Looking for a way to create a simple budget that works? In this article I’m sharing the one that works for us.
You may have heard of the budgeting system called a zero-based budget (if you haven’t, I’ll describe it below.)
It was popularised by the American personal finance guru Dave Ramsey.
In this article, I’m going to share a VARIATION TO THE ZERO-BASED BUDGET – one I find more effective.
It’s similar to the standard zero-based budget, but there are a few key differences that make it easier to manage.
Disclaimer: This is general information only. You should always consult a qualified financial expert when making money decisions.
But before I get into my system, let me briefly explain how the standard zero-based budget works.
You create a budget every month by adding up all of your income and then all of your expenses, savings and debt repayments, and then you deduct your expenses from your income. It’s zero-based because when you take your expenses/savings/repayments away from your income, your budget should equal zero.
Income – Savings – Debt Repayments – Expenses = 0
In other words, every cent of your income is allocated in your budget to either savings, living expenses or debt repayments.
This is good in that you’re being proactive with your money and making every dollar count.
But it can be hard to stick to and also a lot of work because…
The next step is to track your expenses during the month to make sure you stick to your plan.
And then next month…?
You create another budget (again!?), and you do it all over.
I used to prepare an elaborate budget and then track my expenses to see if I stuck to my budget or not.
And I had a 100% FAIL rate.
That’s right! I failed to stick to my budget 100% of the time.
[It’s at this point the song “Oops, I did it again…” starts playing my head.]
It took me a long time to realise the problem wasn’t me, the problem was the system itself.
There’s a better way to budget that can turn failure into saving success.
While the budget I use is similar to a zero-based budget, it varies in some critical ways. Here’s how the budgeting system I use is different:
- My budget is based on a pay cycle rather than a month.
- I have a “Yes!” buffer in my budget, which I’ll explain below.
- I couple my budget with a modern envelope system so I don’t have to worry about big bills throwing the budget. This is a budgeting game changer.
- I use automation, so I don’t have to track every cent we spend.
How to Make a Simple Budget That Works
Your budget is a plan for your pay. That means you decide how you’re going to spend your pay before you get it.
You can do this monthly (and if you get paid monthly, a monthly budget makes sense) but if you get paid weekly or fortnightly, I find it’s easier to budget for a pay cycle.
Below I take you through the steps I use to create a budget. But there are a few things to consider before we begin…
Things You Need Before You Create A Budget
For a budget to be successful, it needs to be based on actual spending patterns. So, if you’re not sure how much you spend, it’s easier to do an expense tracking exercise for a few weeks (you don’t have to do it forever) to get a handle on your REAL spending.
It’s important to base your first budget on your actual spending patterns, even if your aim is to reduce your spending.
Budgets don’t save money, habits do. So here’s what I’ve found to be the foundation for our budgeting success: before creating a budget, we focus on adjusting habits, and when we see results from creating saving habits, we adjust our budget and come out a winner.
Here’s what to do before creating a budget:
- Track your expenses for a month and categorise your expenses as explained in this article.
- Log into your bank and download a year’s worth of statements for your transaction accounts and credit cards. This will help you work out your income and budget for the bills etc.
- Grab a piece of paper, a pen and a calculator. You can get fancy with spreadsheets later but a pen paper and calculator is easy and writing out your budget helps you get a handle on the numbers better.
1. Write Down How Much You Get Paid Per Pay Period
The first step in creating a budget is to work out how much income “comes in” during a pay period. You would include your pay, your partner’s pay, any Centrelink payments you receive and any other income you receive during a normal pay cycle.
If you get paid fortnightly, it’s easier to create a fortnightly budget so write down all the income you receive in a fortnight and add up the total.
The next step is to calculate your “outgoing” money (expenses, savings and debt payments).
2. Start With Your Savings
The first rule of effective budgeting is to pay yourself first, so the next step is to allocate some of your income to go to savings.
If you don’t have a regular saving habit, just allocate a small amount of savings – even if it’s only $1 that you can afford. Establishing and maintaining the habit of saving is more important than the amount when you’re just getting started.
Once you start reducing expenses, come back and adjust this amount later.
