What is the best way to budget?
There is no right or wrong way to budget; you simply need to find what works best for you.
For me, this changes depending on my mood and financial goals. Some months, I create a detailed all-round budget so that I know exactly where all of my money is going. Other months, I create a financial plan for either my savings or my spending in isolation.
To develop the budgeting style that’s best for you, it’s important to understand the budgeting styles that already exist.
My 3 favourite budgeting styles
The three budgeting styles that I use the most are:
- The “Zero Based-Budgeting” approach
- The “Save First, Spend Later” approach
- The “Spend First, Save Later” approach
These have really helped me make progress towards reaching my financial goals and spend more intentionally over the years. Here is everything you need to know!
Zero Based-Budgeting
This is definitely my favourite approach to budgeting, which is why I use it most often.
To create a zero-based budget, your income minus your expenses must equal zero at the end of every month. In this sense, your “expenses” include your spending, debt payoff, savings, and investments.
Each month, you assign ALL of your income across the above categories until you have £0 left to assign. If you overspend in a certain category, you find money in another to make up for it. This will be a category that you have underspent in.
Below is an example of a simplified zero-based budget for someone taking home £2,000 a month.
The pros of zero-based budgeting
A zero-based budget is great at giving you a detailed overview of your spending. You are made aware of where your money goes each month, where you are overspending and where you can cut back.
This type of budgeting also allows you to easily prioritise specific financial goals each month. For example, if in one month you aim to invest more money, you can increase your income allocation to this category. If you decide to focus on paying off your debt a few months later, you can reduce your investment allocation and increase your debt pay-off allocation.
The cons of zero-based budgeting
Despite being a very useful budgeting style, the zero-based budget is not without flaws.
If your income fluctuates every month, you may find zero-based budgeting rather challenging. This is because it’s hard to match your expenses to your income when you don’t know how much your income will be. One way you can try to overcome this is by budgeting a minimum amount each month. You can then allocate anything extra to a chosen category (e.g. savings).
Another con of zero-based budgeting is that it’s fairly time-consuming. This is because you need a thorough understanding of your income and spending habits to set realistic allocations. Creating your first zero-based budget is therefore likely to take a very long time. Maintaining it can be just as time-consuming too.
Save First, Spend Later
This is a budgeting style that allows you to prioritise your savings. As soon as you receive each paycheck, you decide how much you would like to save and where these savings will go. You pay yourself straight away, then spend whatever money you have left over.
For example, if I earned £4,000 per month (I WISH), I could choose to save £1,500 each month. Of this £1,500, I would contribute £500 to my emergency fund, £500 to my house deposit, and £500 to my stocks and shares ISA. The remaining money I would spend up until my next paycheck.
The pros of saving first and spending later
This approach to budgeting is great if you’re solely focused on saving more money. It’s quicker than zero-based budgeting because you only analyse your savings. For this reason, you do not spend time putting together a spending plan or debt payoff plan. You only have to plan how much you will save and what these savings will go towards.
Also, rather than changing the amount of money that you save each month, you can choose to set a fixed amount. This means that you will always know exactly how much money you are due to save, and how long it will take you to reach each milestone. For example, if you set yourself a goal of saving £500 every month, you know it will take you 6 months to save £3,000.
The cons of saving first and spending later
If you do not have a thorough understanding of your monthly spending habits, this probably isn’t the budget for you.
The “save now, spend later” approach to budgeting fails to give insight into where all your income goes each month. By only focusing on your savings, your spending isn’t tracked. This makes it hard to identify areas where you are overspending and can ultimately save more.
It also isn’t easy to create a realistic saving plan without a true understanding of your spending. This is something I struggled with when I first started using this method. I would save an unrealistic amount of money at the start of each month so that by the middle of the month, I would have to dip into those savings to survive. In the months I didn’t dip, I was going above and beyond to spend as little money as possible. This meant putting aside any means of enjoyment, like chilling with my friends.
It’s good that this budget encourages you to save, but sometimes it can result in you saving too much. It’s therefore important to find the right balance.
Spend First, Save Later
Spending first and saving later is often considered a poor approach to budgeting, but when executed correctly it can be very effective. To ensure this, you need to create a detailed spending plan each month, covering how much money you will spend each day.
This means taking into consideration every activity you’ll take part in during the course of the month, in addition to your fixed or automated bills and subscriptions. You will need to consider everything you will spend money on in order to make a realistic estimate of your total spending each day.
Once you have finished planning your daily spending for the month, you may realise that you will spend more money that month than you had intended to. This is an opportunity for you to find certain days to cut back on your planned spending. You could perhaps do this by reducing your budget for a particular activity or dropping the activity all together.
On the other hand, you may find that you have enough money left over to pay for something you weren’t sure you’d be able to afford. You can add this expense to your spending tracker on the day you think you will buy it.
Below is an example of what a week of daily spending could look like for someone taking home £2000 a month.
The pros of spending first and saving later
A key advantage of the “spend now, save later” approach to budgeting is that it promotes a high level of organisation. This is because it allows you to plan how you spend your money in advance, in addition to your time.
Although some expenses are fixed, you are able to shuffle around your pre-planned daily activities to match the amount you are willing to spend. This style of budgeting is therefore useful in helping you identify areas where you are spending excessive money before you even spend it. You simply need to revise your schedule in advance.
You may also find yourself feeling less guilty when you spend money on the things you enjoy. For example, if I dedicate £50 towards my favourite sushi restaurant, I am more than happy to spend the full amount. This is because it’s a pre-planned expense that I know I can afford as I know exactly how much I will be spending the entire month. This type of budgeting therefore allows you to include a detailed spending plan for the things that make you happy, in addition to your other expenses.
The cons of spending first and saving later
This budgeting style may not be for you if you struggle to plan your personal schedule in advance. The activities that you pre-plan need to be somewhat accurate for this budgeting style to work. Predicting these activities wrong could significantly impact your overall spending for the month, resulting in you spending more money than planned.
Also, the fact that there is no focus on saving money means that you could easily end up saving nothing at the end of the month. This could be because you distribute your whole paycheck across planned spending until there is nothing left. Or, it could be due to the fact that you only save at the end of the month, making unplanned spending very tempting while the money is still in your spending account. Whatever the reason, saving is not prioritised (although you could combat this by saving the leftover money directly after planning your spending).
Finally, this approach to budgeting is rather time-consuming, simply because you need to plan a whole month of time and money ahead. This is a major drawback if you prefer a quick approach to budgeting.