50/30/20 Rule vs Zero-Based Budgeting: Which One Is Right for You?
Overview of Each Method
When it comes to managing your personal finances, choosing the right budgeting method can make the difference between success and frustration. Two of the most popular approaches—the 50/30/20 rule and zero-based budgeting—offer distinct philosophies and techniques. Understanding the nuances of each can help you select the strategy that best aligns with your financial situation and personality.
The 50/30/20 Rule Explained
The 50/30/20 rule is a proportional budgeting method that divides your after-tax income into three simple categories:
50% for Needs: These are essential expenses you cannot easily live without, including:
– Housing (rent or mortgage)
– Utilities (electricity, water, gas)
– Groceries (basic food, not dining out)
– Transportation (car payment, gas, public transit)
– Insurance (health, auto, home/renters)
– Minimum debt payments
– Childcare
– Basic clothing
– Essential medical expenses
30% for Wants: These are non-essential expenses that enhance your quality of life:
– Dining out and takeout
– Entertainment (streaming services, movies, concerts)
– Hobbies and recreation
– Vacations and travel
– Shopping beyond necessities
– Gym memberships
– Subscription services beyond the basics
– Gifts
– Upgraded versions of necessities (premium cable, luxury car)
20% for Savings and Debt Repayment: This category focuses on financial security and future planning:
– Emergency fund contributions
– Retirement account contributions (401(k), IRA)
– Investment accounts
– College savings
– Extra debt payments beyond minimums
– Down payment savings
– Other financial goals
The 50/30/20 rule was popularized by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book “All Your Worth: The Ultimate Lifetime Money Plan.” They developed this approach to help people achieve financial balance—meeting current needs while building future security and still enjoying life’s pleasures.
The beauty of this method lies in its simplicity. Rather than tracking dozens of specific categories, you only need to monitor three broad ones. This makes it accessible to budgeting beginners and those who prefer a low-maintenance approach to financial management.
Zero-Based Budgeting Explained
Zero-based budgeting follows a fundamentally different philosophy: every dollar you earn is assigned a specific purpose until your income minus your planned expenses equals zero. This doesn’t mean spending everything—it means intentionally allocating every dollar, including to savings and investments.
The core principle is expressed in the equation:
Income – Expenses = $0
Here’s how zero-based budgeting works:
1. Start with your income: Calculate your total monthly take-home pay from all sources.
2. List all expenses and savings goals: Create detailed categories for everything you spend money on and want to save for.
3. Assign specific amounts to each category: Allocate your income across all categories until every dollar is assigned.
4. Track spending in each category: Monitor your spending to ensure you stay within the allocated amounts.
5. Adjust as needed: If you overspend in one category, reduce spending in another to maintain the zero balance.
Zero-based budgeting typically involves much more detailed categories than the 50/30/20 rule. For example, instead of a broad “needs” category, you might have separate allocations for:
– Mortgage/rent
– Electricity
– Water
– Natural gas
– Internet
– Cell phone
– Car payment
– Car insurance
– Gasoline
– Groceries
– And many more
This method was originally developed for businesses by Peter Pyhrr at Texas Instruments in the 1970s but was later adapted for personal finance. Financial advisor Dave Ramsey has been instrumental in popularizing zero-based budgeting for individuals and families through his Financial Peace University program.
The zero-based approach requires more time and attention than the 50/30/20 rule, but proponents argue that this increased awareness leads to more intentional spending and better financial outcomes.
Pros and Cons of Each
Both budgeting methods have distinct advantages and disadvantages. Understanding these can help you determine which approach better suits your financial situation and personal preferences.
50/30/20 Rule: Advantages
Simplicity: With only three categories to track, this method is easy to implement and maintain, even for budgeting beginners.
Flexibility: The broad categories allow for shifting priorities within each bucket without needing to adjust the overall budget structure.
Balance: By design, this method ensures you’re addressing current needs, future goals, and quality-of-life wants simultaneously.
Quick setup: You can establish a 50/30/20 budget in minutes, making it ideal for those who have avoided budgeting due to perceived complexity.
Less tracking: The simplified categories mean less time spent recording and categorizing every expense.
Psychological ease: The built-in “wants” category helps prevent the feeling of deprivation that causes many budgets to fail.
