There are many types of budget, which one should you choose? Personal finance isn’t a one size fits all approach, so you need to know how to make budgeting work for you. Budgeting systems are designed to help you understand and evaluate your relationship with money. Each uses a unique system to help you achieve this goal. Many people try and fail at budgeting because they choose the wrong type of budget. Some people need a very rigid structure and others want to set and forget.
Which Types Of Budget Will Work For You
It can also depend on your circumstances as to what type of budget you need. If you need to pay off debt, you might feel you need a very granular budget; one which accounts for every penny you spend. On the other hand, you might be chasing financial freedom. Therefore, you need a long-term way of saving a high percentage of your income, without getting too zoomed in.
I’ve collated 5 different types of budgets I think can work for a variety of people and situations.You can also take my quiz, to help decide which of these types of budget will be the perfect fit. It will even direct you to an excel template where relevant.
#1. Zero Based Budgeting
Zero-based budgeting is all about accounting for every penny of your income and expenditure. By budgeting this way, you give every pound you earn a purpose. Although it might seem incredibly self-micromanaging, it can actually be very freeing. You may have debts, but you can also ring-fence some of your budget for the things you enjoy. Understanding your money down to the pound is a comprehensive way of managing your money and may help you to feel less stressed about your finances.
This budgeting system is perfect for over-spenders or meticulous planners alike. It clearly separates out where you should or shouldn’t be spending your money, the same goes for saving. One thing many people struggle with is giving their money a purpose, as a result, saving is neglected. Being intentional about every pound or dollar is an efficient way to fix that. One of the best apps for budgeting is called Emma. You can set a budget with a maximum spend by category and it will tell you how much you have left to spend. Read more about Emma by clicking here.
#2 The ’50 / 30 / 20′ Budget
The 50 30 20 system gives you the ability to separate out and focus on three main financial categories: 50% goes to necessities (your needs), 30% to your wants and 20% goes to saving and/or debt repayment. Get my 50/30/20 excel template today.This budget allows you to ring-fence the absolute essentials in life which can help with your psychological wellbeing when it comes to money.
There is also room to treat yourself and make sure you can live for today, whilst you get out from under debt or save for your future. This is a good system for someone who needs structure but not too much. It may also be useful for someone who feels guilty or anxious about spending money. A quarter of the UK workforce is worried about money, so you are not alone. Combining this budget with some other simple actions can help you stop worrying about your money.
#3 The ’80/20′ Budget (The Reverse Budget)
The 80/20 is perhaps more of a rule of thumb than a budget. It uses a powerful money hacks: it puts your savings first. One of my top money rules is to always pay yourself first and not doing it is just one of three tragic money mistakes people make
The 80/20 rule for budgeting means that you put 20% of your take-home pay into your savings. Then you can spend the rest guilt-free. This one of those types of budget that can very simply help you maintain financial stability and grow your wealth. All whilst maintaining a great lifestyle without compromising on your lifestyle.
If you don’t the types of budget that are very time-consuming. This actually is a very hands-off approach to maintaining prosperous financial discipline. As your income grows you can continue to build up a large contribution to your savings, rather than figure out how much money you should save in absolute terms.
By taking 20% off the top and putting it into your savings before you do anything else, you essentially put your budget in reverse. Get my 80/20 excel template and get reverse budgeting today.
#4 Activity-Based Budgeting
The activity-based budget is something I would consider to be somewhere in between zero-based budgeting and the less structured 80/20 budget. In the sense that you can both give your savings a purpose, by saving for something specific. You are not controlling for every expense but directing a percentage of your pay-check to financial or lifestyle goals.
One of my big goals is financial independence, so historically I have saved and invested £400 to £600 a month since I my early 20s. I also want to buy a house so I contribute £200 towards my help to buy ISA. This means that my short, mid, and long-term goals have a specific account for each purpose. Once I achieve these monthly contributions, I am free to spend the money as I please.
#5 The ‘No Budget’ Budget
Life is for living and you need to experience things that make you happy. Many people think that when you decide to save money, you are choosing to do one or the other. While this may seem true for many types of budget, it’s certainly not the case for this style of money management.
The ‘No Budget’ approach to saving money operates on the assumption that unless you stick to a budget that prioritises your needs, you simply won’t be able to keep at it.This budget might sound simple at first but you really do need to prioritise what you value and what you do not. This is so you can focus on spending money in a way that maximises your happiness, whilst mercilessly cutting back on what you do not.
All of which requires building up the skill of conscious spending. For veteran savers, this might sound easy but if you want to start savign then you need to track your expenses. You need to be able to direct your savings and spending around a structure at first. After a while it all becomes an ingrained habit. I use an money app called Snoop to track my spending because there arn’t any budgets as such but there are some great visualisations to help you understand where your money is going.
Why Budgets Are Important
Budgets are important not in terms of simply controlling your money, they help you to form important habits around tracking your spending and directing the flow of your money. Without this positive intent, your money is aimless. However, by structuring money in a way that flows into your savings and investments you can build positive money systems. By taking actions such as paying yourself first, automating your payments, and saving into specific accounts you can make saving effortless. These strategies have helped grow my wealth to over £60,000 and has me on track to retire by 2036.
What Budget Is Right for You
Knowing how to make your type of budget work for you requires you to think about a number of factors:
- Consider how much time and maintenance your budgeting system involves
- How strict will you be with your requirements
- Are you open to using excel spreadsheets?
- Do you want to frequently detail and track your expenses?
- Are you naturally more inclined to save or spend?
Understanding the types of budgets out there is crucial for your personal finances. If you don’t get this right now, then you could get stuck in a loop of repeatedly trying and giving up with budgeting. This could potentially be down to you selecting an inappropriate style of budget for your needs. For example, if you are anxious or often feel guilty about spending money then the 80/20 budget might not be for you. You may feel more inclined to use a zero-based budget where you can make every penny count.
By contrast, if you struggle to save anything at all, then conscious spending might not be a good fit. You might need something a little more structured, such as an Activity-based budget.Remember to take the quiz and find the right type of budget for your personality.
