Budgeting in its simplest form is the process of looking at how much money you have coming in and going out each month, so you can prioritise your spending and make a plan for your money.
There are numerous ways to work out a budget, but here we’ve gathered together some of those that you might not have heard of.
50-20-30
The 50-20-30 budgeting rule has been around for years, but saw renewed popularity in 2005 when it appeared in Elizabeth Warren’s book ‘All Your Worth: The Ultimate Lifetime Money Plan’. It’s a really simple way of budgeting that’s fairly intuitive so you might already be using it without even knowing.
With the 50-20-30 rule you divide your income after tax between three pots:
- 50% goes towards your essential bills: This should cover things like housing, such as rent or mortgage payments, energy and food. What each of us views as a necessity will vary from person to person, so it could also include things like your phone bill, travel costs or medical expenses if you have them. If your current expenses in this area exceed 50% it’s worth considering whether there is anywhere you can cut back. Read our guide How to save money – 21 money saving tips for some ideas on ways you might be able to reduce your spending.
- 20% goes towards savings or debts. Two of the best things you can do to build your financial resilience is to pay down debts and build an emergency fund, so try not to reduce the amount you dedicate to these goals if at all possible. How you choose to split this percentage between savings and debts is entirely up to you.
- 30% can be spent on whatever else you want. This could be anything from a meal out with friends to your Netflix subscription, or during these difficult times, you may need it simply to cover rising living costs.
The beauty of this budget is its simplicity, and it can work fantastically if you automate your banking, either through standing orders or direct debits, so your income is split into these three pots as soon as you get paid.
Zero based budgeting
Zero based budgeting is something that is often used by companies and businesses when managing their accounts, but it can work just as well for your personal finances.
The idea with zero based budgeting is that you start each month with nothing in your bank and you end it in the same way. This doesn’t mean that you’ve got no income, but rather that you’ve balanced your income and outgoings perfectly. In practice this means when you get paid, you allocate every single penny you earn to a specific purpose so that by the end of the month, you’ll be back to zero.
It might sound a little complicated, and while it takes a little more thought than the 50-20-30 budget, it’s actually pretty straightforward.
To start a zero based budget, you’ll need to take your monthly income and divide it between a range of set expenses. These expenses are whatever you spend your money on, which will usually include things like housing costs, bills, savings, food and eating out. It’s entirely up to you how you allocate your money, and you can go as broad or as granular as you like with the detail, but the goal is the same, at the end of each month, you want your main bank account to have £0 in it so you can start afresh.
To give an example, if you earn £2,000 a month after tax, you might decide to allocate it in the following way:
Mortgage / Rent | £800 |
Gas | £80 |
Electric | £80 |
Other bills | £200 |
Food | £200 |
Savings | £200 |
Debt payments | £100 |
Eating Out | £60 |
Entertainment | £100 |
Car / travel costs | £80 |
Emergency fund | £100 |
Total | £2,000 |
This style of budgeting can be really useful for understanding how you actually use your money, and you can adapt it to suit your own lifestyle. For example, if you set a budget and realise at the end of the month that one of your pots still has a lot left in it, then you can think about putting less into that pot next month and more into another.
Some banks and apps will allow you to set this all up digitally, with providers such as Monzo allowing you to detail how much you’d like to spend in each category, which you can then track throughout the month. You can read about this and other money management apps in our guide 19 top money-saving apps.
Cash budgeting
Cash budgeting is pretty similar to zero based budgeting, except you’ll only use cash, rather than card for your spending. This style of budgeting can be great if you’re a visual person, or if spending on your cards, for example for online shopping, makes it a little too easy for you to get carried away.
With cash budgeting, you physically manage your money by withdrawing cash and keeping separate pots or envelopes for each of your expense areas.
If you already have direct debits and standing orders for certain things like your rent, mortgage, and energy bills, you’ll probably still want to carry on with these, and use the cash budget for everything else.
The theory is that by actually holding the cash and seeing the amount you’re spending, it can help to deter unnecessary purchases. You won’t have the option to overspend as you might if using a debit or credit card, as once the money’s gone, it’s gone. However, the downside is that keeping too much cash lying around can be risky, and you won’t earn any interest on this money either.
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No budget
While no budget is certainly not something you might expect to see on this list, having no budget at all actually works for some people, and could be a useful method for you if traditional budgeting methods seem a bit too much.
The no budget method really only looks at two broad figures: what you bring home and what you have to pay, with the idea being that you bring home more than you spend. So if you make a lot more money than you usually spend, have few or no debts and have a reasonable level of self discipline, this could be an option worth considering.
Of course, the no budget method won’t suit everyone, and unless you’re careful, you could find that you spend your money faster than anticipated and might have to borrow to cover your costs.
One thing that can be useful to minimise the risk of spending your money too quickly is to arrange for bills, housing costs and any other direct debits to be paid as soon as you get paid, rather than later in the month so you know that they’re sorted. It’s also a good idea to set aside a small amount each month in savings if you’re able to, so that you can build an emergency savings pot.
Value based budgeting
Unlike more traditional budgeting methods, which typically look at cutting back, or saving up for expensive items, value based budgeting reframes your spending to see the value certain things bring to your life.
Value based budgeting asks you to consider what really matters to you and to think about how your money can support your values. For example, if the things you really value are family, safety and security, your local community and the environment, you might decide to categorise your spending along the following lines, allocating a set amount to each every month:
Value | Budget item |
Family | Savings |
Eating out | |
Holiday fund | |
Entertainment | |
Safety and security | Housing costs |
Insurance | |
Emergency fund | |
Local community | Food shopping at local businesses |
Charitable donations | |
The environment | Making your home more energy efficient |
Saving up for an electric car |
Thinking about aligning your spending to your values in this way might even change the way you spend your money, whether that involves choosing to shop locally or switching to a green energy tariff.
This way of budgeting isn’t something that will work for everyone, but you might find that you can build certain elements of it into your financial planning. If you have something you feel passionate about, whether that’s saving up to do a pottery course or making regular donations to your favourite charity, channelling a little money into it can be a good motivator.
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