Five budgeting techniques to suit your needs
By Pauline Muindi
| March 22nd 2020
Creating a budget is one of best tools to manage your money wisely and boost your savings. It is, therefore, a shame that many people still avoid creating a budget.
This could be partly blamed on the misconception that a budget is a cut-and-dry one-size-fits-all kind of regimen. However, the truth is that there are many effective techniques of budgeting that one can choose from.
Here are some of the most common budgeting techniques:
The traditional method
Most people only know of the traditional method of budgeting. This is where you draw one column for expenses and another for your income, then calculate the difference.
This shows you how much you have left to save. You can set goals on how much you want to spend for each item or category in your budget to boost your savings. This way of budgeting might work for you if you’re detail-oriented and don’t mind having to calculate and record every expense.
However, the method won’t work so well for “big picture people” who don’t want to invest a lot of time and energy in budgeting. If you are too busy, the traditional method of budgeting might also prove to be tricky for you.
The 50/20/30 budget
For many people, determining what portion of their income to spend and save can be challenging.
If you are just starting out in life or have a young family, all the money you make can easily be gobbled up by bills, groceries and debts. You can easily find yourself in a vicious cycle of overspending, borrowing and being late in paying your bills.
To help people have an easier time budgeting, Elizabeth Warren, a Harvard professor (who later became US Senator) created the 50/20/30 rule of budgeting. She wrote about the method in her book, All Your Worth: The Ultimate Lifetime Money Plan.
The method allocates 50 per cent of your net income to needs, 20 per cent to savings, and 30 per cent to wants.
Needs: This category included all the necessary expenses such as rent or mortgage payments, utility bills, car payments, insurance premiums, minimum debt payments and groceries. This is not the category to include your entertainment expenses such as TV subscription, eating out or the cost of hosting guests. Half of your net income (after tax) should go towards this category. If you realise that you are re spending more than that on your necessary expenses, it is time to either look for ways to boost your income or downsize your lifestyle. This might mean moving to a smaller, less expensive house, going for a more modest car or using public transport, and eating at home more often.
Wants: This category includes all other expenses which aren’t essential such as going out, buying movie tickets, vacations, gym membership, updating your electronic gadgets or shopping for designer clothes. Basically, the expenses in your “wants” category are optional. You can continue using your old smartphone instead of updating to the latest version, you can work out at home instead of paying gym membership, and you don’t have to go on vacation. But these expenses might make your life a little easier and more enjoyable. You should only spend 30 per cent of your net income on them.
Savings: Lastly, 20 per cent of your income should be directed to your saving accounts and investments. You can split the money into different accounts such as emergency fund, investing in stock market, saving for your children’s education and retirement fund. In this category, you can also include extra debt payments - since they reduce the principle and future interest owed, you can count that as savings.
The 80/20 Method
Did the 50/20/30 method sound too confusing for you? You might like the simpler 80/20 method a little better. With this method, you simply direct 20 per cent of your net income into your various saving accounts.
Experts recommended that you put away at least 10-15 per cent of your income for retirement. The remaining 10 per cent can go into your emergency fund, investment account and children’s education fund.
You can freely spend the rest of the money as you please. Of course, you have to make sure that all the necessary expenses are paid before spending on luxuries.
Some people modify this budgeting method to suit their unique needs and circumstances. It can become a 70/30, 60/40, or even 50/50 budget depending on how much you’re willing and able to save.
What makes this method attractive is that you don’t have to keep on calculating every expense. Once you have put away your savings, you don’t have to worry yourself about how you’re spending. This is why some people call it the “Pay Yourself First” method.
The Sub-Savings Account Method
With this method, you open different savings accounts, each with its own purpose. For example, you can open a savings account for buying a car, another for a dream vacation, and another for updating your smartphone.
You set a goal for each account and the timeline to achieve it. For instance, you can decide to save Sh500,000 by March 2021 so you can buy a car in cash. Then you calculate how much you need to put into the account each month to meet this goal.
Using Budgeting Apps
Although budgeting apps are not a budgeting method, they are worth a mention.
If you have a hard time sticking to any of the budgeting methods above, you can always make things easier by using a budgeting app, software or tools. The apps and tools usually have categories to help you track your spending and boost your savings.
You can try apps such as Mint, Personal Capital and Goodbudget among many more.
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