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 yo