You wouldn’t buy a size 8 if you’re a size 12. You would buy clothes that fit, are comfortable and suit you. The same goes for budgeting – there’s no one-size-fits-all.
Most people think that budgeting just means setting up a spreadsheet, working out your incomings and outgoings and then wielding the axe.
And it’s true, these are the basics of budgeting, knowing what you have coming in and going out.
But there are ways to tailor your budget to suit your personality, income and spending habits.
So, like picking a new outfit, you can choose a personal budgeting method that makes your finances look a whole lot better and suits the way you like to live. You just have to think outside the budget box.
The 5 Different Personal Budgeting Methods
Depending on your personal preference and financial circumstances here are the 5 types of budgets or budgeting method to help you create a personal budget.
1. The Envelope Budgeting Method
For the plastic over-spenders. It’s a cash-only budgeting method where you physically divide your money into different envelopes.
How to do it?
Label envelopes with different categories such as Food, Transport, Kids, Going Out.
Work out how much you spend on each category every month.
When you get paid, pay your rent/mortgage and bills out of your account.
Then take out the leftover in CASH and divide it between your envelopes. So, £400 in the food envelope, £200 in the kids envelope and so on.
Only spend out of the designated envelope for each category. So, if you’re going to the supermarket – take the Food envelope with you.
Don’t ‘borrow’ money from other envelopes. Once an envelope is empty, it’s empty. You just need to carefully plan each envelope to cover what you need.
Using cash in shops will stop you from overspending on ‘extras’, as it’s less easy than just whipping that handy card out.
Carrying cash around is less secure. Also, you need to be disciplined and work out how much cash you need to avoid being caught short. You need to be an expert list-maker!
2. The 50/30/20 Personal Budgeting Method
For the busy bees. Developed by Harvard bankruptcy expert, Elizabeth Warren, this is a no-fuss method for busy people on a steady income.
How to do it?
Work out your after-tax income and all other incomings (tax credits, child benefit etc.) then…
Spend 50% of your earnings on living expenses (needs) such as rent, food, bills.
Spend 30% of your earnings on things you don’t need (wants) such as going out, new shoes etc.
Spend 20% of your earnings on financial goals such as savings, investment or reducing your debt.
A simple method which only needs a calculator (to work out the percentages). Easy to stick to and the ‘20%’ part will help you accumulate more money and build wealth faster.
Not ideal for people who have an unsteady monthly income.
3. The Zero-Based Budgeting Method
This budget has one simple rule: your incomings minus outgoings equals ZERO at the end of the month.
If you earn £2,000 (after tax) each month, then ALL your spending, including the money you pay into savings, should not be a penny more than £2,000 each month, giving you a zero balance.
How to do it?
Work out to the last penny how much money you have coming in every month. Write it down.
Then list every, single monthly expense in that coming month.
This includes essentials and non-essentials that you are going to spend on in that particular month (this should be done at the start of EVERY month, as some months will be more expensive than others – car tax etc. so you will need to tweak it every time you get paid.)
Subtract your income from your expenses (including paying off debts and credit cards). The amount should be ZERO.
This takes some practice and you might be out £50 either side. If this happens you need to cut something from the spending side of your budget to get the numbers to equal out.
Teaches you to stop spending more than you earn.
Needs to be done every month so takes dedication! It also doesn’t allow for unforeseen spending, the outgoing you might not know is coming in that month (like your roof falling in). This is where your emergency fund will come in handy.
4. The Half Payment Budgeting Method
For weekly earners. This is a great budget for those who are paid weekly but still end up with no money to pay the once-a-month items.
How to do it?
Work out the payments that happen ONCE a month.
When you get your weekly pay cheque – take out HALF of the money you need for each payment and pay it into another account.
Example: You have a monthly car payment of £150.
- Week 1: You get paid £300. Put £75 in another account (HALF of the car payment)
- Week 2: You get paid £300. Put £75 in another account (the other HALF of the car payment)
By the time your car payment comes around at the end of the month – you’ll have set the money aside to pay for it.
Gives you peace of mind that you have the money to pay bills without eating up all your weekly cash.
Works better for those on a low weekly income who share bills/rent with another person.
5. The Goals-Driven Budgeting Method
For the needers of nice things and a clear financial goals. This is for you if you need a goal and rewards to get motivated.
It’s also for those who whack ‘I gotta have it now’ goodies on credit cards and think about the consequences (debt) later….
How to do it?
Choose one goal. It could be a holiday you want to go on, or a new car you’ve got your eye on. Work out how much it will cost. This goal needs to be the guiding light, influencing everything you spend on.
Write this goal in big letters at the top of your spreadsheet. Then list your outgoings and incomings, always with the goal in mind.
Work out what you can contribute to your goal every month. This could mean ditching other non-essential items (gym, coffees, eating out) that you regularly spend on and redirecting them to your goal.
Open up a separate GOAL account and set up a standing order for the amount you can contribute each month.
Having a goal can make you more determined to budget and save.
Not good for those who are on a very tight budget or are paying off debt. Debt comes first.
These are the 5 different personal budgeting methods. Whichever budget you choose, make sure that you have the tools in place to help you stick to it and commit to sticking to that budgeting method for at least 90 days.
Why? It takes about 90 days to get your budgeting right. The more months you budget, the more accurate you become. The key is to continue to adjust your budget until you get it right.
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Over to You
Do you use any of the budgeting methods in our list? Or do you have your own way of doing it? Share your tips with us here.
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