50/30/20 Rule: Disadvantages
Lack of detail: The broad categories may not provide enough guidance for those who need more structure to control spending.
Rigid percentages: The prescribed allocations may not work for everyone, particularly in high-cost-of-living areas where needs might exceed 50% of income.
Limited accountability: The flexibility within categories can make it easier to justify overspending in certain areas.
Not ideal for irregular income: The percentage-based approach works best with stable, predictable income.
May not be aggressive enough: For those with significant debt or ambitious savings goals, allocating only 20% to financial progress might be insufficient.
Oversimplification: Some expenses don’t clearly fit into “needs” or “wants,” creating confusion about proper categorization.
Zero-Based Budgeting: Advantages
Maximum control: By assigning every dollar a specific purpose, you gain complete control over your financial life.
Heightened awareness: The detailed tracking increases your consciousness about spending patterns and priorities.
Customization: The categories are entirely personalized to your specific financial situation and goals.
Effectiveness for debt payoff: The intentional allocation of every dollar makes it particularly effective for aggressive debt reduction.
Adaptability: Works well with irregular income since you can create a new budget each month based on expected earnings.
Prevents unconscious spending: With every dollar assigned a job, there’s no “extra money” to spend mindlessly.
Goal alignment: Ensures your spending directly reflects your priorities and values.
Zero-Based Budgeting: Disadvantages
Time-intensive: Requires significant time for initial setup and ongoing maintenance.
Steeper learning curve: More complex to implement, especially for budgeting beginners.
Requires regular attention: Demands frequent monitoring and adjustments throughout the month.
Can feel restrictive: The detailed structure may feel constraining to some personalities.
More room for frustration: The precision required can lead to discouragement when actual spending doesn’t match the plan.
Technology dependent: While possible with pen and paper, this method typically works best with budgeting apps or spreadsheets.
Overwhelming for some: The level of detail can cause some people to abandon budgeting altogether.
Examples of Both Methods in Action
To better understand how these budgeting approaches work in real life, let’s examine how they might apply to the same financial situation.
Case Study: The Johnson Family
Monthly Take-Home Income: $6,000
Financial Situation: Dual-income household with two children, $8,000 in credit card debt, and a desire to save for a vacation and build retirement funds.
50/30/20 Budget for the Johnsons
50% for Needs ($3,000):
– Mortgage: $1,500
– Utilities: $350
– Groceries: $600
– Car payments: $400
– Insurance (health, auto, home): $450
– Minimum credit card payments: $200
– Total: $3,500 (exceeds the 50% allocation)
Since their needs exceed the 50% guideline, the Johnsons would need to either:
1. Reduce some “needs” expenses (e.g., refinance mortgage, find cheaper insurance)
2. Adjust the percentages (perhaps 55/25/20)
3. Increase their income
30% for Wants ($1,800):
– Dining out: $400
– Entertainment subscriptions: $100
– Children’s activities: $300
– Shopping: $300
– Family outings: $200
– Gifts: $100
– Miscellaneous wants: $150
– Total: $1,550 (under the 30% allocation)
With $250 remaining in their “wants” category, the Johnsons could either:
1. Enjoy additional discretionary spending
2. Reallocate this money to “needs” to cover the overage
3. Move it to savings/debt repayment
20% for Savings and Debt Repayment ($1,200):
– Emergency fund contribution: $300
– Retirement contributions: $400
– Vacation fund: $200
– Extra credit card payments: $300
– Total: $1,200 (meets the 20% allocation)
Zero-Based Budget for the Johnsons
With zero-based budgeting, the Johnsons would create a more detailed plan where every dollar has a specific purpose:
Income: $6,000
Housing:
– Mortgage: $1,500
– Electricity: $150
– Water/Sewer: $80
– Natural Gas: $70
– Internet: $50
– Cell Phones: $120
– Home Maintenance: $100
– Total: $2,070
Transportation:
– Car Payment 1: $250
– Car Payment 2: $150
– Auto Insurance: $150
– Gasoline: $200
– Car Maintenance: $75
– Total: $825
Food:
– Groceries: $600
– Dining Out: $300
– Total: $900
Insurance:
– Health Insurance: $200
– Life Insurance: $50
– Home Insurance: $100
– Total: $350
Personal:
– Clothing: $100
– Haircuts/Personal Care: $75
– Gym Memberships: $50
– Children’s Activities: $300
– Total: $525
Entertainment:
– Streaming Services: $50
– Family Outings: $200
– Hobbies: $75
– Total: $325
Savings:
– Emergency Fund: $300
– Retirement: $400
– Vacation Fund: $200
– Total: $900
Debt Repayment:
– Minimum Credit Card Payment: $200
– Extra Credit Card Payment: $300
– Total: $500
Miscellaneous:
– Gifts: $100
– Shopping: $200
– Buffer/Unexpected: $105
– Total: $405
Total Expenses and Savings: $6,000
Income ($6,000) – Expenses ($6,000) = $0
Key Differences Illustrated
This comparison highlights several important differences between the two methods:
1. Level of detail: The zero-based budget breaks expenses into much more specific categories, providing clearer guidance on spending limits.
