Budgeting: Budgeting methods

There are different approaches to budgeting, though they are all underlined by the same principle of having clear proportions of income allocated to needs, wants and your future.

The traditional budgeting method is referred to as the 50-30-20 rule. This budgeting method suggests that 50% of our income should go on needs, 30% on our wants and 20% on our future – whether that’s savings, investments or rainy day funds. To use this method, once you’ve mapped out your current spending, you might want to take some time to do a quick calculation. Take your income and divide it in half. Compare this amount to the amount you’re currently spending on needs. The difference between the two isn’t necessarily anything to worry about. There’ll be times where these proportions shift, especially during high inflation periods when the cost of essential items increase. This is a guide to show you how much wriggle room you may have in your budget.

If you are spending less than 50% of your income on your needs, that means that you might have extra income to allocate to your wants and saving goals. But it can also identify where you have money in your budget to manage lean periods if they arise. On the flip side, a rising cost of living may well mean that you cannot avoid spending more than 50% of your income on your needs. For example, if electricity bills increase, you’ll spend more on your needs. Will this shortfall come at the expense of non-essential spending or savings? And this is where it is important to have a clear picture of your financial goals. It is also important to consider debt management.

The money freed up once debts are paid off can be allocated to your needs or you might decide to save more. Always keep your financial destination in mind when budgeting. Set yourself goals and keep those goals in focus. Save first. This might mean setting up a direct debit for a manageable amount on your payday, and then working with the rest of your budget for everything else. 

To stay on track with your budget you might find so-called envelope budgeting helpful. Envelope budgeting is when people typically use cash in envelopes to manage their budget, dividing money into spending categories such as groceries, travel and leisure activities. Now, we can’t wholeheartedly recommend using actual envelopes because there’s a security risk of loss or theft. Also, any cash savings you have in envelopes can’t earn interest. There are banks that can help you do something similar to this via apps providing the option to use digital pots or wallets for ringfenced spending. 

There’s no one-size-fits-all approach to budgeting. What matters most is finding a method that works for you and helps you stay focused on your goals. Revisiting your budget if your circumstances change, will help you remain flexible and in control, so you can feel more confident about your money and your future. If you’d like to learn more, watch our video on using digital tools to guide you through automating your spending and saving.

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