Budgeting is essential to take control of your spending. When you have a record of each expense, you can have better insight into your financial condition. However, many of you find it frustrating to track every dime.
When it comes to budgeting, your aim should be to ensure that you are not overspending and saving money for a rainy day and that you do not need to track your every expense.
You all know that you need to categorize all of your expenses to get an idea of how much money you need to cover your regular expenses so you can set a limit for your saving goal.
Many expenses are not fixed, and as a result, your expenses keep fluctuating, affecting your savings goal. So, what can be the best way of budgeting, and how can you make a budget that works for you without tracking all your expenses?
Method 1 – Set up separate accounts with a specific purpose
Open separate accounts for each of the following categories and make sure that they are linked to your payment account for auto-debit.
Daily expenses – transfer 60% of your income. This will include all of your regular expenses like rent, bills, debt payments, and mortgages.
Discretionary expenses – transfer 10% of your income and spend this money the way you like. You can use this money for eating out, parties, and the like.
Savings account for big goals – transfer 10% of your income to this account. This money will help you achieve your big goals like arranging a down payment for your car and a deposit for a mortgage.
Emergency cushion – set aside 10% of your income for a rainy day. This will cover expenses that pop up out of nowhere, and an emergency occurs like you lose your job. Although you can take out loans for the unemployed, they may not be enough to meet all of your current expenses.
Shield – keep 10% of your income in this account. It is named shield because it will help you pay off your credit card bills and other debts if you struggle to keep up with repayments. This can keep you from falling into debt.
Although this budgeting method is more structured and can allow you to stick to your goals because of auto-debit mode, you must be earning a good amount of money because you will be living off only 60% of your income.
It may not fit your financial goals, especially if you have to boost the savings for a mortgage and car expenses quickly.
Method 2 – The balanced money approach
This focuses on the big picture. Unlike method 1, you can divide all of your expenses into three categories. Take a look at them:
Essential expenses – It includes must-have expenses that you cannot live without, for instance, food. You should spend 50% of your money on these expenses. Note that these expenses also include debt payments. If you are to pay off guaranteed loans for the unemployed, they are essential expenses.
Wants – these are discretionary expenses. You can spend 30% of your income on these expenses. These inessential expenses include dining out, night parties, cinemas, vacation, and the like.
Savings – you should set aside 20% of your income. When you have a financial emergency, you can dip into these funds. Note that savings for your mortgage and car may not fit in this category because the size of savings is tiny. This is why experts suggest that it should be a part of your essential expenditure. If you want to increase the size of your savings, you can by cutting back on your wants by 10%.
The best part of this method is it is simple and easy to manage. However, you must have a steady source of income to stick to budgeting.
Method 3 – pay yourself first.
Pay yourself first method allows you to stash away money as soon as you get your paycheque. You link your savings account to your payment account, so you do not have to worry about transferring money yourself.
If you are trying budgeting the first time, this method will work for you. As far as it is about the money you need to pop into your savings account, look over previous months’ statements to get an idea of how much you need for your regular expenses.
If you want to be more specific about your saving, you should look at your goals. For instance, you want to have a new car in the next three years or plan a vacation in the next two years. There is no doubt that it is flexible and straightforward, but it is less structured.
You can use any of the methods mentioned above to make a budget. Identify your goals and needs for budgeting before opting for any methods.