2. Flexibility vs. structure: The 50/30/20 budget allows more movement within broad categories, while the zero-based budget prescribes exact amounts for each expense type.
3. Time investment: Creating and maintaining the zero-based budget requires significantly more time and attention than the three-category approach.
4. Adaptability: When unexpected expenses arise, the zero-based budget requires explicit reallocation from other categories, while the 50/30/20 method allows for adjustments within the broader buckets.
5. Awareness level: The zero-based approach creates heightened awareness of exactly where money is going, while the 50/30/20 rule provides a more general overview.
Who Should Use Which Method
The best budgeting method for you depends on your financial situation, personality, and goals. Here’s guidance on which approach might be more suitable based on different factors.
The 50/30/20 Rule Is Better For:
Budgeting beginners: If you’ve never budgeted before, the simplicity of the 50/30/20 rule makes it an excellent starting point. You can always transition to a more detailed approach later.
Those who value simplicity: If you’re likely to abandon complicated financial systems, the straightforward nature of this method increases your chances of sticking with it.
People with stable incomes: The percentage-based approach works best when your income is relatively consistent month to month.
Those in good financial health: If you’re not struggling with debt and already save regularly, this balanced approach can help optimize your finances without requiring intensive tracking.
Busy individuals: If your time is limited, the minimal maintenance required by this method makes it more practical.
People who dislike financial micromanagement: If detailed tracking feels restrictive or anxiety-inducing, the broader categories of the 50/30/20 rule may be more sustainable.
Couples with different money styles: The simplified system can be easier to implement when partners have different approaches to money management.
Zero-Based Budgeting Is Better For:
Those with financial challenges: If you’re dealing with significant debt, living paycheck to paycheck, or struggling to save, the detailed control of zero-based budgeting can be transformative.
Detail-oriented personalities: If you enjoy tracking details and find satisfaction in precise systems, you’ll likely thrive with this approach.
People with irregular income: The flexibility to create a new budget each month based on expected income makes this ideal for freelancers, commission-based workers, and seasonal employees.
Those with specific financial goals: If you’re saving for multiple specific objectives or working to eliminate debt quickly, the intentional allocation of every dollar supports faster progress.
Individuals who struggle with overspending: If you tend to spend unconsciously, the structure of assigning every dollar a purpose can help break this pattern.
Financial optimization seekers: If you want to maximize the efficiency of every dollar, the detailed nature of zero-based budgeting allows for fine-tuning your financial plan.
Those who have tried broader approaches without success: If less detailed methods haven’t worked for you, the structure of zero-based budgeting might provide the accountability you need.
Personality Traits That Match Each Method
Beyond financial circumstances, your personal traits and preferences play a significant role in determining which budgeting method you’ll stick with long-term.
The 50/30/20 rule tends to work better for:
– Big-picture thinkers who prefer overview to details
– Those who value flexibility and adaptability
– People who make decisions based on general principles rather than specific data
– Those who find detailed tracking tedious or stressful
– Individuals who prefer simplicity over optimization
– People who are naturally moderate in their spending habits
Zero-based budgeting tends to work better for:
– Detail-oriented individuals who appreciate structure
– Those who enjoy tracking and analyzing data
– People who find security in having a specific plan
– Those who are working to change established spending patterns
– Individuals who value optimization over simplicity
– People who gain satisfaction from financial precision
How to Implement Your Chosen Method
Once you’ve determined which budgeting approach better suits your situation and personality, follow these steps to implement it effectively.
