There’re many different budgeting methods out there. Which one you choose to use depends entirely on your particular financial needs and goals. There really is no ‘best’ way to budget, but our goal at 22seven is to help you budget better and take back control of your money.
Some people like the idea of spreadsheets, graphs, precise planning and making sure that each cent is accounted over the long-term. This could be considered a more traditional approach to budgeting, where each cent is given a specific purpose. A more approachable method that’s been used in households for decades is the envelope method, where you physically keep fixed amounts of cash in different envelopes, each of which is used for specific expenses throughout the month.
In an increasingly cashless world though, proportional budgeting is by far one of the more popular budgeting methods. Using this method, your spending is divided into different groups based on specific percentages (i.e. proportions). You then make sure that your monthly spending is as close as possible to these target percentages you’ve set for yourself.
We’ve talked a bit about proportional budgeting before, specifically referring to the 50/30/20 rule – the most popular proportional budgeting rule. Using these proportions, you can divide your planned monthly spending into needs (50%), wants (30%) and savings (20%). This is normally how this particular rule is interpreted, focusing on the distinction between needs and wants.
Another way of interpreting this proportional budgeting rule is to make a distinction between fixed expenses (50%), variable expenses (30%), and investment/savings/debt payments (20%). In 22seven, this would be the most appropriate way to interpret the 50/30/20 rule as you can set your targets based on 22seven’s spending groups.
- Recurring (the yellow spending group): fixed expenses that tend to be the same amount every month, e.g. rent/mortgage payments, utilities, insurance payments, cellphone contract payments, bank account fees, and subscriptions.
- Day-to-day (the blue spending group): variable expenses that tend to differ from month to month, e.g. groceries, take-outs, personal care items, entertainment items/activities, transport & fuel costs.
- Invest-save-repay (the purple spending group): expenses, either variable or fixed, that pay off long-term debt or contribute to savings and/or investment accounts.
If you want to cut down your monthly costs, a good place to start is to make small cuts here and there in your variable/day-to-day spending. Larger cuts will require you to reorganise your priorities in the fixed/recurring spending group. Finding ways to reduce your fixed and variable costs, no matter how small, is an effective way of saving more and spending less. Over time, you may find that extra boost you need to reach that comfortable 20% invest-save-repay target.
Is saving 20% of your income a bit too steep for you? Well, you aren’t alone. According to the Old Mutual Savings and Investment Monitor, South Africa’s savings rates within the working population has held firm at around 15% of income over the last 3 years. Across the entire population though, the gross savings rate is closer to a disappointing 3% of income! Unfortunately, this problem has been compounded over time by unstable income, poor saving & spending habits, and low awareness of savings & investment vehicles.
It’s absolutely crucial that at least something is saved for your future. Always aim to pay yourself first before spending on everything else! If saving 20% is too difficult, then first aim to save 5-10% of your income and work your way up to 20% from there. You could use that other 10-15% to pay off larger debts or to pay for tricky unplanned expenses, i.e. exceptions (the red spending group). If you do have exceptions to pay for, you can always offset your targets in order to cover these types of expenses. Give yourself some wiggle room and you can avoid new debt, while still saving a little bit.
Are your saving and spending targets realistic though? There’s no point being in denial over your financial state or setting yourself targets that you cannot possibly achieve. Maybe you have to work with a 55/25/20 split? Perhaps you’re living mostly paycheck-to-paycheck and a 60/35/5 split is more appropriate? Are you possibly earning enough to make a 40/20/40 split where you can save almost half of your monthly income?
These ‘rules’ are clear and tangible targets that guide your behaviour. Make sure you are as close as possible to the target proportions you set and keep at it each month! As you come to terms with setting a monthly budget and learning how to follow it over a longer period of time, you can always tweak your targets slightly to make sure that you’re saving enough and practising healthy spending habits. 22seven’s budget feature will undoubtedly make proportional budgeting easier and give you a much clearer idea of how to get the most out of your money monthly.
Want to get better at budgeting? Then sign-up to 22seven and find a method that works for you.