Five budget approaches and how they work

Spending is as easy as tapping a card or clicking a button. The hard part? Keeping track.

If you vowed to take control of your money this year, a budget that tracks your income and expenses is essential. A clear picture of your money can help you plan for expenses, avoid unplanned debt and save for goals. Plus, you'll know how much you can spend on the fun parts of life.

Since we all have different incomes, expenses, lifestyles and needs, there is no one-size-fits-all kind of budget. To help you get started, we've broken down five popular budget approaches.

The 50/30/20 budget

Like diets, budgets often start with optimistic intentions but fall to the wayside because they are over-ambitious and too complicated. The 50-30-20 budget makes it simple. 

According to the 50/30/20 rule:

Fifty per cent of your salary goes towards essential 'needs' like rent, utilities, food and transportation.

Thirty per cent pays the 'wants' in your life, like streaming subscriptions, dinners out, movie tickets, gym memberships and new shoes. We enjoy these things, but we could live without them if needed. 

Twenty per cent should go towards savings for big goals, like a house deposit, wedding, new car or paying off debt.

While not appropriate for all income brackets, this approach enables you to pay your bills, grow your savings, and still have money to spend on fun, non-essential things.

Who suits this budget? Anyone feeling overwhelmed by the thought of budgeting.

Zero-sum budgeting

Do you get to the end of the month and wonder where all your money has gone? The budgeting method requires you to 'give every dollar a job' by allocating it to a specific type of expense, like bills, an emergency fund, holiday spending, and so on, so there are zero dollars left over every month.

If you earn $4,700 per month, all line items in your budget should add up to $4,700, leaving you with $0 at the end of the month.

This way, all bills are accounted for, as well as non-essential spending and saving, rather than waiting to see how much money you have left by the end of the month. Since every dollar is given a job, zero-sum budgeting forces you to scrutinise your spending habits and help you identify where you overspend. 

Who suits this budget? People who thrive on having total control.

Bucket budgeting

When all of your money is in one place as one lump sum, it's harder to track your spending. Bucket budgeting is the Barefoot Investor's modern-day version of 'envelope budgeting' when people store their cash in separate, specially-marked envelopes to cover different expenses. 

His updated method involves creating multiple savings accounts in your banking app for different purposes, like bills, housing, spending and saving. Once a bucket is empty, you cannot dip into another to refill it. Any money left over gets deposited into a high-interest savings account to earn interest while it sits there.

Creating buckets in your banking app is a visual way of gauging your monthly expenses and determining whether you're overspending in specific categories. Plus, it's super satisfying balancing your money every month.

Who suits this budget? Hands-on, visual types.

Pay-yourself-first budgeting

Do you want to start a budget but are stuck on getting started? 'Paying yourself first' might be the psychological hack you need.

To make this system work, as soon as income lands in your account, you transfer a portion directly into your savings. Once you've paid 'yourself', you can use the rest to pay expenses like housing, bills and discretionary items. Also called the 'reverse budget', this approach prioritises saving.

Who suits this budget? People who prefer a hands-off approach.

Line-item budget

As the name suggests, a line-item budget involves listing all your expenses in a spreadsheet and grouping related costs together. Once you've identified your typical ongoing expenses, you can set yourself a spending goal for each category and keep track of your progress. Plus, you can compare your spending year on year.

ASIC offers a handy Excel spreadsheet template on its MoneySmart website to help get you started.  Download it for free.

Who suits this budget? Detail-oriented people.

Final words

Think of a budget as a game plan for your money that sets you up for success. The trick is to start with small goals and start today. Budgeting is kind of like a muscle; the sooner you start, the stronger you get. 

And lastly: The best budget is the one you'll stick with.