Implementing the 50/30/20 Rule
Step 1: Calculate your after-tax income
Start with your take-home pay—the amount that actually hits your bank account after taxes and deductions. If you’re self-employed, subtract estimated tax payments and business expenses from your gross income.
For multiple income sources or household members, combine all after-tax income to find your total.
Step 2: Determine your category allocations
Calculate the target amount for each category:
– Needs: 50% of your after-tax income
– Wants: 30% of your after-tax income
– Savings/Debt Repayment: 20% of your after-tax income
For example, with a monthly after-tax income of $4,000:
– Needs: $2,000
– Wants: $1,200
– Savings/Debt: $800
Step 3: Categorize your current expenses
Review your spending from the past month and assign each expense to one of the three categories. Be honest about which expenses are truly needs versus wants.
Common categorization challenges:
– Cell phone: Basic service is a need, but an expensive plan with premium features is partly a want
– Internet: Basic service for work is a need, but high-speed gaming packages are partly wants
– Groceries: Basic nutrition is a need, but premium or convenience foods are wants
– Clothing: Basic wardrobe is a need, but fashion purchases are wants
Step 4: Compare actual spending to targets
Calculate how much you’re currently spending in each category and compare to your targets:
– If needs exceed 50%, look for ways to reduce these expenses (refinancing loans, finding cheaper insurance, downsizing housing) or adjust your percentages temporarily.
– If wants exceed 30%, identify discretionary expenses you can reduce.
– If savings/debt repayment is less than 20%, increase this category by reducing wants or, if necessary, finding ways to reduce needs.
Step 5: Adjust spending to align with targets
Make specific plans to bring your actual spending in line with your target percentages. This might include:
– Calling service providers to negotiate lower rates
– Canceling unused subscriptions
– Meal planning to reduce food costs
– Finding free or low-cost alternatives for entertainment
– Automating savings to ensure the 20% goal is met
Step 6: Track and monitor
Choose a tracking method that works for you:
– Budgeting apps like Mint or Personal Capital
– Spreadsheet templates
– Pen and paper tracking
– Separate bank accounts for different categories
Review your progress weekly at first, then monthly once the system is established. Adjust as needed when your income or expenses change significantly.
Implementing Zero-Based Budgeting
Step 1: Determine your monthly income
Calculate your expected income for the month from all sources. For irregular income, use a conservative estimate based on past earnings.
Step 2: List all expense categories
Create a comprehensive list of spending categories relevant to your life. Common categories include:
Fixed expenses:
– Housing (rent/mortgage)
– Utilities (separate each one)
– Insurance premiums
– Loan payments
– Subscriptions and memberships
Variable expenses:
– Groceries
– Dining out
– Transportation (gas, public transit)
– Entertainment
– Shopping
– Personal care
– Healthcare
– Childcare
– Pet expenses
– Gifts and donations
Savings and financial goals:
– Emergency fund
– Retirement
– Specific savings goals (vacation, home down payment)
– Debt payoff beyond minimums
Step 3: Assign amounts to each category
Allocate your income across all categories until every dollar is assigned a purpose. Start with fixed expenses and essential variable expenses, then move to discretionary spending and savings.
When determining amounts:
– Review past spending patterns for realistic estimates
– Prioritize financial goals and necessities
– Include categories for irregular expenses (car maintenance, medical, gifts)
– Create a small “buffer” or “miscellaneous” category for unexpected expenses
Step 4: Choose your tracking system
Select a tool that supports detailed category tracking:
– Specialized zero-based budgeting apps like YNAB or EveryDollar
– Customized spreadsheets
– Budget binder with category trackers
– Envelope system (physical or digital)
Step 5: Track every transaction
Record all spending in its appropriate category as it occurs. This can be done through:
– Manual entry in your chosen system
– Automated import from bank accounts and credit cards
– Receipt collection and regular entry sessions
– Cash envelope system for certain categories
Step 6: Regular check-ins and adjustments
Monitor your budget frequently:
– Daily quick checks for high-frequency spending categories
– Weekly comprehensive reviews
– Mid-month reallocation if certain categories are depleted
– End-of-month evaluation and planning for the next month
When you overspend in a category, immediately decide which other category will be reduced to compensate, maintaining the zero balance.
