Ultimate Guide To Personal Budgets

Ultimate Guide to Personal Budgets

Saving money can be difficult, particularly living in the high inflationary times we are currently in. With ever increasing house and asset prices, along with soaring interest rates and sky high cost of living there are many people really struggling financially.   

Given this current financial and economic backdrop, people are watching their budgets with even more detail. If you’ve found your financial situation getting worse and haven’t addressed your budget or haven’t really engaged in personal budgeting it might be time to look at this. 

However your financial journey or current financial situation has led you to budgeting, below we go through the ultimate guide to personal budgets. 

What is a personal budget?

A personal budget is where you allocate your income (or savings) to a particular expenses or specific items. This could include allocating a portion of your expenses to rent or your mortgage, allocating a portion of your budget to food or simply allocating to loans and lifestyle spending. How you allocate this doesn’t matter so much as you are earning (and eventually saving) more than you are spending. 

For some people the concept of a personal budget is second nature while for others this can be a totally foreign concept. Some people inherit their parents financial savviness and are born budgeters where others put no thought into their budget and just spend whatever is in their bank account living each day like it’s the last. 

Your experience with budgeting usually comes from childhood financial education, life experiences, financial hardship or a combination of all of these and unless you had parents or family members who instilled financial discipline in you at a young age, it’s likely financial waywardness has brought you to budgeting. 

You can go as deep into setting a budget or you can stay at surface level focusing on having a surplus and making sure all bills are paid, however the more you want to achieve financially or the more financial problems you have the more in depth your budgeting should be.  

While a personal budget should be an important part of your finances, it isn’t the only part. A personal budget is only part of a strong financial plan and this plan should take into account a full financial audit of your situation listing all assets, liabilities, income and finally your expenses or personal budget. As part of this plan you should have listed your financial goals (both long term and short term) and your income and expenses should reflect these goals.

Why set up a personal budget?

For most people it’s a lot easier to reach your financial goals and targets if you have a personal budget set up. Taking this to another level, combining a detailed personal budget with automation of your finances is more likely to lead you to financial success.  

Setting up a personal budget takes away a lot of the guesswork and uncertainty around your finances. It can also take away feelings of fear such as not knowing if you have enough in your account for a bill to be paid or whether you can pay next month’s mortgage or rent. 

Budgeting takes away the guesswork and if you prepare a detailed analysis of your personal finances and have set financial goals, can help you highlight (and eventually close) the gap that is needed to get you from your current position to achieving these financial goals. 

Budgeting also offers peace of mind, particularly when combined with automating your finances. When you are juggling millions of other tasks, it’s easy to forget which bills are coming up or need to be paid. When creating a budget and automating it, this gets handled automatically allowing you to focus on other areas of your life.  

While personal budgets can be both futurised with apps (along with automating your finances) they can also be approached in a more old school cash approach, depending on your technological ability and also your budgeting skills. We’ll touch on these approaches a little later in the article.  

Examples of types of personal budgets

When choosing your preferred budget method it’s important to understand what type of person you are, what type of financial habits you have and how in-depth you need to go. For some they may estimate an amount and that’s the extent of their budgeting and it works for them. 

For others, they like to plan to the last cent where all their money is to go. For some this approach may be too intense, for others it may be right up their alley. 

Again the main point of budgeting is to make sure your funds are being allocated effectively so that you are living an enjoyable life, paying your bills on time and putting money towards savings and investments.   

With these examples nearly all involve you dividing your expenses into three categories, needs (must have staple lifestyle expenses such as housing and food), wants (more discretionary expenses such as entertainment, travel and hobbies) and savings/investing

Some popular personal budget methods and rules include:

Budgets focused more on lifestyle expenditure:

70 20 10 rule

The 70 20 10 budget rule is a bit like the inverse of the 60 30 10 where in this case 70 percent of a person’s income is allocated towards lifestyle expenses, 20 percent of a person’s income is allocated to discretionary (or wants) such as clothing or entertainment while only 10 percent of a person’s income is allocated towards savings and investments. 

