So, you’ve decided you want to get your finances together and don’t know where to start? Sounds like you need a budget! For this post I’ll go through a few different types of budgets and the benefits and features of each one.
In the past I’ve had a varied income which can make budgeting hard – but it can be done! Read on and you can find the perfect budget for you.
Preparation
Before you decide on a budget it’s a good idea to write down your income and expenses. It always helps to see it on paper. Remember to include quarterly and annual expenses and be realistic about your expenses. If you spend $50 a week on Uber Eats – write it down!
Zero sum budget
The zero-sum budget is my absolute favourite type of budget – but that’s because I’m a nerd. The idea is you assign a purpose to every dollar. At the end of each week the balance of your account should be zero. This budget is not for the faint at heart. It takes discipline and regular tracking and adjusting. But it isn’t completely inflexible. You simply work out where your money is going for the week and adjust as needed. I generally have a few dollars left at the end of the week, which I transfer into my savings account the evening before my pay hits my account.
Example:
Daniel earns $600 per week. His regular expenses for fuel, food and rent are $300 per week. He decides to split the remaining $300 like so
$100 long-term savings (used for house deposit)
$100 short-term savings (used for wants and periodic bills)
$50 weekly variable expenses
The key to success is to include some money each week for things that pop up. You might get invited to the cinema, have a meal out or have extra expenses like posting a birthday gift to Aunty Beryl.
Daniel is realistic about these things. He puts any extra money towards investing. Good stuff Daniel!
Pros: Limits wasteful spending
Cons: More maintenance and tracking than other budgets
Best for: People with a fairly consistent income
Envelope system
The envelope system is a fairly old fashioned approach to budgeting. It involves putting money into “envelopes” each for a specific purpose. For example – each week you might put $50 into your envelope for fuel, $50 into food and $100 into a holiday fund.
I used to use this system when I was a teenager. I had a little fund for CD’s, one for clothes and I’m fairly certain there were funds allocated for lollies after I blew my first paycheck of $28 at the local lolly shop.
Whilst the phasing out of cash may make this budget a little redundant, there are money management apps like Good Budget that can be used in place of literal envelopes. This system is great for people with an income and expenses that varies from week to week and is a great way to ensure that your expenses are still covered.
Example:
Bobby earns between $300 and $500 per week working casually in a restaurant while he’s studying.
Each week he has fixed expenses of $300 consisting of:
$150 rent
$50 food
$50 loan repayment
$50 fuel
On short weeks he earns enough to cover his fixed expenses.
On weeks when he gets paid extra he puts aside
$100 for bills
$100 for emergencies
$50 for wants
He keeps this all in a savings account and uses his money management app to keep track of the balances of the “envelopes”
Bobby knows what it's all about. Good work Bobby
Pros: makes putting aside money for specific expenses simple
Cons: The decline of cash makes the simple ease of this budget a little redundant
Best for: People with a regular but varied income
50/20/30 Budget
This is a percentage based budget and operates on a simple principle:
50% of your income should go to your needs, such as housing, bills and loan repayments.
30% should go to your wants – such as entertainment, eating out and new clothes
20% should then go to your financial goals which may include investing or saving for the future
Example:
Georgia gets paid $1000
She keeps $500 in her transaction account to take care of her weekly expenses
She transfers $300 into a savings account for her “wants”. In this case she is saving for a holiday, but she also decides to splurge $200 for new boots this week. (You do you Georgia)
She transfers $200 into a long term savings account that she plans to use for a house deposit. Good job Georgia!
The good thing about this type of budget is the percentages can be adapted to suit your budgeting needs. My partner uses this system but in a 30/30/40 ratio (so proud)
Pros: less tracking than other budgets
Cons: doesn’t factor in annual or periodic expenses
Best for: People with a fairly consistent income
Reservoir budget
This is the budget that worked best for me when I had a hugely variable income. When I was self-employed, I would go for long periods without income and then I’d get paid a large lump sum. It made it difficult to stick to a budget, so I devised this system
Example:
Let's imagine there is a musician called Donnelle. Each time Donnelle receives an invoice she sends 10% to a savings account for her annual tax bill, 20% to a savings account for long term savings then transfers the remaining into a third savings account that acts as a “reservoir”. Each week Donnelle would then pay herself a “wage” from the third account to cover weekly expenses. Good thinking Donnelle!
The benefits of using a savings account as a reservoir rather than leaving the money in a transaction account is twofold. You can get a handle on your weekly spending while also maximising the interest earned on that money.
This type of budget would be best suited to someone who is self employed or has an income where they are paid a monthly commission.
Pros: helps smooth income for self-employed or contracted workers
Cons: doesn’t have much use for people with a steady wage
Best for: People with an inconsistent income
I hope you have learned a little about managing your personal finances by the end of this article. If you are new to budgeting you’ve already taken a step in the right direction. With a little management you can make your money work harder for you. If you have saving goals, take a look at our article How to start saving money for some tips!