A stark reality in our society is that most adults do not even know the basics when it comes to budgeting methods, let alone how to stay in control of their finances.
This is evident with the “Just chuck it on Afterpay” culture we’re living in.
In this post, I will cover four easy methods for budgeting so you can find one that’s right for you.
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Why Do You Need a Budgeting Method?
It’s important to find a method for budgeting that suits your style. Budgeting can get overwhelming pretty quickly, with so many methods going around. Everybody will be singing praises about one strategy or another, which can leave you feeling like you’re drowning in information.
The overwhelm will end up causing you to freeze and do nothing, rather than finding what works for you and getting your money organised.
Budgeting doesn’t have to equal suffering or cutting things out that you like. It’s all about allocating money to different areas of your life, so that you know you’ve always got everything covered.
On top of that, budgeting allows you to start building up some savings (for a big thing like a car or house), plus have some set aside for a rainy day (emergencies and unforeseen circumstances).
Okay, let’s get into it.
P.S. If you find that bits and pieces from the following budgeting methods work better for you than rigidly sticking to just one, then that’s okay too. Whatever works!
Methods for Budgeting
The ‘Zero-based Budget’
Let’s start off with the zero-based budget. In my opinion, this is one of the most organised and clear budgets you can get.
The idea of the zero-based budget is that you have $0 left at the end of the month.
| Income – Expenses (and savings) = Zero |
Zero-based Budget ADVANTAGES:
- By ending the month at $0, it’s easy to make your next month’s budget without calculating what’s
- left of the former month
- Every single dollar gets a purpose
- This budget is a great beginner method
- This method teaches you discipline
- Long-term success
This budget is kind of like a strong base. Once you have this budgeting method under control, you can start experimenting with other ‘’rules’’ or methods. Many people start out this way and wouldn’t have the results they’ve got if they skipped this budget.
Zero-based Budget PROCESS:
The process of the Zero-based Budget is quite simple.
Like I said before: Income – Expenses (and savings) = Zero
The entire process goes like this:
| Step | Task |
|---|---|
| 1 | LIST INCOME SOURCES • Write down all your income sources for the budget period (week/ fortnight/ month) • Include bonuses and additional/ passive income |
| 2 | LIST INCOME AMOUNTS • Make a list of all income amounts for the budget period • Use your net income amount (i.e. your salary minus taxes etc) |
| 3 | PLAN YOUR BUDGET • List all of your expenses for the budget period • List all the additional things you want to spend money on for the budget period • Plan how much you want to save/ pay off debt |
| 4 | ADJUST YOUR BUDGET • Work out if you’re over or under spending • If overspending – make some cuts • If underspending – allocate that money to savings/ paying off debt |
| 5 | END OF BUDGET REVIEW • Review your budget at the end of the period • If there’s money left, put it in savings or use it to pay off debt • End of budget = $0 |
Make sure not to use a credit card or any other pay-afterward tool. This will only stir your entire budget up and affect the next one.
In the zero-based budgeting method, it’s easy to implement other methods like paying yourself first, the
cash envelope method, or the 50/30/20 method. As I said, this budgeting method is a strong base that you can build upon later.
Who is the Zero-based Budgeting Method good for?
This budgeting method is suitable for everyone. It doesn’t matter if you’re a beginner or more advanced, chaotic or organised, individual or household. Anyone can use this budget.
The ‘Pay Yourself First’ Budget
The paying yourself first method prioritises saving money or paying off debt. It’s not something like, “We’ll just save up what’s left at the end.”
By paying yourself first, you’re committing yourself to saving up a certain amount of money per month. Beyond that, whatever you’ve got left is what you need to spread out between expenses and spendings.
It can be a tight budget, but this is the one that smashes out debt or builds up savings at the fastest rate you can.
Pay Yourself First ADVANTAGES:
- Paying off debt as soon as possible
- Saving money as quickly as possible
- Mastering self-discipline
- Fast gratification, which increases motivation
Pay Yourself First PROCESS:
If you’ve already done the zero-based budget, look into your last budget’s savings and expenses. See where you can make cuts and save up more money.
| Step | Task |
|---|---|
| 1 | LIST INCOME SOURCES • Write down all your income sources for the budget period (week/ fortnight/ month) • Include bonuses and additional/ passive income |
| 2 | LIST INCOME AMOUNTS • Make a list of all income amounts for the budget period • Use your net income amount (i.e. your salary minus taxes etc) |
| 3 | LIST EXPENSES • List all of your expenses for the budget period • Cut out all expenses that are not absolutely necessary to reduce this amount |
| 4 | SET YOUR SAVINGS AMOUNT • Look at what’s left and allocate as much as you can towards savings or paying off debt |
| 5 | LIVE OFF WHAT’S LEFT • What’s left is what you’ve got to live off for the budget period (e.g. food, fuel, spendings etc.) |
Stick to it. You’re going to have to say no to yourself or others every once in a while. It’ll be hard.
But you’ll get used to it. Just make sure to stick to your budget and you’ll be smashing goals in no time!
Keep in mind that it’s okay to slip up every once in a while, you’re only human after all. So don’t be too hard on yourself (but don’t be too soft either or it’ll take you longer to reach your goals!).
Who is the Pay Yourself First Method good for?
This budgeting method is good for everyone who has been budgeting for at least a few year
months. In the zero-based budget, I covered the ‘base’ part. The paying yourself first budget is great to start with after using the zero-based budget for a while. This budget is good for both individuals and households.
