When I first started falling in love with personal finance, I came across the mantra that has been repeated to death all over the PF world – you need a budget. Problem is, how do you find the best budgeting method for yourself?
If you’re new to this, do know that there are few ways of budgeting, I’m just gonna list the ones I know of:
- Envelope method
- 50/30/20
- Expense tracking
Let’s take a look at these one by one.
Envelope method
This is also referred to as the cash envelope method. Basically you assign buckets or categories and the target amount for each such as transport, groceries etc, then take out the cash allocated for that category, put them in their respective envelopes and label them.
It’s literally cash inside envelopes. The good with this method is, once you spend your allocated budget for that category, you won’t be able to use money meant for other things. It helps with discipline and forces you to spend within your means by restricting your daily spending to cash. Psychologically, feeling the physical cash leaving your hands every time you spend might reinforce good habits and help you to be frugal.
It works even if you don’t use cash that much because you can just track your spending using apps or spreadsheet, though I suspect it won’t be that effective.
Zero-based Budgeting
This is similar to the Envelope system, the only difference being that you budget down to zero. If you earn RM5000, then your spending and investing budget should also equal exactly RM5000.
The main principle is assigning every ringgit you earn a purpose, be it for leisure, paying down debt / loans, food, investment and so on. By assigning every sen a purpose, you don’t leave any chance to frivolous or spur-of-the-moment spending.
A bit extreme, but also useful as you can plan and know exactly where your money is going ahead of time.
50/30/20
This is a very good beginner budget style. Basically you split your spending to 3 categories: Needs, wants, and saving.
50% of your income should go towards needs, 30% towards wants and you save and invest the remaining 20%. You can tweak the numbers around, or what they’re meant to do, but basically you just stick to within these 3 categories and spend within your allocated percentages.
Expense Tracking
The good old way of tracking every single cent of what you spend and then adjusting your spending the following month. Very good for OCD people, not so good for people who just check on their finances once or twice a month.
You can see exactly where your money goes to and the shock and guilt will hopefully force you to make better financial decisions next time. Personally I’ve tried this method the longest, and I kept falling off-track. I’ve since decided to stick to a lesser-known budgeting style. More on that later.
There are hundreds of apps out there that can help you do this, or you can keep it stupid simple and use a spreadsheet. Some apps can even link to your bank accounts so that really speeds up logging all the transactions, though admittedly not all banks are supported. Take your pick.
Could this be the best budgeting method ever?
Alright, everyone knows how important it is to have a budget and stick to it. But how many of us can REALLY create a budget and have the discipline to see it through?
The best budgeting method is the one you can stick to for at least a year.
Here’s what I’ve been practising for years (without even realising) and found works effortlessly for me: it’s called the Anti-Budget.
I’ve tried expense tracking for quite some time and found out that I don’t actually change my spending habits because simply I don’t really care where and how I used my money. What I do care is how much is my net worth is increasing compared to the previous periods and whether I’m hitting my savings rate for this particular month.
Anti-Budget
The main principle at work here is: Paying Yourself First. Here’s how it works:
- Take out a chunk of your salary as soon as it comes in.
- Pay your bills.
- Relax and do whatever you want with the rest
The key thing here is deciding how much to pay yourself. I’d say a minimum 20% is a good starting point. Then you try to increase that amount every month.
Anti-Budget is good for anyone who, like me, prefers a stupid simple way of handling your money as soon as it comes in. Whenever my salary comes in, I just take out 20% automatically, chuck it into my emergency savings / investment accounts and then slowly decide what to do with the rest.
It’s effortless, it’s doable and it’s time-saving.
I find that all the other budgeting methods don’t yield any significant results for me as I still spend without keeping to the bucket rules or 50/30/20 allocations. Practising the anti-budget changed the way I handle money ever since I started working, even before I tried tracking expenses and the various budgeting methods.
Conclusion
Budgeting is highly personal, and one method could work better than the other. The key is to keep trying, and never stop improving the way you handle money.
What’s your budgeting style? Feel free to comment below!