You know you need a budget, but where do you begin with creating one? I’ve created a useful guide on some of the most common budgeting methods, along with the pros and cons for each of them. 

THE 50/30/20 BUDGET

The 50/30/20 budget is where you allocate 50% of your take home pay to your needs, 30% for your wants and 20% to any savings or debt.

Allocate 50% of your money towards any needs – these are expenses you can’t avoid – the payments that are essential. It may include: your mortgage or monthly rent, utilities, petrol and car costs, any minimum loan repayments, your groceries and insurance. 

Allocate 30% of your money to your wants – now that your essentials are taken care of, this budgeting method allows you to allocate 30% of your take home pay to cover your wants. These are non-essential expenses; items you can live without but that you choose to spend your money on. (This can also be referred to as fun money or discretionary spending). This may include: holidays, dining out, takeaways, days out, clothes shopping and TV streaming subscriptions. 

Put 20% of your money towards your savings or debt – once you’ve allocated 50% of your pay towards your necessities and 30% towards your wants, the remaining 20% is allocated to your savings goals and extra debt repayments that aren’t covered by your minimum repayments (which should be part of your needs). You may have a mid or long-term goal that you’re saving money for, or you may want to build up your emergency fund instead. 

Pros

• It’s quick to set up – there are three calculations you need to do (50%, 30% and 20% of your pay), and if you get paid the same amount each month, your allocations will be fixed. 
• It’s flexible – this budgeting method allows for the greatest flexibility when it comes to your budget. You don’t need to allocate a fixed amount to each budgeting category (for example, dining out and clothing). 

Cons

• It’s a cookie cutter approach – the 50/30/20 rule doesn’t take your circumstances into account. For some people, your needs account for more than 50% of your take home pay and realistically, there’s only so much negotiating of bills and deals you can do in this area. 

CASH ENVELOPE SYSTEM

The cash envelope system is where you allocate money towards different categories in your budget, and with one envelope per category, you then fill these envelopes up with the right amount of cash. Once it’s gone, it’s gone.  

Decide on your categories and how much you can afford to budget for it – once you’ve set aside the right amount of your essential expenses, set a budget for each category based on how much you usually spend when it comes to things like transport costs and groceries where the spending can vary (look back on the last three months of bank statements and take an average if you’re not sure). Once you’ve taken care of the barebones of your budget, look at assigning money towards any other categories that are important to you.

Put the right amount of cash into each envelope – have separate cash envelopes for each category and label them clearly with what each envelope should be used for.

Keep your cash envelopes in a safe place – you may decide to keep it all in one place, or to only have the cash envelopes for your day-to-day spending in your bag. Get in the habit of doing the same thing every month so you don’t lose any cash that’s lying around.

Pros

• You can see exactly where your money is going – when we use cash for our transactions, we’re more likely to question whether we really need what we’re buying as we can physically see ourselves parting with the cash. 
• It’s simple – it’s easy to set up and it involves very little admin. 
• It can be changed each month – you can tailor your allocations based on what your plans are for each month.

Cons

• It’s not a secure system – having a lot of cash in your home, wallet or bag isn’t a very secure money system.
• It’s not suitable for everything – not everything can be paid for using cash – for example, your Netflix subscription, and it’s not the easiest method when you have to take all your expenses into account.

ZERO-BASED BUDGETING

Give all your money a purpose by assigning it all to different categories, down to the last penny. This is the budgeting method where you create a budget by minusing all your bills, day-to-day spending, savings, fun money and debt payments from your income. With a zero-based budget, you should be left with zero since all your bases are covered.

Subtract any essential expenses from your take home pay – this will include your rent or mortgage, your bills, any minimum debt repayments, childcare, groceries and transport costs. 

From that number, decide how much you want to save – with the essentials covered, look at how much you want to save that much. You may need to factor in any planned events and activities you have coming up; for example, if you know it’s your best friend’s birthday and you’ve got a big event to attend, realistically you may not be able to save as much as if you were having a quieter month. 

Decide on your goals and allocate money to them – create a rough budget for any events that are already planned so you’re allocating enough money towards them, and then choose how you will allocate the remaining money. Maybe you’ll use it all as fun money for the month or save it into sinking funds.

Make sure you’re left with zero – Now that you’ve allocated money to all the appropriate categories, double check your calculations (so you don’t get caught out mid-month). Your income minus all your expenses should equal zero.

Pros

• It’s customisable – Unlike the ‘off the shelf’ 50/30/20 budgeting approach, a zero-based budget is highly customisable to each individual and their circumstance, making it aligned to your goals and your personal finances.
• You become very aware of your spending – with a zero-based budget, it’s likely that you’ll be keeping track of your spending, and therefore you’ll become acutely aware of where your money is going.
• It can be changed each month – the beauty of a zero-based budget means that it can be easily changed each month, tailored to your social calendar, any annual expenses you might have to pay out or other plans you have.

Cons

• It’s time consuming – working out where all your money will be going can be time consuming, especially if you’re starting out. Once you’ve got the hang of it, you’ll know how much you usually pay for certain things or how much money you need realistically to cover all your expenses in any given category for the month.
• If you’re not careful, it can leave you short of money – when you allocate a purpose to every penny of your money, there’s no room for error. It means if you have an unexpected bill come through or you didn’t allocate any money to the wedding you completely forgot about, it can feel like you’re short on money and a reassessment is necessary, even if you’re halfway through a month.

Finding the right budgeting method that works for you can take time and it’s not something that happens overnight. Allow yourself the patience and time to trial the one that seems most preferable to you; you may decide to tweak it slightly to suit your needs better or even decide it’s not the right one.

When I first started out budgeting, I used the 50/30/20 rule to create my budget and I quickly learnt that it wasn’t for me. While the flexibility of it is one of its USPs, I knew I needed more control over exactly where my money was going as I was allowing myself to make excuses with some of my bad spending habits. I switched to the zero-based budgeting method and combined with a yearly budget for non-essential spending, I haven’t looked back. It’s personal preference and it’s what has worked best for me over the years. 

Which budgeting method will you try? Let me know if you have any questions by heading over to Instagram and leaving me a DM at @howifundthis.