgeting app and know how much we’ve allocated for each specific category (remember, we have 49 categories total).

With this method, I highly recommend getting into a budgeting habit first before starting a Zero-dollar budget. It can feel discouraging at first when you aren’t sticking to your ultra-specific category goals but don’t fret. This method takes time. Eventually, you’ll have enough data and know-how to properly allocate the right amounts for all the various categories of your life.

To conclude, I mentioned the rewards speak for themselves. What did that look like in my case? Well, after using this budgeting method for 16 months, my wife and I paid off over $33,000 worth of debt and managed to buy a house at the same time. So, yeah. Zero-dollar budgeting works.

Finding the Right Budgeting Tools

You might be wondering by now: “Okay great, how am I supposed to keep track of my budget?”

While spreadsheets can get the job done, I highly recommend using a budgeting tool instead. When assessing the various tools and software on the market, you might want to first consider the following.

What features are you looking for?

Think about whether a budgeting tool needs to be tailored specifically to your needs or if it is simply an app that tracks expenses. For example, if you are a high-income earner and not struggling to get out of debt, then you’ll probably look for a tool that has some sort of integration with your investment accounts and can give you updated and accurate reports of your net worth.

Or, you might be more focused on tracking your everyday expenses and need a tool that can help you automatically categorize expenses for you.

How often do you plan on using the software?

Some software requires a long learning curve before you completely know all the ins and outs. If you’re not sure how much time you are going to commit to budgeting then think about getting a free trial first before committing to any long-term subscriptions.

Does the software have flexible budgeting categories?

Categories are essential to budgeting success. The software you choose should offer the ability to customize your categories. Avoid programs that lock you into a predetermined set of income and expense items or force you to categorize transactions manually.

A good budgeting software will give you the opportunity to assign categories for transactions in a detailed and customizable way.

So, what software do I use and highly recommend?

You Need A Budget (YNAB for short) is the software I have been using for over a year and a half now. It works best for me because it is built with Zero-dollar budgeting in mind (the YNAB team calls it “Give Every Dollar a Job”). Some free budgeting software out there is backward-looking and doesn’t help me make better purchasing decisions.

YNAB on the other hand is built for the future. It tells me what my money can do before I spend it and how much I have leftover to save, invest, or give away at any given time.

It’s a long process to change your spending habits but YNAB provides helpful tools like its “Age of Money” Calculator and customizable saving and spending goals to make it easier.

It took some time getting used to, however, YNAB does offer a 34 day free trial for new users. Just a heads up, this post or recommendation in no way is sponsored by YNAB. I’m just one happy customer.

Let’s Wrap This Up

Budgeting is a great way to take control of your finances and reach financial success. The four budgeting methods we’ve covered will help you get started, but make sure to find the one that best fits your lifestyle so you don’t feel overwhelmed or bored by the process. And remember that there are many free (or low-cost) tools out there designed expressly for tracking budgets — so use them!

I’ll leave you with this one final thought: no one ever got rich by spending all their money.

Make a budget. Make better decisions. Good luck out there!