Budgeting is important, we all know that. But just how important is often understated since it’s likely to be one of the most invaluable things you can master to positively impact your financial situation.
Any time spent learning how to budget, or improve your understanding of it, is never wasted time. For the most part, we spend our time generating income but it’s just as important to spend time learning how to best manage that money.
What is a budget?
A budget is pretty simple, it’s developing a plan on how to manage incoming and outgoing money. A well-designed budget will give you a clear view of your finances and allow you to assess how to best spend your money while considering your financial goals. Maintaining it, however, is called budgeting and requires a little more effort…
What is budgeting?
Budgeting is the process of maintaining the budget you’ve established. Doing this effectively will ensure you always keep track of incomings and outgoings, spend, and save where you had intended based on your budget as well as meeting your financial goals! The effectiveness of this will largely depend on what budgeting method you choose and how well this aligns with your situation, as they’re not a one size fits all….
Methods of budgeting
Understanding budgeting as a concept is just as important as finding the right budgeting method to suit your specific situation and goals. There are endless methods to choose from, all with different levels of understanding, time commitment and tools to keep you on track.
Choosing the budgeting method best suited to your needs is key, because the right one will allow you to be consistent.
In this blog, we’ll run through five popular budgeting methods, from the time-tested approaches through to new-age methods that leverage technology and automation. As you read on, consider if any of these tick your boxes and keep in mind you should evaluate as many different methods (yes, even outside of this blog!) as you can so you make an informed decision and find one that suits you best.
Method: The traditional budget
The traditional budget is straightforward and offers a great foundational understanding of the process of budgeting. This is where you list your income, expenses and then determine the difference – this is referred to as disposable income. Ideally, you’ll be spending less than you earn!
Now that you’ve itemised your finances, you can categorise your expenses and set spending goals for each. You’ll also set your savings goals based on your disposable income figure. Ongoing, you’ll monitor your spending habits in relation to your goals and make adjustments if necessary. This is where most people tend to start, where they dabble in budgeting before moving onto something more tailored to their newfound budgeting abilities.
Method: The envelope budget
This method is a little impractical given we’re moving towards a cashless society and requires the budgeter to use cold, hard cash to organise their funds. The name comes from the envelopes used to organise said cash, each holding pre-defined amounts of money designated for different categories within your budget: rent, bills, entertainment, emergency fund etc.
Since it relies on visually seeing your money (or what’s left of it), having physical cash makes you less likely to spend unnecessarily and can help you stick to your spending goals. As we mentioned, the impracticalities of carrying cash is the main drawback of this method.
Bucketing is a similar concept but uses a digital approach, which may be more suited to some…
A technique called ‘bucketing’ gained popularity due to its effectiveness. This method works by creating saving accounts ‘buckets’ for various categories within your budget: bills, emergency fund, holiday fund etc. The initial setup of this method is time-consuming, but its ongoing maintenance is quite easy.
The perk of this method is having full transparency over your transactions to and from these accounts, allowing you to clearly gauge if you’re overspending and where without the need for complicated spreadsheets or budget plans. This is also easily automated with most financial institutions, removing the need for you to manually transfer with each pay cycle!
Method: The 50-20-30 budget
The 50-20-30 method works by having your total income categorised into three streams, split according to percentages:
- 50% = Needs and obligations
These are your must-have expenses like rent, bills, transport costs etc
- 20% = Savings and/or debt
The not so fun but extremely important type of money
- 30% = Wants and entertainment
You know, the fun type of money
This is a great rule to apply to your finances. Once you figure out your current percentages, you’ll be able to evaluate how you’re measuring up. Another great aspect of the 50-20-30 is that you have 30% slice of your income pie to spend exclusively on things you want. Sitting down and actually thinking about how you choose to spend your ‘wants’ allowance is likely to make sure you’re prioritising what’s most important to you rather than mindless spending.
The pros and cons of this method are the same: it’s simple. Simple is a pro in terms of ease in setting it up, but a con in the sense that it’s quite vague and might be too flexible for someone that needs more guidance and structure.
Method: The zero-based budget
The zero-based budget works by determining your incomings, outgoings and ensuring anything in between is allocated towards a specific purpose. This concept is also referred to as ‘giving every dollar a job’, where income minus expenses should equal zero (hence the name). This method sees categories like debt repayments, savings and emergency fund money as ‘expenses’ to ensure they’re considered each pay cycle.
It’s quite the commitment as it requires you to accurately account for each expense, but it’s a great method for anyone wanting to keep track of every single dollar to make sure it’s being put to good use.
Where to start?
Developing the habit of budgeting is key to improving your financial health and allowing you to achieve your goals. Simply starting with the budgeting method you think is most practical for your situation and refining as you learn and practice will have you on the right path. The more you practice, the easier it gets! Establishing good budgeting habits now will set you up to achieve bigger financial goals down the track, even if your current goals are relatively small.
Remember, the best budgeting method for you is the one you’re more likely to stick to.
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