3 of the best budgeting methods for financial resilience
Building your financial resilience is all about understanding your money, improving your confidence and feeling empowered to manage your money. A big part of personal finance is budgeting but with thousands of apps and techniques out there we wanted to run through the top three budgeting methods so you can find the best budget planner for you.
The first step in budgeting is understanding your personal goals and targets, once you’ve done this you can decide which budget planner is the best for you. From traditional excel sheets to app-based budgeting software, where you do your budgeting doesn’t matter as long as you’ve picked the right strategy for you.
1. Line item budget
Perhaps one of the most traditional budgeting methods is the line-item budget where every expense is tracked per item. Even though the line-item budget is a little more old school it’s still very effective. Set up a line-item budget by using a spreadsheet and list each one of your expenses or category of expenses over your chosen time period – we’d recommend a month.
Line-item budgeting is a great way to track all your expenditure if you are super disciplined and record every item you can get a great overall picture of spending and you’ll hopefully have clear areas you can cut back on. However, the line-item budget is mostly used to track spending and not build out savings so make sure you build in your own savings line where you record how much you ‘spend’ or put away in savings.
- Easy to set up and use
- A great beginners way to start tracking expenses and understanding finances
- Very time consuming
- Tracks spending very well but don’t necessarily help reach financial goals
- Doesn’t allow for irregular expenses
2. 50/30/20 budget
The 50/30/20 budgeting plan is an intuitive and simple plan to help people reach their financial goals.
The rules for the 50/30/20 budget are simple:
50% of your take-home pay should go towards needs like food, rent or your mortgage. 30% should be devoted to wants like holidays or new clothes. 20% should be put into savings.
The hardest bit about this plan is distinguishing the difference between wants and needs. Needs are those payments that you absolutely can’t give up and are necessary for survival like rent, car payments, food, debt payments or mortgage payments. Half of your income after tax should be able to cover all of these obligations, if not, you might want to consider rethinking your lifestyle, perhaps to a smaller home or cheaper shops.
Wants are the things you spend your money on that aren’t absolutely essential, you could think of them as nice to have. Wants include things like going out for dinner, buying concert tickets or having the latest electronic gadgets. Everything in this bucket is an optional payment, something you can survive without.
Finally, the 20 means allocating 20% of your income after tax on savings and investment. This includes adding money to an emergency fund savings account, investing your money or saving in a Lifetime ISA.
- Keeps your finances very simple and separate
- Includes savings to help build your financial resilience
- Easy to follow for beginners
- Some argue it gives too much disposable income and 30% is actually a bit too much
- As the buckets are quite wide it’s not too specific so can be open to interpretation
- It might not work for someone who needs more help identifying problem areas
3. The 80/20 budget
The 80/20 budgeting method is a simplified 50/30/20 budget. This budget is built on the premise that you pay yourself first and where the rest of the money goes doesn’t really matter. You skim 20% of your savings off your income to save and the rest is yours to spend as you wish.
This method focuses on savings and can also be changed to 60/40 or 70/30. So if you’ve decided you want to save 30% of your income you can set up an automatic direct debit to your savings account then you don’t need to worry about the rest of your income and you can spend as you wish with no budget.
- This method helps you build up your savings quickly
- You don’t have to track all expenses which can be difficult so it simplifies saving
- This won’t work for people who aren’t ready to start prioritising savings
- Doesn’t give much attention to tracking your expenditure which some people may really like
Pick a budget and start putting your learning into practice. Set your goals and your budgeting methods and start your journey towards financial freedom.
We believe every worker across the globe should have financial resilience. We work with your employer to let you track your wages in real-time, stream the money you’ve already earned, learn easy tips to manage your money and save your wages straight from your salary.
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