4 Ways To Budget

My suggestions of which method will work best depending on your Money Story Type

A plan of how you will use your income and wealth is the foundation on which all your financial objectives are built but there is not just one way to plan. Your relationship with money definitely influences which will be best for you.

1. Proportional Methods

These methods come with a variety of numbers but they all work on the same principle. Taking your NET income (so that is the total of your income after deductions for Income Tax, National Insurance, Student Loan, Pension Contributions and so on, you divide your income into usually 3 broad categories; Essentials or Needs, Discretionary Spending or Wants and Savings/Investments.

50/30/20 or 70/20/10 – allow you to divide your available income into these 3 categories with the 60/40 method being a little more vague.

If you want to consider proportional budgeting, a good place to start is to print out your last 3 months bank statements, and using 3 different coloured highlighter pens (I do love stationery), one for each category of course, highlight which category your current spending falls into and asses which proportions will make the most sense to you.

This can highlight if you are doing too much or too little in each area giving you the opportunity to adjust.

These methods work well for the ARCHITECT and the INNOVATOR

2. Reverse Budget – also known as ‘Pay Yourself First’

This method prioritises savings & investments in a switch to the more traditional method which tends to save whatever – if anything – is left at the end of the month.

By paying your (future) self first, you allocate a % of your income to your savings goals first, and adjust your lifestyle to accommodate this by budgeting for your essentials and discretionary spending after your have paid funds into your savings/investments.

To do this method effectively I would suggest that you do some work on your financial goals first, what are they, what will they cost and when do you want to have achieved them. This will then tell you how much of your net income you need to put aside before spending on ANYTHING else.

If you don’t know how to work out the costs of your goals, have a look at this online course from my financial education company Red Star Education

A word of caution! Be realistic – it might seem ok on paper to forego nights out, holidays, or a new car in favour of getting your holiday home in Antigua next year but sticking to a very restrictive budget is not for everyone. Give yourself the best chance of success by including enough room for you to enjoy life now as well as in the future. Balance is key if you are going to make this method work long term.

This method can work well for the IMPULSIVE and the ENABLER

3. Zero Sum Method

The idea with this method is to give every £ a purpose by allocating every part of your income to a specific expense category – and there are likely to be more of them than with proportional budget methods. Here we will be zooming in on what we want to save, spend and give, and allocating an amount to every category until we have used up our entire income. This can work very well if you have a set income each month but also works when you receive large lump sums of income which have to last over a number of months or even years. In those cases it can help to reduce the feelings of ‘feast & famine’ which often comes when income is received in this way.

This also helps to track your spending, and you might start off doing this frequently – even daily if you really want to get a handle of where your money goes!

Categories might be Household Expenses, Leisure, Health, Social Life, Holidays, Short Trips, Medical/Dental, Beauty/Hair, Clothes, Transport and so on – be as detailed as you like depending on your lifestyle.

Once you’ve got used to tracking your spending, you can see where you might want to reallocate to categories that hold more value for you.

This method works well for the IMPULSIVE and the INNOVATOR

4. Values & Priority Based Method

Instead of considering the actual money, this method looks first at your personal values and priorities and you allocate your income based on these, with the things you value most getting the largest share of your income.

To start with you would want to take some time to consider what your priorities and core values are, and then be able to rank them in order. Then, in a way similar to proportional methods, you would allocate each a % of your income. The higher the priority, the higher allocated amount, moving down a sliding scale until each value or priority has been given some of your income.

This might show up for you where you are using money out of alignment, and can even show up where you might want to make significant change like moving to a smaller house so you have more money for travel for example.

This method allows you to focus on the things and activities which you value and give you joy, rather than focusing on the money.

Budgeting in this way can be great for the ENABLER and the PACIFIST

If you don’t yet know your own Money Story Type, take my assessment now

Whichever method of money management speaks to you, the plan only works if you work with it – that means sticking to it, reviewing it, and being completely honest with yourself if it’s not working.

If your experience is that no matter what method you try, you can’t stick to your financial plans, there maybe something else going on for you and that’s where I can help. Drop me a message now if you would like to explore that