Setting Up a budget? Try These Budgeting Formulas To Get On Top Of Your Money

starting a budget

You know you need a budget. But where do you actually start? How much should you be spending?

In this post, I outline three different budgeting formulas so that you can pick one appropriate to your lifestyle.

  1. The 50/30/20 budget
  2. The Zero-Based Budget
  3. The One True Number Budget

There are lots of different budgeting approaches out there. Odds are it’s going to take some experimenting to find the best way (or hybrid of methods) to manage your money. Budgeting is highly personal so what your best friend or gym buddy swears by might not work for you at all!

The 50/30/20 budget

This popular take on budgeting involves allocating a percentage of your income to different categories, based on the guidelines. Coined by Elizabeth Warren, author of All Your Worth: The Ultimate Lifetime Money Plan, the idea is that breaking down your budget according to this formula can help you achieve better financial stability.

Half of your income should be spent on necessities like housing, transport, utilities, groceries or childcare. 30% is set aside for wants, like travel, shopping, entertainment or eating out. 20% then goes to saving and paying off debt. Easy!

An even simpler variation is the 80/20 formula. You dedicate 20% of your income to your financial goals like saving or crushing debt. The remaining 80% is put towards, well, everything else!

The pros of the 50/30/20 budgeting formula

This can work really well for beginners who don’t have experience building a balanced budget. It’s straightforward and doesn’t get bogged down in figures and details.

The cons of the 50/30/20 budgeting formula

But if you’re in a high cost-of-living area where housing expenses are off the charts, this might be best treated as a starting point rather than a strict equation to adhere to. And if needs and wants tend to blur together for you, getting those percentages right may be a challenge in its own right… That said, even if the proportions don’t make sense for your situation, the concept is sound and offers a simple framework that you can always come back to.

The zero-based budget

The zero-based budgeting system revolves around getting your budget down to zero so that every single dollar has a job. When using this system, there should be no money left over from your income once you subtract all your expenses.

To get started, you’ll need to list out all your costs, fixed and discretionary. Be honest rather than optimistic – if these numbers aren’t realistic, you’ll fail before you even start! Tracking your expenses for a few months will help you get a grip on your typical spending habits.

If you find a theoretical surplus, assign that money to savings. Remember, there should be nothing left over when doing a zero-based budget. Likewise, if you find yourself with real money left over at the end of the month, allocate it to another category, or roll it into next month’s budget as part of your income.

The pros of zero-based budgeting

Assigning every dollar a job means nothing gets frittered away – so you might very well see quicker progress towards your money goals! And if you happen to come in under budget in any category, that extra cash can go toward savings, speeding things up even more. Plus, getting this hands-on with your money means you’ll quickly get a good grip on your true spending habits.

The cons of zero-based budgeting

You need to constantly keep a close eye on your spending to make sure you don’t go over budget. As such, it can be a labor-intensive approach. And it’s easy to get thrown off if you find a lot of variable expenses cropping up early on, or if your income fluctuates at all. You’ll find things flow more evenly with a few months under your belt, and a solid buffer in the bank to help smooth out the bumps.

The One True Number budget

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One number to rule them all – sounds too good to be true, right? This method boils down to first taking care of your bills and savings, and then giving yourself permission to spend what’s left. Think of that as an allowance. No fussing over categories and cents.

Just take your monthly net income, subtract your regular expenses, and contributions to your financial goals (savings and debt). Be sure to account for bills that you may not pay every month, but still turn up quarterly or annually, like insurance policies – work out how much you need to put aside for these each month. Now, the dollar amount you’ve got left over is how much you have to spend freely and without worry! For example, if you earn $4000 and your costs tally up to $3500, then your one number to remember is $500 for the month. That amount is yours to use however you want.

You might want to break this allowance down further into a weekly figure. Don’t forget that some months have 5 weeks, so it’s safer to divide that number by 4.3 rather than a round 4.

The pros of the one-number budget

If you hate feeling restricted by budgets and shy away from spreadsheets, then the simplicity of this strategy might appeal! Once you’ve got your fixed expenses sussed, the rest is yours to play with. It’s hard to argue with the appeal of having such free rein.

The cons of the one-number budget

Overspending can put you into the red quickly, especially if you have a few bad weeks in a row that snowball into a long stretch. If you do go over one week, be sure to adjust next week’s spending amount to make up for it.

Tweak as you go (and be kind to yourself)

Every month is different. Sometimes it feels like there’s no such thing as a typical month! We all have bad runs from time to time, and reviewing your budget every month will shine a light on how it compares to reality. The good news is, tackling those problem areas will pay off hugely in the long term. Don’t try to do everything at once, focus on improving just one thing each month.