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How to succeed at budgeting

A guide to 4 budget planning methods

21 April 2021

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The secret to successful budget planning is finding the right method that works for you. In this article, we'll walk you through four ways that could help you succeed as a household budget planner.

What you'll learn

60% solution – keep essential expenses around 60 per cent to avoid overspending.
Zero-sum budgeting – subtract expenses from your pay, and you should end up with zero.
Reverse budgeting – put the focus on savings (you pay yourself first).
The 50/30/20 rule – probably one of the most popular budget methods.

What is a budget?

In simple terms, budgeting is the process of creating a plan to spend your money. It helps you prioritise your spending to make sure you have enough money to do things you need to do and remain in the black.

This exercise of getting your spending, saving and income to line up perfectly is more than just number crunching. At times, it can feel like you're making difficult decisions that stop you from spending your money on what you want, but it is one of the best ways to make sure you keep a close watch on your finances.

The benefits of budgeting

It's important to remember that the benefits of budgeting not only keep you living within your means but also give you control over your financial life by:

Giving you insights into your spending habits.
Helping you prioritise how you make your spending choices.
Helping you reach your spending goals faster.

While living on a budget can feel restricting, living without a budget can make you vulnerable to unexpected expenses. Here are just a few methods of budgeting you might consider trying.

Which budget works for you?

OK, so you're ready to get started on creating your household budget planner, but which method do you use?

We're going to look at four different ways you could budget. Whichever method you follow, just remember the trick to budgeting success is to be realistic and set goals while giving yourself some flexibility.

60 per cent solution

First proposed by Richard Jenkins, former editor-in-chief of MSN Money, the 60 per cent solution budget emphasises one thing – to keep essential expenses at or around 60 per cent to avoid overspending and running into debt. To avoid dipping into your savings, it could be a good idea to set up a separate savings account.

The 60 per cent solution budget has some similarities to the 50/30/20 rule, but instead of allocating 50 per cent to essentials, 60 per cent goes toward fixed "committed expenses" – your rent or mortgage, food shopping, utility bills, etc.

The remaining 40 per cent is split into four separate 10 per cent increments for:

Retirement
Long-term savings
Short-term savings
‘Fun money’

The 40 per cent can be divided differently depending on your circumstances and goals. For example, if paying off a credit card or a big holiday is on the horizon, bump up savings in one of the categories.

Zero-sum budgeting

The zero-based budget is where all your spending is accounted for – that is, every pound of your monthly income is accounted for and used.

To get started with this method, calculate how much monthly income you take home from your salary, benefits, or other sources of income. Then write down all monthly expenses – including any entertainment and leisure activities. Subtract your expenses from your incomes, what you put into savings and what you put toward paying off debt, and you should end up with zero.

And that's how you achieve a zero-based budget. It's a good idea to track all monthly expenses for a couple of months to identify areas where you could cut back.

Then, create a budget covering all your expenses – essentials, long-term savings and short-term savings for a trip or new car – and make sure your spending matches the budget.

Commonly used within companies, this method takes considerable work and requires you to keep careful tabs on all your spending. On the upside, you'll know exactly where your money is going.

Reverse budgeting

Traditional budgeting usually involves adding up all expenses and allocating the remaining cash toward savings. With reverse budgeting, there's a twist. Here, you put the focus on saving; you're paying yourself first, building your budget based around savings goals.

Establish your savings goals, set aside the amount of money from each month's salary that's to go into your savings account, and then put the remaining amount toward essentials. Whatever remains after that is discretionary cash – i.e., money you can use however you please, whether you want to treat yourself to five speciality coffees every day or pay for a weekend getaway.

Whichever method you follow, just remember: the trick to budgeting success is to be realistic and set goals, while giving yourself some flexibility.

The upside to reverse budgeting is that it's relatively low maintenance in that you're not tracking every penny you spend, nor are you categorising your expenses. How much you set aside for savings is up to you, of course, and should be adjusted as needed. One way to approach this is by writing out goals, whether buying a house or a car, including how much you'll need to save to reach that goal and when you'll need it by. Then calculate how much you can put toward that each month.

To ensure you save the amount you're budgeting for, set up an automatic transfer from your current account into your savings account.

The 50/30/20 rule

If you know you can afford to save or spend more, then this budgeting technique may be for you. The idea is that if you can, you try to allot no more than 50 per cent of your total monthly budget toward essentials like your rent or mortgage, travel, food shopping and bills. A further 20 per cent should go toward savings (either short-term or long-term goals), such as individual investments, retirement savings, or starting a savings account.

The final 30 per cent can then be spent on what you like: perhaps that’s gym memberships, shopping or socialising.

Household budget planner

So far, we've talked about the different types of budget planning, and hopefully, you've got an idea of which one works best for you. The next step is to plan your household budget.

It's important to include all the money that comes into your household each month and everything that goes out. That might sound obvious, but it's easy to forget the small things like paper bills.

How to manage your budget

Once you've got your household budget up and running, it's essential to monitor it continuously.

Food prices, the cost of fuel, household bills and other living costs can increase over time. On the other hand, your household income can also change. That's why it's important to monitor your budget regularly and make any changes needed to deal with any changesin income or expenditure.

Remember, these budget ideas are not set in stone. If you’ve tried one of methods and it didn’t work for you, don’t be afraid to try a different one. We’ve covered several methods so you can find the one that suits you best.

The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.