While we agree that you do need the ability (if you can afford it) to enjoy your life (particularly if your income is quite low compared to your basic lifestyle expenses), this approach will likely set you back years if you have a relatively high income and are trying to grow your savings and build your investments. 

75 15 10 rule

This personal budget rule is a slight tweak on the 70 20 10 rule where basic and discretionary expenses are combined into one category and savings and investing are split into two categories. In these examples, 75 percent of income is allocated towards your total lifestyle expenses, 15 percent is allocated towards investing and 10 percent is allocated to savings. 

60 20 10 10 rule

The 60 20 10 10 personal budget rule suggests that 60 percent of your income is allocated towards your basic/necessary lifestyle expenses, 20 percent is allocated towards savings and investing, 10 percent to discretionary expenses (or wants such as holidays and hobbies) and 10 percent is allocated to donations or debt repayment. 

50 30 20 rule

This personal budget rule is similar to the above budget rule however it is a little more generous with the discretionary (or wants) allocation of income. In this example 50 percent of income is allocated towards basic lifestyle expenses such as housing or energy, 30 percent is allocated to wants such as entertainment or hobbies while 20 percent is allocated to savings or investing. 

40 30 20 10 rule 

A slight tweak to the above 50 30 20 rule, the 40 30 20 10 personal budget rule suggests that 40 percent of your income is allocated to necessary lifestyle expenses (housing, food), 30 percent of your income is allocated to discretionary expenses (hobbies, travel, entertainment), 20 percent of your income is allocated to savings/investing and 10 percent of your income is allocated to charity and donations. 

20 60 20 rule

The 20 60 20 rule is popular in the leadership and change management space however in the personal budget area, this rule suggests 20 percent of your income is allocated towards your lifestyle necessities, 60 percent is allocated to discretionary lifestyle expenses and 20 percent is allocated to savings and investment. While this may be popular with some people, sticking to this budget rule is likely to set you back many years financially given the high allocation to discretionary spending rather than increasing your savings and investing allocation. 

Budgets focused more on building savings and investments:

60 30 10 rule

Whilst the 60 30 10 rule is very popular in the design decor space, in the personal budgeting area the 60 30 10 rule involves 60% of your income should be saved or invested, 30% of your income should be allocated towards basic living expenses such as food and housing while the last 10% is to be allocated towards more discretionary expenditure such as entertainment or travel.

If you are using this personal budget method it’s highly likely you are well on track to achieve your financial goals and achieve an earlier financial independence timeline. 

60 20 20 rule

The 60 20 20 budget is similar to the above 70 20 10 rule however more money is allocated to  savings and investing rather than basic lifestyle expenses. In this example 60 percent of a person’s income is allocated to basic lifestyle expenses (or needs) such as food and shelter (and debt repayments), 20 percent of a person’s income is allocated to discretionary expenditure (or wants) while 20 percent of a person’s income is 

For those on a lower income this is probably the more acceptable budget rule when trying to live and building savings and investments. As your income increases your 60 percent allocation to basics should drop and more should be allocated to savings and investments.   

40 40 20 rule

While the 40 40 20 rule is popular in marketing and copywriting circles, regarding personal budgeting, this rule allocates 40 percent of your income towards basic lifestyle expenses (needs such as housing and food), 40 percent of your income towards discretionary expenses (wants such as travel and hobbies) and 20 percent of your income allocated to savings and investing. 

To repay debt or to build significant savings and investments we feel this personal budget rule allocates too much income towards discretionary expenses however this may fit your style of budgeting. 

30 30 30 10 rule

While the 30 30 30 10 rule is popular rule amongst the project management and time management communities, the 30 30 30 10 budget rule suggests that 30 percent of your income is allocated to rent or your mortgage, 30 percent of your income is allocated towards basic lifestyle expenses, 30 percent of your income is allocated to savings and investments and 10 percent of your income is allocated to your discretionary style expenses such as hobbies or entertainment.  

