Get on top of your budget
Been thinking about starting a budget but not sure how? Our friends at Booster have some great tips on getting started, and sometimes the hardest part is just that, getting started and setting some goals.
The key thing to know when it comes to budgeting your money is there’s no right or wrong way of doing it. It’s all about finding a method that works for you and then refining that over time so that it becomes a central part of how you manage your money to get closer to your financial goals.
To save you scouring the internet, Booster has compiled some of the different ways a budget can help you handle your money.
The 50/30/20 rule:
This method of budgeting gives you a loose guideline for how much of your income to spend and save. Essentially, the 50/30/20 rule encourages you to allocate your money across three categories:
50% of your income goes to needs. These are your basic living expenses such as your rent, mortgage payments, utilities such as power and internet, food, and transportation costs.
30% of your income goes to wants. These are expenses that allow you to live a life comfortably within your means. These include your morning coffee, monthly subscriptions, gym memberships, Ubers, and anything else you deem ‘fun’ over ‘essential’.
20% of your income is saved and invested. This is all the money you’ll pay your future self. Think money put into a savings account, term deposit, shares or other investments (or if you have high-interest consumer debt, this portion goes to paying off your debt first).
The 50/30/20 rule is great for people who don’t want to spend a lot of time tracking their spending dollar-for-dollar and tells you how much to spend and save in simple dollar terms. Soon you’ll know how much to sock away into your savings account each pay - and future you will love you for it!
The Envelope Method
The Envelope Method, like the name suggests, is a way to track exactly how much money you have in each budget category for the week, fortnight or month by keeping physical cold-hard cash in envelopes.
This system is great for those that want to stop overspending in certain areas. Eating out too much? The envelope method’s cash-based approach means that once the money budgeted for food is gone, it’s gone - unless you dig into another category’s envelope. But isn’t pulling out one envelope of cash at dinner embarrassing enough?
Booster’s budgeting app, mybudgetpal, works in a similar way. You assign a set amount of money to different expenses for your budgeting period, and you should aim to spend under that amount during the period.
However, where the envelope method falls short is that it takes a bit of effort to get your budgeting period spending in cash, and you need to be comfortable with dipping into other ‘want’ categories - think entertainment, clothing, and other non-necessary stuff if you start to fall short. You shouldn’t be dipping into your budget for essentials like rent, groceries, debt repayments, or other essential expenses.
The Zero-Sum Budget
Hold your horses - this isn’t a budget where the aim is to spend ALL of your money! Rather, the aim is to give every dollar a purpose and have it assigned to a category. You no longer have ‘leftover’ money after each period - your money has to go somewhere.
This doesn’t mean go out and spend as much as possible on wants and needs. In a budgeting app like mybudgetpal, you’d aim to make sure all of your income is accounted for across your needs and wants, and any leftover money is given a meaningful purpose. Having money ‘spare’ gives you a false sense of financial security and gives you an opportunity to spend money without thinking. Rather, it should have a clear purpose.
For some, this might mean giving a little more leeway to discretionary spending like entertainment, shopping, or for short term savings like a holiday. For others, this might mean contributing any extra money for their long-term savings, investments, and financial goals.
The Pay Yourself First Model
Building on from the Zero-Sum Budget, the Pay Yourself First model focuses on putting your savings and financial goals first. By putting away money as soon as you get paid, you’re giving your future self a slice of your hard-earned cash before you get a chance to spend it on stuff in the now.
Paying yourself first is ideal for those wondering where their paycheck went at the end of each pay cycle and would rather manage their spending with a ‘rule of thumb’ rather than a strict budget.
Generally, people who use this method save a fixed percentage of their take-home pay; 5% is a great start, 10% is awesome and 20% is simply incredible. I personally drop 20% of my pay into my emergency fund, 10% into my house deposit fund, and squirrel away a few more percent into a Booster managed investment fund - my long term wealth vehicle - and budget the rest appropriately to cover my expenses. I know the exact dollar amounts to put into my emergency fund and investment account to achieve that 33% saving rate and as soon as I drag-and-drop those amounts in my banking app, I can focus on the things that matter to me.
To Sum Up
There’s no ‘one size fits all’ approach when it comes to budgeting. There’s so many different ways to think about your money than the 4 budgeting methods above. The best thing to do is try a few different ways before settling on something that works. It’s all about finding what works for you and your goals.
Thanks, Booster for this awesome content, curious about Booster’s my budget pal - check it out here.
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