How hard could it be to save money? Just chalk out a watertight budget and it’s smooth sailing from there, isn’t it? Budgeting may seem easy in your head but once you get down to the brass tacks, it can become a tiresome and confusing exercise. Most people spend years trying to figure out the right budgeting strategy and still find it difficult to plug the holes and save the desired amount of money.
So, how do you really get a firm grip on your finances and expand your savings? Fortunately, there are three proven budget techniques for every type of saver and we will explain each in detail to help you choose the one that works for you.
The zero-sum budget
This strategy advocates that you account for every single dirham every month as money “without a job” is likely to be wasted. In simpler words, you must allocate a purpose to your money to ensure that income minus savings minus expenses equals zero at the end of each month.
Here’s how you can get started:
- Note down your income for each month
- Ascertain how much you wish to save out of that and treat the money as an expense
- Make a list of all regular expenses such as mortgage, rent, bills, etc.
- Make a list of variable expenses, such as groceries, food, entertainment, travel, etc.
- Finally, subtract your savings and expenses from your income and see where you land up
If you are getting a negative number, it means you are overspending and must cut back on your expenditure. If it’s a positive number, you can allocate more money towards your savings or debts.
[Related: Have you tried the ‘Zero-Sum Budget’ yet?]
The 50/20/30 Rule
Popularized by an American senator, this budgeting method is helpful for those who are new to the idea of budgeting. It follows a simple allocation rule. Under this method, you must split your total income in three parts – Needs (50% of your income), Savings (20% of your income) and Wants (30% of your income). Let’s go through each category in detail:
Needs: Set aside half your income for essentials which must comprise all basic needs such as utilities, rent, food, transportation, etc. The 50% limit may seem a bit high, but once you complete the list, you will understand the reason behind it. Also, it’s important to remember that you clearly differentiate between your needs and wants. For instance, while your daily commute to work is a ‘need’, a weekend getaway would be listed as a ‘want’.
Savings: Allocate 20% of your total income for savings, emergency funds, and debt payments. This category should be accounted for after taking care of all the expenses and before you think about self-indulgence.
Wants: Finally, we come to the discretionary category for wants or personal desires. Allocate the remaining 30% on lifestyle spending and miscellaneous luxuries such as vacation, shopping, gifts, gym memberships, dinners, etc.
[Related: The 50/20/30 budgeting rule – Does it work?]
The envelope budgeting system
This is an old-school, cash-only budgeting technique wherein you store money in multiple envelopes, each earmarked for a particular expense such as rent or groceries. Here’s how it works:
- Define all spending categories and set limits for each one of them
- Write the name of every category, such as transport, rent, food, etc., on different envelopes
- Store money in every envelope as per the limits and use the envelope as and when required
So if you have to make a budget for AED 5,o00, here’s how you could allocate it:
- AED 2000 in rent envelope
- AED 1000 in grocery envelope
- AED 700 in transport envelope
- AED 300 in utilities and bills envelope
- AED 500 in personal expenses envelope
- AED 500 in savings envelope
The biggest strength of this strategy is that it forces you to stick to your spending limit as once the envelope is empty, you can no longer spend money on that particular activity until next month. Since most of us are used to debit/credit cards, the strategy can now be conveniently adopted digitally with the help of financial budgeting software based on the envelope budgeting principles.