Budgets focused more on repaying debt and repairing a poor financial situation:

Lean Budget Method

While this isn’t a method so much as it is a plan to cut your lifestyle expenses to the bone while repaying your debts and giving you basic lifestyle expenditure to allow you to survive. This method is only to be used for a short period of time (max 6 months to 1 year) as it is set up to be a pretty brutal budget method where you live on a bare minimum of lifestyle expenses, you have no discretionary expenses and any surplus money goes towards debt repayment and building an emergency fund. 

The worse your financial situation is, you may need to reach out to a financial counselor for more detailed help with your debts. If you are in a situation like this or your financial situation is rapidly deteriorating do something about this NOW. Whether it is a personal financial audit, taking control of your debt or reaching out to a counselor do this ASAP, the longer you put it off the more pain that is needed to right your financial situation.  

Popular cash budgeting (or “old school”) approaches

Cash Stuffing/Envelope Method

Cash Stuffing (or Envelope Method) is an older budgeting technique which revolves around the concept of  “stuffing” or placing cash into various envelopes, envelopes which represent various parts of your budget. 

The amount of envelopes is up to you, you can have as few or as many as you like though the more successful people using this personal budget approach recommend you have a few envelopes across various areas of your personal budget. 

An example of how the cash stuffing approach works is setting up envelopes for areas of your budget including an envelope for mortgage/rent, an envelope for food, an envelope for entertainment, an envelope for fuel, an envelope for holidays, etc.

Given this approach uses a more outdated budgeting technique of using cash in the hand you would think this wouldn’t be too popular in this electronic banking age, however it is having a resurgence thanks to social media. 

Not only is this technique helping people save, invest and stay on budget, this technique is also making people money as a side hustle with savvy creators making funky “envelopes” or cash stuffing wallets and selling these on websites such as Etsy and Amazon. Social media content creators are also building courses around this method and making significant money from this

Cookie Jar Method

Similar to the above cash stuffing method above, the cookie jar personal budget method involves withdrawing your predetermined amount for lifestyle expenses for the week or month and adding this to your cookie jar. You spend the money in the cookie jar on your expenses such as food until this money runs out. You then wait for your next pay day, withdraw a similar amount and add it to your cookie jar. 

Again this was more popular before ATMs and online banking however there are people who still use this method or a derivative of it. 

Another take on this method is using your cookie jar, piggy bank or other money box item to build up your cash towards a financial goal or item. This could be a family holiday, car or a luxury item you are going to buy as a treat. Whenever you have spare money or loose change this is added to your cookie jar or money box until you have enough to fund your goal expense. Just make sure you have a ledger close by tracking every deposit so you know how much you have saved.  

Other personal budget options

The ‘no’ personal budget

As the name alludes to, this is the budget for people who don’t like or don’t want to budget. With the no personal budget method you don’t track your expenses, you just track your personal bank account and if after say 3 months your bank account is increasing then your finances appear to be on track. This method is suitable for those who are very comfortable with their finances and good at living within their means without needing to track their expenses. 

Zero-based personal budget

This is a twist on some of the options above, however the zero-based personal budget method essentially means every dollar that you spend or is debited from your account is allocated. This method is a more intense way of tracking your budget and is recommended for those who have the time and really need that forensic approach to their finances to improve their current situation. 

Pay yourself first personal budget

This method is another name for some of the personal budget options mentioned above. The pay yourself first personal budget refers to paying yourself money as soon as you get paid to save or invest and any income left over is to be allocated to debt repayment and other lifestyle expenses. 

These are many of the examples of personal budgets and personal budget rules that people follow with a range of percentages that can be changed across all areas. Remember there is no right or wrong way to budget, it’s more about finding a budget that suits your financial goal and your financial situation and will have some allocation to savings and investing.

If you are looking to retire earlier in life then you will need savings and investment that will replace your personal exertion income, this means your budget will be highly skewed towards savings and investing. 

Alternatively you may have longer financial goals along the lines of slow and steady and would like your budget to reflect this. Pick what you think will work for you, monitor this and make any tweaks or changes if you feel the need to or if your financial goals change.

How to set up a personal budget

As we touched on above there are various versions on how to prepare a personal budget, the most important part is to pick the approach that will work for you and your personality. 

