When it comes to managing your income and outgoing expenses, without a budget you can quickly lose track of where your money is being spent.
No-one enjoys living from one payday to the other, so the best way to get control of your finances is to start with a budget.
Even the mention of the word can make some people cringe. But it is important to know that there are lots of different budgeting methods, so finding the right one that gels with you could be the key to success.
In this blog, I take a look at the top 7 budgeting methods that are easy to follow. You are sure to find the right one that fits your personality and budgeting style.
The percentage or buckets method
This method of budgeting has been written about in a number of different finance books over the years. In essence, it is dividing your income into a number of different categories or buckets that are broken up into a percentage amount.
Here in Australia, the Barefoot Investor book suggests the following percentage splits
- 60% to your Blow Bucket – which is for everyday expenses like rent, home loan repayments, food, and utilities.
- 10% to your Splurge Bucket – which is for things that make you feel good like socialising or buying new clothes.
- 10% to your Smile Bucket – used for saving for fun longer-term savings goals such as a holiday.
- 20% to your Fire Extinguisher Bucket – which is also for your long-term savings, but less fun things. Such as a house deposit, paying off your mortgage quicker or paying off consumer debt.
There is another similar take on this that Elizabeth Warren and Amelia Tyagi first made popular, called the 50-20-30 method.
So the split, in this case, is that you spend 50% of your total income on your needs or necessities, 20% on saving or debt payments, and 30% on wants such as entertainment, travel, shopping and eating out.
In essence, the method is the same in both cases, it is just a case of working out what percentages are going to be able to work for you.
There are some people where a larger percentage of their income will be needed to cover their basic expenses and others where they are able to save a bit more.
The real point of this method is to not have to budget down to the nitty-gritty details but instead have buckets of funds to use for each of the categories.
If you can automate the process of sending the savings or debt payments to a different account on payday this can be a really effective method to ensure you are keeping up with saving a set percentage of your income.
There are however a few pitfalls of this method of budgeting. Because you are only budgeting in categories and not down to individual expenses, you could find yourself say spending more on food than you thought, leaving you short for your electricity bill.
To get around this, it is a good idea to build in a little bit of wiggle room into your budget. That way if you do happen to overspend one month, you could move some cash reserves from your ‘wants ’into your ‘needs category if you have to.
The Envelope System
The budgeting method is designed to be simple. I think is a great budget for a beginner, as it helps you to have a clear picture of just exactly where your money is being spent.
For this method, you add up all of your fixed and variable expenses. A good way to do this is to look at your bank statements from the previous year and work out when you spent in each area. Then subtract this from your income.
Withdraw the cash for your expenses and place them in individual envelopes labelled food, rent etc.
Whilst I think this can be a good method for things like food and groceries. Carrying around cash for your utility bills seems a little bit silly to me. You might as well have a bills account earning you interest and arrange direct debits of your bills from that account. So having virtual envelopes which you track through a spreadsheet can make much more sense here. Just make sure you keep a good eye on the account and what your bills come to. So you don’t get any surprise overdrawn fees.
So having virtual envelopes which you track through a spreadsheet can make much more sense here. Just make sure you keep a good eye on the account and what your bills come to. So you don’t get any surprise overdrawn fees.
This is a good budgeting technique if you have struggled in the past with overspending and need to get a handle on it. Basically because once the cash is gone, you need to wait to purchase anything else in that category until your next payday.
The pitfall of this method is that if you are carrying around cash there is a chance you might lose or misplace it. But for a lot of people, this can be a great starting budgeting style to get you in the habit of having more focus on where your money is spent.
The number one goal of this budget method is savings. So instead of setting up categories that cover your expenses, you instead focus on an ambitious savings goal.
Say you choose to save 20% of your income. This is saved first and foremost and is kept in a separate bank account. The leftover funds from your income can be allocated as you wish.
Whilst this can be a great approach to use when you have a set savings goal in mind (check out my savings plan calculator) it does leave you at risk of overspending the rest of your income and falling short when bills fall due.
Zero-based budgeting method
This budgeting style is where your income exactly matches what is going out of your account. Of course, this does not mean that you spend every cent you earn!
You simply transfer money into your savings accounts, retirement funds etc. In essence, you are paying those accounts (almost treating them like an expense).
This is sometimes referred to as a ‘’évery dollar has a job’’ budget. A portion of your money you’re giving the job of paying your food bill or rent and others you are giving it the job of funding your retirement or emergency fund. So every dollar is accounted for.
I don’t mind this method, I think if you have a consistent salary allocated your income to the different expenses and savings accounts is a good approach. You literally take your budget and bring it back to zero.
This method is one that I have used in the past, as it allows you to be completely in control of your money. My epic spend tracker spreadsheet can be a great tool to use for this budgeting method.
The pitfall of this type of budget is that it can be quite time-consuming to keep track of where all of your money goes. So unless you a spreadsheet geek like me, you could find this approach a little cumbersome.
No budget budget
This is the most handoffs budgeting style. You do not track your expenses but you do need to pay attention to your bank balance.
Whilst I think this approach can be a risky one for most people, it does seem to work for some people.
Automation is the key to this method working. If you automate sending a certain amount of your wage to savings or automate your bill payments to save a certain amount each payday it can be a hands-off approach.
This budget is designed for those people that really hate to budget. If you can get all of the automation setup and ticking over (and not forget to include irregular expenses) then it can be a good time savings approach.
I do think though that this approach can be pretty risky, as the inclination to overspend is quite high with this approach. You really need to make sure you are making savings a priority and that you have a healthy emergency fund for anything unexpected that pops up.
In recent times there has been a number of budgeting Apps that can help you to keep track of your finances.
The Apps generally allow you to link them to your bank accounts. So it eliminates the manual need to track your expenses in a spreadsheet.You can often set up savings goals as well as alerts to keep you on top of your budget.
Here in Australia some of the Apps includes Money Brilliant, PocketBook, YNAB and Money Smart’s TrackMyGOALS and TrackmySPEND.
In the US, popular Apps include Personal Capital and Mint.
Create your own budget
This is how I currently budget. I use a combination of the methods outlined above.
I don’t spend a lot of time tracking individual expenses these days (but I have in the past). So I guess the buckets approach is the closest to what I use.
But I don’t have a bunch of bank accounts all set up with separate names. We just keep all of our money in our mortgage offset account and I keep track of what money is allocated to what via a spreadsheet.
You might find that you read up on a few different methods and then adapt them to what works best for you.