With budgeting, what works for someone else may not be right for you. Thankfully there are lots of different ways you can approach managing your money depending on what your goals are.
Here are a few budgeting methods you may find useful.
1. Traditional Budgeting
This is probably the most common technique and is a simple one to understand. Basically, you add up all of your expenses for the month such as your rent, any bills you pay and any debt repayments due, then you take that away from your total income from the month.
What you have left you can divide into categories depending on how you want to spend that, it's a good idea to prioritise important things such as your food shopping or your savings before you set aside money for the fun stuff.
The benefits of this method are that it is quite a simple one to follow and allows you to be flexible with how you want to spend your money after you've taken care of your important expenses.
To get a step-by-step guide on how to make a budget using this method, check out our handy article.
2. Proportional Budgeting
To use this method, you work out your total income for the month and divide that up into set proportions based on how you want to spend it.
Proportional budgeting is a good choice for people who want to keep a structured approach and also those who want to prioritise saving.
Two popular examples of proportional budgeting are the '50/30/20' and the '80/20' methods.
Using this method, you split the money you have coming in for the month into three categories:
- 50% for your needs,
- 30% for your wants,
- 20% to go into your savings.
Needs are your essentials, so things like your bills and your rent. Wants are things you enjoy but aren't essential such as new clothes or days out and savings are what you put away each month for the longer term.
So if you had £1000 coming in each month, you'd use £500 to take care of the needs, £300 to spend on your wants and put £200 into your savings.
This method is also known as the 'Pay Yourself First' method because it prioritises saving.
You start by putting 20% of your income away as savings and then with the remaining 80% you are free to decide the best way to approach paying for your expenses.
This simplifies the 50/30/20 model and you adjust it depending on how aggressively you wish to save.
If you had £1000 coming in each month, you'd take £200 out your budget and into your savings and then use the £800 as needed to cover other costs.
3. Reverse Budgeting
If you are saving towards a goal, this might be a good tactic to help you achieve it. In this method, you work out how much money you need to save over a period of time to reach a target.
For example, if you have a holiday abroad planned in 3 months time and you want to save £150 to use as spending money, you will need to save £50 each month to reach that target. So each month you'd deduct £50 from your income and set it aside towards your savings goal. You are then free to spend the remainder of your money between other costs.
4. Zero-Based Budgeting
If you are a fan of detail and like to know where every penny is going, this is the method for you.
This approach involves keeping a record of all of your income and expenses and accounting for every pound. Start at zero and make a note of all of your expenses and other costs until you have a plan for every penny that you will have in income that month.
It can be difficult, particularly if you have costs or income which varies month to month, however, after you have been doing it for a while you will be able to look back at previous months and see if there are areas where you are spending more than you would like and could be saving money.
It is a method that businesses may use to justify their spending and ensure every pound is being spent wisely, however it can work for individuals too.
Get more information about budgeting, saving and money management on our Money & Me page.