Once you’ve picked out your method then it’s time to go through your planned expenditure and allocate the relevant amounts and set this up. Ideally you’ll want to automate as much of your budget as possible and if you need some help in doing this, check out our article on personal automated financial hubs for some ideas or inspiration.

Once you’ve completed this and you have, you will either have a surplus or deficit. If it’s a surplus, great put your personalized automated financial hub in place and start building your savings and investments

If you find you have a deficit then you have two options, either earn more money or cut your expenses. Whilst the easier short term option is to cut expenses unless you are spending bigtime on your lifestyle then it’s not really a viable option for financial prosperity and focus should be on increasing your income. We’ve discussed ways to increase your income previously, ranging from getting a pay rise, to selling household items to setting up a side hustle or business

Once you’ve set this up, let it run. Check in with your finances every week or two in the beginning, a simple check of making sure bills are paid on time and that your bank account isn’t in overdraft or your credit card hasn’t been maxed out should be a sufficient review.

As your level of comfort improves and you start hitting your savings and financial goals, look to incorporate building your investment portfolio to help you get towards any financial independence goals you may have. 

What personal budget type is best for mortgage holders?

This one will depend on a few factors, firstly what country you live in and the type of mortgage that you hold. If you are lucky enough to live in the U.S and could lock in a fixed term 30 year mortgage when mortgage rates were at historical lows at the beginning of 2021 then happy days for you. 

If you are based in a country such as the UK or Australia where variable rate mortgages (or very short term fixed rate mortgages) are commonplace then the recent interest rate rises have hit your purse or wallet hard! 

If you are in the U.S locked in a fixed rate boat it’s likely you could have a 30, 40, 30 personal budget or 40, 30, 30 personal budget approach or possibly something even higher such as 60.20, 20 budget rule or 60, 30, 10 budget rule. It’s also likely you won’t be looking to move house any time soon with interest rates as high as they currently are. 

If you have a floating rate mortgage (or a loan that will soon convert into one) it’s likely you will have to allocate more money to your mortgage affecting either your lifestyle expenditure, your savings/investing or both. In this case you will also want to focus on paying down this non tax deductible debt as soon as you can while hopefully maintaining your savings and investing program.

A more appropriate personal budget type in this scenario is likely 30, 40, 30 or even a 60, 30, 10 personal budget rule. 

What personal budget type is best for those in serious debt?

If you are in serious debt and your finances are a mess then we suggest you first perform a complete financial audit across everything. Figure out where you are at financially, how much money you owe, how much you earn, all assets and liabilities and current debt repayments. 

Once you’ve got a handle on this, you need to prepare a budget that initially will be difficult, such as the lean budget method mentioned above. As discussed this isn’t really a method, it’s basically building a budget that is as lean as possible while allowing you to survive and running this for the short term (max 6 to 12 months). 

Cut your lifestyle expenses to the bare minimum focus on building good financial habits, repaying debt and building an emergency fund and do what you can to earn more income to get on top of your financial situation. 

The worse your financial situation the more detail that should go into tracking your expenses. 

What personal budget type is best for saving and investing?

As mentioned previously, while a stable consistent budget that matches your financial goals is the aim and will speed up the process, look to build your income such as a pay rise, building side hustle or a business. 

For those looking to boost savings and investing and have little to no debt then look at a 70 20 10 personal budget where you put away at least 70 percent of your income for savings and investing while allocating a maximum of 20 percent to basic lifestyle expenses and 10 percent to discretionary expenses. 

You can tweak the 20 and the 10 numbers to go more towards savings and investing if you have the appetite for this. 

If you have a mortgage and or family commitments where you can’t devote as much of your income to savings and investing as you would like, then you may want to look at a 60 20 20 rule or 60 30 10 personal budget option.

What personal budget type is best for FIRE devotees?

The acronym FIRE stands for Financial Independence, Retire Early, and refers to people who are looking to retire or achieve financial independence as soon as they can. As you can imagine those people who have taken to this approach will have a large portion of their income that is allocated towards saving and investing. 

