Take Control Of Your Cash With These Budgeting Basics

Do you often feel confused at the end of each month, wondering where all your money went? You could have sworn you had more money left over! Well, it is easy to lose track of your cash. That’s where budgeting comes in. Having a budget helps you understand your income and expenses and gives you a clearer picture of where all your money is going. It helps you take control of your finances as you’ll be able to make conscious decisions to change and improve your financial situation. Whether you are saving for a big purchase like a house, or for a trip to Japan to see the Sakuras in full bloom, a well-structured budget can help turn these goals a reality. So… which budgeting method should you use? Well, that depends on your own financial goals, lifestyle, and personal preference. Here are three common budgeting methods to get you started. Try one out and see if it works for you!

The 50/30/20 method

The 50/30/20 method is perhaps one of the more popular budgeting methods due to its simplicity. Here, you allocate 50% of your income towards your needs, 30% of your income goes towards your wants, and 20% of your income is set aside for your savings. Needs are essential expenses that you must pay, such as housing costs (rent), utilities (electricity and water), groceries, transportation, insurance, and medical expenses. Wants on the other hand are important but non-essential expenses such as entertainment, dining out, travel, and entertainment. The 20% of your income allocated to savings should only be used to improve your financial health, such as contributing to your retirement and/or emergency fund.   

Pros

This method is easy to understand and implement. And, as there is a specific percentage for each category, it ensures that there is a healthy balance between meeting your needs, satisfying your wants, and securing your financial future. The best part is that this method doesn’t require you to track your expenses meticulously. And if you are reaaaally lazy, you can even automate your payments and deductions, so you won’t have to do it manually.   

Cons

Unfortunately, this method might not be for everyone. The rigid percentages might not suit some people, especially those with lower incomes or who have higher debt. For example, a fresh grad who has student loan debt and is starting at the bottom rung of the income ladder may have to allocate a bigger percentage of their income towards paying off their loan. Also, the 50/30/20 method is oversimplified and overlooks factors such as varying income and fluctuating expenses.

Zero-based budgeting

In zero-based budgeting, every dollar has a specific purpose. Your goal is to allocate each dollar you earn in advance until you have allocated all your income. For example, if you earn S$3,000/month, you have to allocate your entire income into different expense categories such as savings, debt repayment, bills, insurance, and investments until you are left with S$0.  

Pros

As you know where every dollar is going, this method gives you complete control and awareness over your finances. And as there aren’t any set percentages and figures, it offers more flexibility to allocate funds according to your own priorities, unlike the 50/30/20 budgeting method.  

Cons

The biggest drawback of the zero-based budgeting method is that it can be very time consuming to set up. You’ll have to track your expenses, allocate your funds and keep rejigging your budget based on your spending. This may be too much administration for busy individuals.

Pay yourself first

As the name suggests, this method encourages you to set aside money for your savings and investments first, before spending on other expenses. This can really benefit those who have irregular income such as freelancers and part-timers as it ensures that you are saving every month, irrespective of how much you make.   

Pros

By prioritising your savings and investments, you are ensuring that there will always be money set aside for your future self and when there are emergency situations. Early and regular contributions towards your savings also aids in wealth building over time, especially after you factor in compound interest.   

Cons

Allocating a portion of your income to savings first can reduce the amount of money you’ll have left for spending. This may restrict your options for spending on other areas like housing, as well as fun stuff such as travel.

So, which one should you choose?

With so many budgeting methods to choose from, the big question now is – which one should you go for? To determine the best method for you, think about your financial goals and spending habits. Do you prefer saving more, paying off your debt as quickly as possible, or is it important that you maintain a certain lifestyle? If you are someone who likes planning and knowing where every dollar goes, the zero-based budgeting method may work for you. However, if you are not very disciplined with your spending and tend to overspend leaving little left for savings, you might want to try paying yourself first. Or, if you are new to budgeting and unsure of where to start, the 50/30/20 rule is a good option. If you still have no idea which option to use, try experimenting with the different methods for a month or two to see which one suits you best. However, the most important thing is that you get started!