4 strategies for more effective budgeting

4 strategies for more effective budgeting

Posted on March 22, 2021 at 10am

In recent months, many households have had to tighten their belts due to the economic impact of the coronavirus pandemic. According to a survey reported in the Guardian, more than half of people are having to spend their savings in order to get by.

Perhaps you have found yourself unable to work and have been furloughed? Or perhaps your business has struggled, and you have lost revenue as a result? Whatever the reason, you may have found that you’ve had to budget more carefully in the past few months.

Careful budgeting is a cornerstone of financial stability and is essential for bringing household spending under control. If you aren’t sure of the best way to make your money last, read on to discover four strategies for more effective budgeting.

1. Values-based budgeting

“Values-based” budgeting is one of the simplest methods for managing your household spending. It can be ideal for people who don’t have much experience of budgeting.

This strategy places fewer restrictions on you than other methods, as it acknowledges that you’re only human and sometimes want to spend money on things you enjoy. That’s why this can be particularly useful for getting used to the concept before transitioning to stricter budgeting methods.

Essentially, this strategy involves listing your monthly expenses in order of priority from most to least important. Then, you simply work out how far down the list your income will stretch.

If you’re trying to save money you can then cut back on any of the expenses past this point.

This budgeting strategy can also help to get you used to the idea of making difficult decisions while budgeting, as you may have to choose what to cut back on.

2. Envelope budgeting

“Envelope budgeting” is another great strategy if you need to tighten your spending. It essentially involves setting aside literal envelopes of cash for you to use to cover different areas of household expenses.

Of course, while an effective strategy, it does also require self-discipline to stop yourself from taking money from another envelope!

By looking back through your bank statements, you can work out roughly how much you pay per month for your household expenses. You can then represent these categories, such as food and leisure activities, with separate envelopes.

Once you’ve been paid and have set aside enough money to pay for things like utilities, rent, and savings you can then begin dividing the money out between the envelopes.

If you only have a finite amount of cash, it stops you from overspending since it gives you a hard limit. When an envelope runs out, you will have to wait until the following month.

On the other hand, if you find that you have money left over in an envelope at the end of the month, you can set it aside and make an extra contribution to your savings.

While paying with cash may seem old-fashioned to some people, this method of budgeting is a tried and tested strategy and was the norm in the days before easy-to-access credit.

3. Zero-balance budgeting

“Zero-balance budgeting” is one of the most flexible budgeting strategies there is and makes it easier for you to absorb large expenses.

This budgeting strategy involves making a detailed plan of your monthly costs, and making sure your income and your outgoings add up perfectly to zero so you don’t overspend.

With this method, you can also factor in large future expenses, such as buying gifts for a loved one’s birthday, and organise your budget around that. This strategy can also help you to find areas to cut back on so that you don’t go over your budget on the month they are due.

For example, if you want to buy £300 worth of gifts for your loved ones at Christmas, you can spread this expense across the previous six months, making it much easier to absorb. This gives you more flexibility in your budgeting and means you can still make some large expenses when you need to.

4. 50:30:20 budgeting

The “50:30:20 rule” is a simple and intuitive strategy for managing your budget by dividing your income into three simple categories:

50% Needs

The first and largest category is your needs. This area covers things such as rent or mortgage payments, utilities, groceries, and anything else that you need to live.

Typically, you should be allocating around 50% of your budget to pay for the things in this category. If you find that you’re regularly paying more than this, you may have to reduce your expenses or alter your lifestyle.

For example, you can save money through planning your meals and reducing the amount of food that you waste.

30% Wants

The next category is your wants, which covers all the non-essentials in your life. This includes things like leisure activities, eating out, or other expenses like a Netflix or Disney+ subscription.

While these are not essential, you’re only human and so it’s understandable that you need some non-essentials to make you happy. That’s why it’s recommended that you spend around 30% on this category.

With that in mind, however, this could be a useful source of potential savings if you need to make cuts in your budget.

20% Savings

Once you’ve budgeted for those expenses, you should save the remaining 20%. This can include putting the money into an emergency fund, saving it into an Individual Savings Account, or investing it.

As we discussed in a previous blog, experts recommend keeping an emergency fund of between three- and six-months’ salary to help you absorb financial shocks.

This category can also include debt repayment. While the minimum payment on debts such as credit cards can be considered needs, paying off debts will save you money on interest payments in the future.

Get in touch

If you need help managing your finances to save money, we can help. Email enquiries@prosserknowles.co.uk or request a call back from one of our advisers.

 

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