If we are comparing it to one of the personal budget rules on this list it would be something like the 70 20 10 budget rule where 70 percent of a person’s income is allocated to savings and investing, 20 percent is allocated to basic lifestyle expenses (or needs) such as food and shelter while 10 percent of their income is allocated to discretionary expenses such as entertainment  (or wants). More hardcore followers of this movement may even have a higher allocation to saving and investing at the expense of their lifestyle allocation. 

What personal budget type is best for children?

Whilst you can teach them one of the personal budget methods above we suggest you start by teaching them the basics around financial discipline, about budgeting, saving, investing and the potential dangers of personal debt such as credit cards. As they get older and take on part time jobs and their personal expenses increase then they can move towards one of the above personal budget methods. 

What personal budget type is best for students?

In this case it’s likely as a student your income isn’t too high and the majority of your expenses if lifestyle of education costs. Even though income likely isn’t high, that doesn’t mean you shouldn’t be neglecting savings and investing. 

Look for one of the above personal budget methods that fit within your current income/expense profile and hopefully the larger percentage of income goes towards savings and investing. A 60, 30, 10 personal budget might be able to work (particularly if you can boost your income with one of the ideas below) where 60 percent of your income is allocated towards savings and investing, 30 percent is allocated toward basic lifestyle (and education) expenses and 10 percent is allocated to discretionary expenses such as entertainment.    

As a student you might find you have some free time on your hands (particularly during holidays) to take on a part time job (or a 2nd part time job), start a side hustle or even start a small or online business. There are plenty of ideas to find some part time work to boost your income. 

What personal budget type is best for low income earners?

The key here is what your basic lifestyle expenses are as a percentage of your income. In these inflationary and expensive times, it’s likely that simple lifestyle expenses such as food and housing takes up a significant portion of your income. 

If there is any way you can, look to put some money aside for savings and investing or look to spend some of your spare time trying to boost your income. A 60, 20, 20 budget (with 60 percent being allocated to basic lifestyle expenses, 20 percent to discretionary expenses and 20 percent to savings and investing) or 70, 20,10 budget (with 70 percent allocated to basic lifestyle expenses, 20 percent allocated to savings and investment and 10 percent allocated to discretionary expenses) may only be appropriate personal budget strategy (in the short term) for your current circumstances. 

No matter how small the savings or investing amount, get into a routine and as your income increases (and you maintain your budget discipline) your savings and investments will balloon! As mentioned above there are many ways to boost your income from something simple like asking for a payrise to building an online business or website. 

What personal budget type is best for single mothers?

Similar to a student’s situation (particularly if you have younger children) it’s likely your earnings potential is going to be compromised (though hopefully you are receiving child maintenance payments). A large portion of your income will likely be taken up by housing and the other basic lifestyle expenses will take up a good portion of your income. 

It’s likely that a 60, 20, 20 budget rule or 70, 20, 10 rule will be the most appropriate for you, however your main focus should be on providing a safe environment for your children and try your best to build up some savings and/or build your investments.  

What personal budget type is best for retirees?

In an ideal situation as a retiree you have ample retirement assets producing income, you are debt free and are of good health. 

As you are retired your type of budget will be different to those methods mentioned previously as you won’t be investing or using any personal exertion income. You will be living off your 

In the lead up to your retirement we suggest you put together what you feel will be a healthy retirement budget and estimate whether you will have the retirement income streams/assets to be able to fund this in retirement. 

If you do have the funds and assets to cover this great, if not either tweak your retirement budget or extend your worklike to boost your retirement assets and income streams. Also do your in depth research regarding social security benefits you will be able to receive in retirement as this could help you speed up your retirement date with this additional help. 

Popular personal budget apps

  • YNAB (You Need A Budget)

It doesn’t matter what method you choose when putting together your personal budget, just find an approach that works for you and is something you can stick to for the long term. Try a few of these methods out before you select your preferred option. Ask friends and family members who have personal budget experience what method they prefer and what works for them. 

The quicker you find an option and build this as part of your personal finances the quicker you can build a financial system that works for you, either automated or manual depending on your preferences. A personal budget can and should be an important aspect of your overall financial plan and will help you achieve your financial goals and achieve financial prosperity.