In recent months, millions of people have felt the impact of the lockdown caused by the pandemic and the subsequent recession.
Perhaps you work in a sector that has been affected and you have been furloughed? Or perhaps your business has struggled, and your revenue has decreased?
Whatever the case, you may have found that you’ve had to budget more carefully. Careful budgeting is the cornerstone of financial planning and essential if you want to get your household spending under control.
If you’ve considered budgeting but don’t know where to start, read on for four strategies that can help you to budget more effectively.
1. Values-based budgeting
Values-based budgeting is the simplest strategy for managing your budget and can be ideal for people who are new to budgeting. It can be a good introduction to budgeting before transitioning into a stricter form of it to better manage your finances.
Values-based budgeting places fewer restrictions on you, as it takes into account that you’re only human and sometimes want to spend money doing things you enjoy.
This strategy involves listing your monthly expenses from most to least important and seeing how far down the list your income will stretch. If you’re trying to save money, cut back on the ones past this point.
This budgeting strategy can also help to get you used to the idea of making difficult decisions while budgeting. For example, weighing up the benefits utility of a new pair of shoes against a relaxing night out at a restaurant.
2. Envelope budgeting
Envelope budgeting is a great strategy to save money and cut down on spending when you need to tighten your finances.
This strategy involves literally setting aside envelopes of cash to be used to cover different categories of your household expenses. While it is an effective strategy, it also requires self-discipline to stop yourself from taking money from another envelope.
Using bank statements, you can work out roughly how much you pay per month for your household expenses. These categories, such as food or leisure activities, are each represented by an envelope.
After you’ve been paid and have set aside money for things like utilities, rent, and savings, you can begin dividing the money out between the envelopes.
Having a finite amount of cash stops you from overspending because it sets a hard limit on the amount you can spend. When the envelope runs out, you have to wait until the next 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 put this money aside and make an additional contribution to your savings.
Although paying with cash might seem old-fashioned to some people, this style of budgeting is a tried and tested method of limiting how much you spend 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 of the budgeting strategies available and makes it easier to absorb large expenses.
This budgeting strategy involves making a detailed plan of your expenses, making sure your income minus your household expenses add up perfectly to zero so you don’t overspend.
You can also factor in large future expenses, such as a holiday or buying gifts for someone’s birthday, and organise your budget around that. When big expenses are on the horizon, this strategy can help you find areas to cut back on so that you don’t go over your budget in the month they are due.
For example, if you want to get £600 worth of gifts for your family at Christmas, you can spread this expense across the other months of the year. This gives you more flexibility in your budgeting and makes absorbing large expenses easier.
4. 50-30-20 budgeting
The 50-30-20 rule is a simple and intuitive strategy for managing your budget by dividing up your after-tax income into three categories.
The first category is your needs. This area covers things such as rent or mortgage payments, utilities, groceries, and anything else you need to live.
A good rule of thumb is to allocate 50% of your budget to pay for things in this category. If you are paying more than that for your needs, you may have to cut down your expenses or alter your lifestyle. For example, you can save money on food by planning your meals and reducing the amount of food you waste.
The second category is your wants. This covers all the non-essentials in your life, such as leisure activities, eating out, or things like a Netflix subscription.
You can spend the next 30% of your budget on these non-essentials. This category can be a good source of potential savings, if you need to make cuts to your budget.
Save the remaining 20%. This can include putting money into an emergency fund, saving it into an ISA (Individual Savings Account), or investing it. It is generally recommended that you have between three- and six-months’ worth of savings in case disaster should strike.
This category can also include debt repayment. While the minimum payment on things 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’re struggling to budget, or you need help getting your finances in order, we can help. To find out more about managing your finances, please get in touch. Email firstname.lastname@example.org or call (0161) 8080200.