WELCOME TO SMARTER Spending. Over the coming weeks, we’ll be sharing expert advice and real-life experiences, giving you the tools to spend more mindfully and get more from your euro.
“A BUDGET GIVES you freedom and choice, which is what so many of us look for when it comes to money.”
This is according to money coach Kel Galavan (@mrssmartmoneyhq), who highlights that – despite how it can be perceived – budgeting doesn’t have to be difficult or restraining.
“Budgeting has had negative connotations and can often leave people feeling like they will have to live a life of frugality or deprivation if they start one,” she says.
“However, the beautiful thing about a budget is that, in reality, it does the exact opposite. A budget sheds light on where your money is coming in and going out. It lets you see exactly where you are and where your starting point is.”
This, explains Kel, is beneficial because it allows you to see your expenditure clearly. “Once you do that, you can start making simple changes that can free up money so that you can save better, pay off debt and be confident in knowing that you are getting your money to work as hard for you as you do for it.”
But, with many different budgeting methods out there, it can be overwhelming to choose one to follow. To make the decision easier, we’ve done our research and found four tried-and-tested budgeting methods from different corners of the finance world – from using cash-only to putting savings first.
If you’re unsure where to begin when creating a budget, the 50/30/20 rule could be a good place to start. “This is such a simple rule to work with,” says Kel. “It keeps a healthy balance, steadily builds savings and keeps you on track while still being able to enjoy yourself.”
Created by US senator Elizabeth Warren, this method divides your income into three categories; needs, wants and savings. 50% is dedicated to necessary expenses, such as rent, utilities, groceries, transport and insurance. 30% goes towards your ‘wants’, meaning the things that aren’t necessary for day-to-day living, like going to concerts or the cinema, clothes shopping, eating out and subscriptions. Lastly, 20% goes towards your savings, pension and repaying any debt you may have.
Having just three categories makes it easy to divide up your income, which could be well-suited to those who want to keep their budget simple. Try this tool to see what the 50/30/20 method could look like for you.
For those who tend to tap their card into oblivion without keeping track of their bank balance, the envelope system could be the solution to following (and sticking to) a budget. Also known as Ramsey’s envelope system, this method requires taking your income out in cash (leaving only the exact amount for your necessary direct debits on your card), budgeting the remainder between different categories and then keeping the cash for each category in its own dedicated envelope. Once you spend what’s in the envelope, that’s it – there’s no swapping cash around between other categories.
“The envelope system works great for people who are starting out and are on really tight budgets,” says Kel. “Handing over physical cash when paying for things is not only a physical reminder of what you’re spending, but it also makes us think twice before parting with our hard-earned money.” If you’re not a fan of managing cash, this method can also work virtually by using features like savings jars or vaults on a banking app.
As the name suggests, zero-based budgeting means planning how you’ll spend every euro you earn, leaving you with €0 at the end of the month or pay period. Again, the idea behind this is to minimise overspending. Deciding how you divide your income is up to you, and you can be as specific or as broad as you like. For example, you can add a budget amount that’s specifically for eating out, or you can add a general budget amount for social activities. This method is particularly suitable for those whose budget changes from month to month, as you can alter it as needed.
“Zero-based budgeting is my personal favourite,” says Kel. “It’s a great way of living within your means and is great for people who prefer short term planning.”
If you have a savings goal that you’d like to achieve, the reverse budgeting method may suit you. Rather than focusing on allocating your savings amount after you’ve calculated your necessary and miscellaneous expenses, the reverse budgeting method prioritises your savings first.
“Reverse budgeting is a powerful way to ensure that your saving is prioritised,” says Kel. This method could be especially helpful if you’re looking to maximise your savings (and minimise non-essential spending) with a specific target in mind, like for a wedding or big holiday. Ultimately, you ‘pay yourself first‘, and then use what’s left for all other expenses. You might also find this method beneficial if you tend to dip into your savings throughout the month, as they’ll be prioritised with this method.
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