Step 7: Create a new budget each month
Unlike the 50/30/20 rule, zero-based budgeting typically requires a fresh budget each month to account for:
– Varying income (for those without steady paychecks)
– Seasonal expenses (holiday gifts, quarterly insurance payments)
– Changing priorities and goals
– Lessons learned from previous months
Hybrid Approach Possibilities
If neither method seems perfect for your situation, consider these hybrid approaches:
Modified 50/30/20 with Detailed Categories
Maintain the three main buckets but create subcategories within each for more detailed tracking. This provides the simplicity of three main categories with more specific guidance on spending limits.
Zero-Based Framework with Flexible Categories
Create a zero-based budget but include some flexible spending categories that don’t require detailed tracking. For example, you might have a “discretionary spending” category that works like a mini 50/30/20 system within your otherwise detailed budget.
Graduated Approach
Start with the 50/30/20 rule to establish the budgeting habit, then gradually transition to zero-based budgeting as you become more comfortable with financial tracking.
Priority-Based Zero Budgeting
Use zero-based principles but focus detailed tracking only on problem areas while using broader categories for areas where you naturally stay within reasonable limits.
Remember that the best budget is one you’ll actually use. Don’t hesitate to customize these methods to fit your unique situation and preferences.
Success Stories and Case Studies
Real-life examples can provide inspiration and practical insights for implementing these budgeting methods. Here are stories of people who have successfully used each approach to transform their finances.
50/30/20 Success: Sarah’s Balanced Approach
Sarah, a 32-year-old marketing manager, had always struggled with budgeting. “I tried detailed budgets several times, but I’d always abandon them after a few weeks,” she explains. “It felt like a part-time job just tracking every coffee and grocery item.”
When Sarah discovered the 50/30/20 rule, she was attracted to its simplicity. With a monthly take-home income of $4,500, her categories were:
– Needs: $2,250
– Wants: $1,350
– Savings/Debt: $900
Initially, Sarah discovered she was spending nearly 60% on needs and 35% on wants, leaving just 5% for savings. Rather than giving up, she made strategic adjustments:
1. She refinanced her student loans, reducing her monthly payment by $200
2. She found a roommate, cutting her rent by $400
3. She negotiated lower rates on insurance and phone service
These changes brought her “needs” down to 48% of her income. For “wants,” she kept the categories she valued most (travel and dining with friends) while reducing impulse shopping and subscription services.
Within six months, Sarah had built her first emergency fund of $3,000 and increased her retirement contributions. “The 50/30/20 rule worked because it gave me guidelines without micromanagement,” she says. “I still get to enjoy my life while making financial progress.”
Three years later, Sarah has maintained her budget, paid off her student loans, and saved for a down payment on a condo. “The simplicity made it sustainable for me. I’ve adjusted the percentages slightly as my income has grown, but the framework remains the same.”
Zero-Based Success: Miguel’s Debt Freedom Journey
Miguel, a 41-year-old teacher and father of two, found himself $35,000 in debt after a medical emergency and years of spending slightly more than he earned. “I was making minimum payments but never getting ahead. It felt hopeless,” he recalls.
After researching budgeting methods, Miguel decided to try zero-based budgeting. “I needed the structure and accountability. With two kids and variable expenses, the detailed approach made sense for us.”
Miguel and his wife sat down with their $5,800 monthly income and created specific categories for every expense. They used a budgeting app that allowed them to track spending in real-time and adjust categories as needed.
The first few months were challenging:
– They discovered they were spending nearly $800 monthly on dining out and convenience foods
– Their “miscellaneous” expenses were consistently over $500 with little to show for it
– Multiple subscriptions and services were barely being used
By assigning every dollar a purpose, they made significant changes:
1. They reduced food spending by meal planning and limiting takeout to once weekly
2. They created specific categories for each child’s activities and needs
3. They allocated $400 monthly to debt repayment beyond minimums
4. They established small but consistent contributions to emergency savings
“The most powerful aspect was the awareness,” Miguel explains. “When every dollar has a job, you think twice before spending impulsively.”
Within 18 months, Miguel and his family had paid off $22,000 of debt and built a $5,000 emergency fund. “Zero-based budgeting wasn’t just about restricting spending—it was about intentional spending. We still budget for fun and treats, but now they’re planned rather than impulsive.”
