If you’re looking for a budgeting system and have been reading about it for a while, you know choosing the right budgeting method can be tricky.
The difficulty lies in a variety of choices available.
When you have too many options, you will most likely end up not choosing at all.
It’s a fear of thinking that you might have made the wrong choice. Or you’re just overwhelmed and uncertain.
But remember, personal finance is personal.
None of the budgeting methods mentioned here is right or wrong.
What’s important is you choose one, see how it goes and change things up, if necessary.
I suggest you choose the one that makes the most sense to you and your circumstance.
For example, some give general advice of having $1,000 emergency fund.
But if you’re single who rents a house and doesn’t drive, it’s highly unlikely that you have costs such as car maintenance or home improvement, hence needing less rainy day fund.
Or if you aim to save up 6 months’ safety net as an emergency, you’ll likely need more than $1,000.
So don’t think any of the budgeting methods are set in stone.
That being said, let’s explore the budgeting options.
The Best Budgeting System: A Beginner’s Guide
1. Pay Yourself First Budget (Highly Recommended)
The author of a timeless personal finance book, The Richest Man in Babylon, George S. Clason, came up with the phrase “Pay Yourself First”.
This is my favourite budget method because it’s the simplest and most straightforward.
When you receive a paycheck, before you start paying for anything else, you pay for yourself first by saving and investing it.
The above author recommends keeping 10% of your earnings and 20% to pay off debt.
The remaining 70% covers all your expenses.
If you don’t have debt, increase the amount you pay for yourself first to 30%.
The best way of doing it is by setting up an automatic payment so that you don’t get tempted to spend any of 30% and learn to live on 70%.
This budgeting method is ideal for you:
- If you’re a ballpark kind of person, not particularly meticulous and organised.
- You don’t fancy going through and record every penny you spend.
- Budgeting feels like too much work and time-consuming.
- Budgeting sounds awfully boring.
- You want to enjoy some flexibility between your needs and wants (within the remaining 70%!).
Here’s an example.
Let’s say your take-home pay is $4,500.
|Take-Home Pay||Save and Invest||Debt Pay Off||Expenses|
Debt takes a bigger portion than save and invest because trying to accumulate money when you have high-interest consumer debt isn’t smart.
But debt shouldn’t also stop you from preparing for your future, hence paying for yourself 10% at the minimum.
It gives you a sense of achievement and security as you build your savings pot whilst paying down the debt.
If you have no debt or a small debt, that’s even better.
You can increase the amount you keep for yourself as long as the total for save and invest and debt pay off remains 30%.
From the same example, let’s say $400 (not $900) is going towards paying off your loan.
You can bump up your save and invest by $500.
Now your Pay for Yourself First Budget looks like this.
|Take-Home Pay||Save and Invest||Debt Pay Off||Expenses|
Notice that the percentage of expenses (70%) hasn’t changed.
You might save and invest for a variety of reasons.
- Your retirement
- Children’s education
- A new car
- Home improvement and so on.
2. Cash Envelop Budget (Recommended)
This budgeting method requires you to be more hand-on in that you’ll be carrying cash with you (gasp! ha).
How it works is you withdraw a set amount from a cash machine that’ll last you for a month.
Allocate it to each envelope for your budget, say, $300 for food and $50 entertainment (cinema).
The idea is once the money is gone, that’s it.
You can’t refill your envelope.
If you splashed on grocery by week 3, you aren’t allowed to withdraw more cash.
It was fun, but I can only recommend it if you have one or two major expenses.
Imagin creating 3 or 4 envelopes.
It’s too cumbersome and feels primitive when there’s a better alternative.
But it’s effective:
- If you’re struggling with overspending.
- You find a credit card is the bane of your existence. ha.
- You’d like to be more mindful with the way you spend the money.
- Want to break off the bad money habits.
We’re so accustomed to using a card.
It’s difficult to feel the actual money leaving you.
When you pay with cash though, you see it when you hand it over to a cashier and see your wallet getting lighter.
You’re likely more reluctant to spend money when you use cash.
It forces you to think hard and stop you spending the dwindling cash on the unnecessary stuff.
3. Zero-Based Budget (Recommended)
If you had hated budgeting before you started, zero-based budgeting method won’t make you feel any better about it!
It’s one of the most time-consuming budgeting methods.
But if you’d like to go over areas in which you spend your money with a fine-tooth comb, zero-based budget is perfect for you.
Zero-Budget means when you subtract your total expenses from your income, you’re left with 0 balance.
$4,500 (income) – $4,500 (expenses) = 0
Of course, you wouldn’t spend the whole of $4,500 on all your expenses.
The idea is you give a job to every penny and assign it accordingly.
The best approach to allocate every penny is to look at your previous month spending.
Use it as your baseline to allocate money to the right places.
You’ll love this budget method:
- If you’re a highly organised and meticulous person.
- You love budgeting.
- You want to scrutinise your expenses down to the penny.
It may take more work than the first two budget methods, but it’s an effective way of identifying where you overspend and allocate it to the right place.
For instance, if you find an excessive amount of money spent eating out on the previous month after receiving a bonus, you won’t make the same mistake.
You identify mistakes and allocate the extra income in future to the right place such as save and invest or debt pay off.
4. The 50/30/20 Budget (Recommended)
The 50/20/30 budget is similar to Pay Yourself First Budget in that it’s percentage-based budget.
The crucial difference between the two is the former is bottom up and the latter top-down.
The 50/20/30 divides your budget into three major categories.
You work out your essential expenses such as mortgage/rent, water, electricity, internet and foods and allocate 50% of your income to those essentials.
20% to your financial obligations such as savings and debt and 30% to your wants, non-essential expenses such as entertainment, takeaway and eating out.
Your wants and needs can be subjective.
To be effective, it requires you to be strict with your criteria and follow through, but it can easily lead you to overspend if you aren’t careful.
The 50/20/30 budget will make you feel more restricted compared to Pay for Yourself First budget.
Bonus: A Bare-Bones Budget
I recommend this budget only if your finance is really bad. So bad it wakes you in the middle of the night.
As the name implies, a bare-bones budget means you strip your expenses down to the essential to survive and pay off debt.
I’ve started with this, so I know it works.
A bare-bones budget can help you reset your finance and resume your debt pay off journey with a clear head, not in panic and stress.
If you’re a complete beginner to budgeting and would like to start your financial journey to save or/and get out of debt, I recommend Pay for Yourself First budget.
It’s super easy with no complex or stress.
If you’re struggling with spending habits, however, cash envelop budget will make a drastic difference in the way you spend money.
It’s well worth a try, even for a month.
If you want tight control over your finance and don’t mind spending a fair amount of time budgeting, accounting for every penny, go for the zero-based budget.
The 50/20/30 budget is the least favourite for me.
I like the top-down idea of Pay for Yourself First, putting your future first while not getting bogged down with your wants and needs.
You can learn all about Pay for Yourself First from this timeless best seller.
No matter which budget method you choose, budgeting is a vital tool to take control of your finances, saving money, paying off debt, staying out of debt and building wealth.
A budget will keep you on the straight and narrow and enable you to create a financially independent life.
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