Here we share some insight into the different types of budgets and tips for how to build your own budget.
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In a world and time where finances can feel stretched, mastering budgeting is a vital skill.
Chances are, you've tried budgeting before, but did sticking to it prove a challenge? This guide will explore all things budgeting, empowering you to craft a plan tailored to your needs.
Remember, budgets aren't one-size-fits-all; they're as unique as you are.
Budgeting is important to ensure you to keep on track with your long-term financial goals and offers a range of benefits:
avoiding overdraft charges and late fees, including those pesky credit card fees
identifying weaknesses and protecting yourself from unnecessary spending
directly comparing income and monthly expenses to evaluate your spending
helps you recognise the link between your financial and mental wellbeing, fostering healthier financial habits that positively impact your mind
There’s no single approach when it comes to budgeting strategies, as everyone’s financial situation and goals differ. So, it’s important to tailor these to you - it will make it easier to stick to, and it won’t feel like a constant chore.
The 50/30/20 budget is one of the most popular ratios that many budgeteers use. The ratio is:
50% for essentials - This is your rent/mortgage, food shopping, utilities and other necessary expenses
30% for discretionary expenses - This is for the things you want to buy but aren’t essential. It’s up to you what these are, but they could be new clothes, going to the cinema or TV and music streaming services
20% for savings and debt - This portion is for getting yourself out of debt as soon as possible (just overpayments, though, minimum payments go into the 50%) and increasing your personal savings.
The 50/30/20 budget works well for those whose essential expenses do not equal more than 50% of their income so that they can allocate enough money to discretionary expenses and savings.
If that type of budget doesn’t work for you, there’s no need to worry. You can always adjust this ratio to be sustainable for you. For example, if your ratio currently looks like 60/40/0, you could aim for a 60/30/10 budget.
Reverse budgeting focuses on saving towards your financial goals first; then, your remaining income covers necessities and discretionary spending. Here are the three steps:
Prioritise your financial goals. When you get paid, you start by allocating money to your financial goals like savings, paying off debt, or building an emergency fund.
Cover your needs. Next, you pay all your essentials like rent or mortgage payments, bills, food and other necessities. This ensures that you live comfortably each month.
Enjoy the rest. Any money you have left, after goals and essentials have been covered, can be spent on discretionary expenses – whether that’s clothes, date nights, or spontaneous hobbies.
Reverse budgeting works well for those with the financial freedom to prioritise financial goals over other expenses. However, if your monthly necessities already take up a large portion of your income, this might not be for you.
Developing a personalised budget will help you stay ahead of your financial game. Here at caba, we have a downloadable budget template to help you track your spending and figure out where most of your money goes each month.
Start by listing all sources of income, expenses, and savings or debt repayments:
For income, include your salary, any benefits, contributions from your family, or any other sources of income you may have.
For expenses, this will include any money for outgoings, like rent or mortgage payments, food bills, or childcare etc.
Add in all the realistic values for each item in your list. You can either look back at your last month or take an average across a few months for more accurate budget targets.
Begin categorising and prioritising your spending. We recommend prioritising debt repayments before building your savings pot, as you’ll likely pay more in interest to borrow than you’ll earn in savings. You should also ensure that priority debts, such as energy and rent arrears, are paid before non-priority debts.
Remember, your priorities should reflect logical options, but try to leave room for the things you love where you can.
Choose a budget strategy that works for you. If you aspire to hit the 50/30/20 ratio, check out our handy budgeting tool to see how your spending stacks up.
Now, you can add your budget goals next to each category and item. This will set out your spending for the months to come.
It’s important to remember that budgeting is like a marathon, not a sprint. So, set realistic targets for the next month, and you can build these up or pull them down gradually over time.
Reflect and readjust your budget. Once you’ve given it a good try for a couple of months, you’ll begin to see where it’s working well and perhaps not so well. Then you can adjust to account for any issues.
Your budget should continue to evolve with your life as things change to ensure you feel confident and comfortable sticking to it.
To learn more about budgeting and other personal finance topics from dedicated financial experts, listen to our new podcast – The Cash Conversation.
If you’re struggling with your finances or need further support with your budget, our friendly support officers are here to help. Get in touch today to access help.