Who should skip the Pay Yourself First Method?
Complete beginners should probably not jump straight into this method for budgeting.
It’ll be very hard to suddenly cut out a lot of expenses and save up if you’re not used to tightening the belt. But if you do want to take on a challenge, go for it!
The ‘Cash Envelope’ or ‘Buckets’ Method
The cash envelope method is all about categorising your expenses and saving goals.
You simply allocate a certain amount of cash in envelopes (or multiple bank accounts) per category and that is your maximum budget to spend for each of those categories.
The cash envelope strategy is an old-fashioned budgeting method, but don’t discount its effectiveness because of that.
You don’t have to use cash for this method, especially since many parts of the world are phasing out physical cash.
The modern alternative is to use your banking app and either set up ‘savings goals’ or create separately labelled bank accounts (‘buckets‘).
Savings goals include vacation, future plans, weekends away, eating out, gifts, an emergency fund, and a car/ house fund.
Each pay cycle you just put small amounts into each goal and know that everything is always covered.
So, whenever you go out for dinner spontaneously, you’ve already got money to cover it, without
disturbing your entire budget. Or when something’s wrong with your car, your ‘car fund’ has money put aside to cover it.
For everyday spendings such as groceries, you can help make sure you stick to your budget by going to the ATM beforehand and getting out the exact amount of money you’ve allocated for that expense. Using a calculator to add up your items along the way means that you’ll know exactly how much you’re spending before you even get to the checkout.
Cash Envelope or Buckets ADVANTAGES:
- Easy to save more money
- Very satisfying as you become more aware of where all of your money goes
- Keeps your money organised
- Gives you a lot of control
- Good method for overspenders (once the envelope’s empty, that’s it until next pay cycle)
Cash Envelope or Buckets PROCESS:
| Step | Task |
|---|---|
| 1 | CREATE ENVELOPES/ BUCKETS • Write the name of each category you need in your budget (include spendings, savings & expenses) on individual envelopes or bank accounts |
| 2 | ALLOCATE YOUR MONEY • Look at how much money you’ve got • Allocate the amounts you want/ need into each envelope or bank account |
| 3 | REVIEW EXPENSES • Ensure you’ve got enough put away in all of your expense related categories to cover everything until your next pay cycle |
Who is the Cash Envelope/ Buckets method good for?
This budgeting method is great for people who tend to overspend. You can use this budget as a beginner or advanced. Chaotic people can use this method to add structure and organisation to their money management system.
Who should skip the Cash Envelope/ Buckets budget?
People who don’t want to carry cash or don’t want to add the extra step of having to get cash out are better off using the bank account ‘buckets’ method.
The ’50/30/20′ Budgeting Method
The last budgeting method is the 50/30/20 method.
Here’s what the numbers stand for:
💰 50% for NEEDS
This category includes all resources and expenses that you need in order to survive.
- Rent or mortgage
- Car payments
- Insurance
- Health care
- Groceries
- Utilities
- Minimum debt repayments
💰 30% for Wants
Everything that you want and not a primary need, falls into this category. You shouldn’t spend more than 30% of your income on this. You may think that 30% isn’t enough, but that’s the thing with budgets, they challenge you. 30% is more than enough.
- Clothing
- Eating out
- That new purse
- Vacations
- Electronics
- Hobbies
💰 20% for Savings
This 20% can be used for saving, but you could also invest part of it or choose to pay off your debt faster. You could build an emergency fund or save up for travel or a new car. You can save up for anything you want.
I recommend building an emergency fund that can support you for at least 3 months, which is the backbone of being financially stable. This is in case you lose your job or break something. Building an emergency fund may not be the most fun thing to save up for, but if something happens, you’ll be grateful to yourself for building this fund.
50/30/20 Budgeting ADVANTAGES:
- Beginner-friendly
- Really easy to calculate
- Creates simple organisation of your money
50/30/20 Budgeting PROCESS:
| Step | Task |
|---|---|
| 1 | TALLY UP INCOME • Add up all your income amounts (including any passive income) |
| 2 | CALCULATE 50/30/20 • Calculate the figure that will be allocated to each category • 50% of income → Needs • 30% of income → Wants • 20% of income → Savings/ Smashing out debt |
| 3 | REVIEW THE FIGURES • Make sure that 50% is enough to cover all of your survival expenses • If it’s not, look at ways to reduce your basic expenses (e.g. downsize the car or house, reduce electricity usage etc.) • Cut out any other unnecessary spendings to stick within the 50/30/20 budget |
Pro Tip:
To up the challenge, you can try using 50% for savings/ debt, 30% for needs and 20% for wants. This is a
fun challenge you can do as a more advanced budgeter if you’re wanting to hit a savings or debt-reduction goal at lightning speed.
Who is the 50/30/20 budgeting method good for?
This method is very beginner friendly because it’s easy to calculate and implement. You could use this
budget as an individual or as a household.
Who should skip the 50/30/20 budget?
Nobody, really. Whether you’re a beginner budgeter or more advanced, the 50/30/20 strategy is worth trying out to see if it works best for you.
Final Thoughts
Like many other budgeters, I like to mix and match methods for budgeting until I find what works best for my earnings, goals and situation. This can even change from year to year depending on circumstances.
Now it’s time to start experimenting for yourself and having fun with the process. You may slip up along the way, but that’s okay! Tweaking the process and massaging the numbers is what it’s all about.
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