Sunday, 16 June, 2024

Budgeting Tips for Every Income Level

Reading Time: 5 minutes

Budgeting is the sacred cow of personal finance. But, most budgets simply don’t work, and this includes popular envelope and category-based budgeting methods. 

Years ago, JP Morgan Chase did a study on 2.5 million of its own bank customers, across a wide range of income levels. They found that, “… very few individuals follow a consistent monthly budget that sets strict parameters on spending”. 

More than 4 out of 5 of its customers had a greater than 5% monthly variance in their account deposits and withdrawals each and every month. Most budgets target exact numbers, and ignore averages. In fact, the very definition of a zero based budget demands you budget to an exact number—$0. 

In practice, this is impossible. And so, zero-based “envelope” method type budgets always fail. People don’t always ditch the budget when it fails, however. What they do instead is shuffle money across envelopes or budget categories to “solve” the problem. 

Some expenses, particularly health care expenses, gasoline, and heating and cooling costs, fluctuate somewhat unpredictably.  If the market for natural gas or electricity changes, a change in your electric and gas bill might happen very quickly, and it might change month-to-month. 

Furthermore, even when individuals do attempt to control expenses by planning out what they will spend beforehand on various items, they tend to overspend——the opposite of what should happen with a budget. This fact was highlighted by a group of professors at Brigham Young University, who found when buyers budget an amount of money they will spend beforehand, they end up spending more money than they would have if they went into a purchasing decision “blind”. 

For example, setting a budget of $5,000 before shopping for a new T.V. causes most buyers to spend more on a television set than if they started shopping “blind”, without a set budget in mind. Sounds counterintuitive, but the arbitrarily budgeted amount “anchored” a high price in the buyer’s mind. Now, extrapolate this out to an entire budget where you set a bunch of arbitrary target amounts for each and every expense you have. The problem just keeps growing and growing. And the more complex your life, the more income you make, the bigger lifestyle you have, the worse it gets.

Don’t Use Zero-Based Budgeting

Zero-based budgets are, by far, the most common way to budget today. 

Envelope budgeting is the most common iteration of zero-based budgeting, as are category-based budgets. These types of zero-based budgets involve dividing your income into specific spending categories, often represented by physical envelopes or digital accounts. Each envelope or category represents a distinct expense category, such as groceries, entertainment, or utilities. The idea is to allocate a predetermined amount of money to each envelope based on your budget, and then only spend from each category’s designated funds. 

For the first several months of a new zero-based budget, it tends to work decently well, especially compared to not having a budget at all. 

But over time, these budgets break because money inevitably must be shuffled around to meet variable expenses. For example, a person’s gasoline budget can be quickly depleted if gas prices surge, forcing the budgeter to shuffle money from some other category to make up the difference for the month. 

Ultimately when the budgeter goes “over-budget”, the budget has failed. 

Don’t Categorize Your Expenses

Similar to not using zero-based budgets, it’s mostly pointless to categorize expenses. Let’s say you have insurance expenses that include:

  • Homeowner’s insurance
  • Car insurance
  • Business liability insurance

You’ve categorized these into the budget category, “insurance”. OK, so now what? If those expenses climb, it’s not as though you have a practical means to eliminate them. And in many cases, you won’t be able to reduce them. 

The categorization gives budgeters the appearance of organization and control, but that’s it. Budget and cost control comes from doing auditing, not categorization.

Pay Off Debt, But Don’t Obsess Over It

Some financial gurus stress the importance of paying off debt to the exclusion of everything else. This can put undue financial strain on a person and serve no real long-term purpose. 

Whether or not debts are helpful or harmful depends entirely on the purpose of the debt and also a person’s ability to pay off their debts. If an individual has a 0% APR on credit cards, and $20,000 in savings earning 5%, it makes little sense to cash out the savings, and lose the 5% future interest, just to pay off a debt with no interest charges.

On the other hand, a budgeter with a 7% APR on a car loan would do well to either refinance or pay off the loan as quickly as possible, especially as the car ages and needs more service and maintenance. 

Prioritize, Don’t Sacrifice

Budgeters who make sacrifices to hit financial goals often act like deprived dieters trying to hit an arbitrary number on the bathroom scale. 

Eventually, they cave in. 

Instead of making sacrifices to hit goals, prioritize goals so that you can achieve everything you want on a timeline. You might not be able to do everything all at once. Few people can. But you can generally do everything you want in life if given enough time.

Start with 2 or 3 core financial goals and start with those. It may take decades for those goals to pay off, but these will be your major life goals, and accomplishing them will bring you immeasurable joy. Fill those major life goals in with smaller goals, perhaps annual or even monthly and weekly goals.

Regardless of what type of budget you use, it should allow you to arrange things so you can achieve all your goals without having to make sacrifices. If you find yourself having to make sacrifices, your budget is irreparably broken and should be replaced with a budget that doesn’t require you making personal sacrifices. 

Automate Expenses Through Your Bank

Set up automated bill pay, ACH, and EFT for income and expenses. The more you can automate, the better. Automation cuts down on manual work needed to maintain your budget. It also helps you stick to plans you previously made. 

Most banks these days have online bill pay, which allows you to schedule payments for just about any service provider. 

Use Credit Cards Intelligently

Credit cards get a bad rap, but they’re incredibly useful if used appropriately. For example, using cash back credit cards and paying off the balance every month can help you save a substantial amount of money every month, and every year. 

If you’re careful in your credit card selection, you can also earn very generous signup bonuses worth hundreds, even thousands, of dollars just for paying your normal monthly bills. 

Avoid The Risk of Debit Cards

Debit cards are inherently risky because it’s a direct line to your bank account.If you lose the card, or it’s stolen, you’ve essentially given someone else direct access to your cash. 

Now, it’s not as bad as carrying cash around in your pocket, but it’s close. 

And while many banks will reimburse depositors for fraudulent charges associated with debit cards, some banks make this process difficult. It’s not the same as the fraud protections that come with every credit card.


You don’t need to have a complex budget, nor do you need to follow complicated rules. In fact, budgets with complex rules are often the most fragile and prone to failing. Keep your budget simple if you want it to be effective. Regardless of your income level, a good, simple, budget can help you build real financial security for yourself and your family.


David has been a licensed life insurance agent since 2004. In addition to life insurance design and sales, he has also helped develop educational and marketing content for large financial firms like Allstate, New York Life, State Farm, AmTrust, and J.G. Wentworth. His articles and essays on life insurance and Human Life Value are currently taught at California State University (CSU) as part of its Expository Writing and Reading Course, and his articles on budgeting, life insurance, investing, and financial planning have been featured in online publications like ThinkAdvisorThe Huffington PostNuWire Investor, and RealClearMarkets. David is also the author of several short eBooks on budgeting and saving money, and the designer of the xFlow™ budgeting app and the xCalc™ suite of financial calculators.

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