3 types of budget to get your personal finances in order
Whether you keep it old school using pen and paper, or are happily high tech with spreadsheets and apps, it’s important to keep a budget.
Tracking your income and expenses will not only take the pressure off in the short term – especially if you find there’s usually too much month left at the end of your money – it can also help you achieve long-term financial goals.
For many, just the thought of keeping tabs on your finances is unpleasant. Plus, the number of results gleaned from a simple search about which type of budget to use can be daunting.
What’s most important when deciding how to handle your money is that the budget you choose suits both you and your lifestyle. Some of us are naturally great with money and don’t need to keep too many tabs, others like to account for every cent.
Fortunately, there’s a budget style to suit everyone.
1. The 50/30/20 Budget
One of the most popular budgeting formats, the aim of the 50/30/20 Budget is to spend 50% of your income after deductions on needs, 30% on wants and either save the final 20% or use it to service your debt.
(The 50/20/30 Budget has a close relative, the 80/20 Budget, which essentially the same but drops the distinction between ‘wants’ and ‘needs’.)
The pros and cons
While there’s plenty of conflicting information about how much you should be saving each month, many financial experts agree that 20% is a solid number. However, if you have large amounts of debt, this can be difficult.
The great thing about this budget is that it’s relatively simple. Once you’ve broken your expenses down into these three categories and you know how much should be allocated to each, it’s easy to keep track of your spending.
It can get tricky when categorising your needs. For example, fruits and veg are an essential on your shopping list, while a slab of Lindt chocolate might be a want. You can get around this by lumping these all under ‘groceries’, which are a need. Then, if you find yourself overspending in the ‘needs’ category, you can examine how you’re spending in more detail.
How to do it
- Take a piece of paper and draw three columns
- Calculate 50%, 30% and 20% of your take-home salary and write these amounts at the top of each column
- Identify your needs (e.g. bond repayments or rent, utilities, groceries, petrol or transport costs, healthcare or medical aid) and record each amount in the 50% column
- Identify your savings and debt (e.g. retirement fund payments, emergency fund contribution, credit card payments, loan repayments) and write each of these in the 20% column
- If you find that you are spending too much or too little on one category, consider where you can cut back or if you’re forgetting anything
2. The Anti-budget
The most elusive of all the budget types – at least for me – the Anti-budget doesn’t involve any tedious planning or tracking. You set aside a predetermined portion of your income each month (the more the better), save that and spend the rest.
At the end of the month, you look back at your expenditure and evaluate whether or not you accomplished your goals. As simple as it is, the Anti-budget still checks all of the necessary personal finance boxes.
The pros and cons
The main goal of a budget is to ensure you’re saving enough. With the Anti-budget, you set aside your savings first and needn’t worry about the rest. And because you aren’t dissecting every bit of spending, budgeting becomes far less tedious and time-consuming – the reason most traditional budgets fail.
That said, while it might sound good in theory, the Anti-budget can go horribly wrong if you’re not naturally frugal or if you have complex finances. Another drawback is that it can be very difficult to see where you’ve overspent when you don’t track your expenditure.
How to do it
- Determine how much you’d like to save and work out your fixed expenses
- Have these amounts come off your account automatically
- Spend the rest without worry
3. The Zero-based Budget
With the Zero-based Budget, you allocate every last cent of your take-home income so that you have nothing left or ‘zero out’ at the end of the month.
The idea is that every cent has a purpose, whether that’s to pay utility bills, buy shoes or be saved. Money in is exactly equal to money out.
The pros and cons
Many budgeting apps use the Zero-based Budget as their basis, so it can be quite convenient to follow this method. It’s also the best budgeting method for those who want to be in complete control of their money. And it’s especially good for those who struggle to control their spending – you don’t spend any money unless you’ve planned to.
While the structure is great for some, it can be overly restrictive for others. There’s no wiggle room to cover even small unexpected expenses and you’ll spend a lot of time planning and tracking your finances. Recording every transaction can also lead to budget burnout, which will be detrimental to your long-term financial fitness.
How to do it
- Write down your take-home income
- Calculate your fixed monthly expenses and evaluate your variable expenses – looking at your three most recent bank statements is a great way to do this
- Categorise these expenses (e.g. groceries, rent, transport)
- Identify how much you’d like to save each month
- Subtract your expenses and savings from your income
- Make adjustments in each category until your final output is zero
- Track your spending as you incur expenses
Regardless of which method you choose, having a budget is the simplest way to achieve your financial goals – whether that’s to get out of debt or save for an overseas holiday.
What’s important to remember is that you have complete control over your budget. You can mix and match different methods to create a plan that works for you. As long as you abide by the golden rule: don’t spend more than you earn.