Creating a regular savings habit allows you to establish and build an emergency fund, which makes life so much easier when unexpected expenses pop up.
3. Calculate Your Expenses
The next step is to write down how much you are going to spend on expenses for that pay period.
Some expenses will be easy, like rent or mortgage, so start with these expenses first. Subscriptions and regular direct deposits are all fixed expenses. Check the transaction statements you downloaded to make sure you’ve covered all the expenses you would normally have in a pay period.
Discretionary and Variable Expenses
Then, if you did the tracking exercise for a month or so, you’ll have a good idea of how much you spend each pay period on groceries, petrol, entertainment and other variable expenses. So write down a ballpark figure for these expenses. Overestimate a little bit to give yourself some wiggle room.
Finally, we come to the irregular bills. Irregular bills like the electricity bill, where you only pay them once every few months.
A big bill like this can really blow the budget, right?
How do you come up with the cash and pay for everything else?
This is where the modern envelope system comes in.
Instead of trying to find the money to pay for these bills when they arrive, it’s easier to plan for them in advance and stash away regular small amounts to cover them.
That means you use your (weekly/fortnightly/monthly) budget to allocate a regular portion of your pay to go towards your bills every payday.
When the bills come in, you pay them using the money you’ve already saved, not that fortnight’s pay. That fortnight’s pay gets allocated the same as every other fortnight (or week or month, depending on your pay cycle budget).
It’s called BILL SMOOTHING, and it means that big bills don’t affect your budget.
It’s important to note that it can take a few months to transition from the old way of paying bills to the new way while you build your savings.
4. Don’t Forget Debt Repayments
The last outgoing to budget for is debt repayments.
As with irregular bills, you can “smooth” these out by putting aside regular amounts each payday (in the case of direct deposit repayments) or just pay a regular amount each payday in the case of credit card repayments.
Again, this takes the highs and lows out of budgeting – your budget is pretty much the same each week.
For more information on regular debt, repayments check out the article on snowballing your debts.
5. Balance and Adjust Your Budget and Add a “YES! Buffer”
The final step is to add up all your “outgoings” (expenses, savings and debt repayments) and write down the total.
Then take away this total amount from your income.
Income – Outgoings
If you have money left over, you’re spending less than you earn. If your expenses total is more than your income, you might have to adjust your budget a little bit.
As noted, in a traditional zero-based budget the aim is to get this income minus expenses amount to equal zero. It means you’ve allocated every cent you earn.
But I like to leave a little left over as a “YES!” buffer.
By that I mean we have money left over to say:
“Yes! I can go out for a coffee today.” or
“Yes kids, let’s have fish and chips on the beach this week!” or
“Yes Amazon, I would like to read that book.” (A girl’s got to have one weakness!) or
“Yes! I will stock up on that staple while it’s half price at the supermarket.”
Sure, I could allocate this money, but the main benefit of the buffer is psychological, not financial.
If you feel that budgeting is boring, constricting and takes away your freedom, a YES! Buffer gives some of that spontaneity back, while still allowing you to save money and stay on top of the bills.
How much you allocate as a buffer is up to you and your circumstances, but even a couple of dollars a week can give you a little psychological wiggle room that gives life a little extra joy.
6. Automate Your Budget For Success
As I mentioned above, I don’t track expenses anymore – instead, I automate my budget.
I schedule payments each payday to go towards:
- Savings / Emergency Fund
- My “envelope” for bills and other irregular expenses like Christmas and the dentist
- Groceries and petrol
My husband and I also take a small “allowance” each for personal spending that we don’t have to account for and what’s left over is for our YES! Buffer.
If you have debts to pay off, you can also schedule your debt repayments.
While it’s not practical to pay cash for everything, especially these days, it can certainly help keep you on budget without having to track every cent because an empty wallet = no more spending.
And if you’ve done the tracking exercise before you created a budget, your budget will be in the ballpark of how much you need for each expense.
So, that’s how we’ve been budgeting for the last few years. Of all the budgeting techniques I’ve tried (I studied and worked in accounting, so I learned and applied a lot of budgeting techniques), this has been the most successful for us. What I like about it most is that it’s automated so I can focus on what’s really important – good habits – and I don’t have to worry about the bills when they come in.