After three years, they became completely debt-free and now use the same detailed approach to save for retirement and college funds. “The time investment in budgeting pays off many times over in financial progress and peace of mind,” Miguel says.
Hybrid Approach: Jamie’s Customized Solution
Jamie, a 28-year-old freelance graphic designer, struggled with irregular income that made traditional budgeting difficult. “Some months I’d earn $7,000, others barely $3,000. Neither the 50/30/20 rule nor strict zero-based budgeting worked perfectly for my situation.”
Jamie developed a hybrid approach:
1. She created a “bare-bones” budget covering essential needs based on her lowest income months
2. She used zero-based principles to allocate her baseline income
3. For additional income in good months, she used a percentage system: 40% to savings, 40% to business development and taxes, and 20% for quality-of-life improvements
“The hybrid approach gives me the security of knowing my basics are covered while providing guidelines for handling the variable income,” Jamie explains.
This customized system helped Jamie build a three-month emergency fund within a year while managing her irregular income effectively. She now maintains a six-month emergency fund and has started investing for retirement despite her variable earnings.
“Don’t be afraid to adapt budgeting methods to fit your unique situation,” Jamie advises. “The best budget is one that works for your specific circumstances and that you’ll actually maintain.”
Conclusion
Choosing between the 50/30/20 rule and zero-based budgeting isn’t about finding the “right” method in absolute terms—it’s about finding the right approach for your specific situation, personality, and goals.
Decision Framework Based on Personal Factors
Consider these questions to help determine which method might work better for you:
1. How much time are you willing to dedicate to budgeting?
– Minimal time: 50/30/20 rule
– Willing to invest more time: Zero-based budgeting
2. What’s your current financial situation?
– Generally stable, need optimization: 50/30/20 rule
– Struggling with debt or specific goals: Zero-based budgeting
3. How do you prefer to make decisions?
– Big-picture thinking: 50/30/20 rule
– Detail-oriented analysis: Zero-based budgeting
4. What has caused previous budgeting attempts to fail?
– Too complicated or time-consuming: 50/30/20 rule
– Too vague or lacking accountability: Zero-based budgeting
5. Is your income stable or variable?
– Stable, predictable income: Either method works
– Variable or irregular income: Zero-based budgeting typically works better
6. What are your primary financial goals?
– General improvement and balance: 50/30/20 rule
– Aggressive debt payoff or specific savings targets: Zero-based budgeting
Hybrid Approach Possibilities
Remember that budgeting isn’t an all-or-nothing proposition. Many successful budgeters use hybrid approaches that combine elements of different methods:
– Start with the 50/30/20 rule for overall allocation, then use zero-based principles within each category
– Use zero-based budgeting for problem areas (like dining out or shopping) while using broader categories for areas where spending is naturally controlled
– Implement zero-based budgeting during financial challenges, then transition to the simpler 50/30/20 rule once stability is achieved
– Use different methods for different income sources (e.g., 50/30/20 for steady paycheck, zero-based for side hustle income)
Implementation Tips for Success
Whichever method you choose, these principles will increase your chances of success:
1. Start small: Begin with the basics and add complexity gradually as you build the budgeting habit.
2. Use technology wisely: Choose tools that support your preferred method without overwhelming you with features.
3. Build in accountability: Whether through a budgeting app, spreadsheet tracking, or regular check-ins with a partner, create systems that keep you engaged.
4. Expect adjustment periods: The first three months of any new budgeting system involve learning and adaptation. Don’t give up too soon.
5. Schedule regular reviews: Set calendar reminders for weekly quick checks and monthly comprehensive reviews.
6. Celebrate progress: Acknowledge improvements and milestones to maintain motivation.
7. Be flexible: Life changes, and your budget should evolve accordingly. Be willing to adjust your approach as your circumstances and goals shift.
The most important factor in budgeting success isn’t which method you choose—it’s consistency in implementation. A simple budget you follow is infinitely more effective than a perfect budget you abandon. Choose the approach that feels most sustainable for your lifestyle, and remember that financial management is a skill that improves with practice.
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This article is part of our Personal Finance 101 series. For more guidance on managing your money effectively, check out these related articles:
– Personal Finance 101: The Beginner’s Guide to Managing Your Money
– How to Create a Monthly Budget You Can Actually Stick To
– How to Track Your Spending Without Expensive Apps