Looking for a way to create a simple budget? 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 bloke Dave Ramsey.
In this article, I’m going to share a variation to the zero-based budget – one I find more effective for our situation.
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. In this blog, I share my savings and budget planning and what works for us. You should always consult a qualified financial expert when making money decisions (not a random stranger on the internet like me – or even your mate at the pub).
But before I get into my system, let me briefly explain how the standard zero-based budget works.
The Standard Zero-Based Budget
In the standard zero-based budget, you create a budget every month by adding up all of your income and then adding up all of your expenses, savings and debt repayments.
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 a lot of work because…
The next step is to track all your expenses during the month to make sure you stick to your plan.
And then next month…?
You create another budget (again!?) and do it all over.
There had to be a better way…
I used to prepare an elaborate budget (because I used to be an accountant and still love spreadsheets) 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 in my head.]
I know this is going to sound a bit dodgy, but I no longer think the problem was me; I believe the problem is how traditional budgets are built (at least how I was taught). My accountant boss once told me that budgets aren’t meant to be followed, and that was a red flag for me. I mean, why bother, then?
The good news is I found a better way to budget that turned 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 so much about big bills throwing the budget (except when the prices go up a lot!). This was a budgeting game changer.
- I use automation, so I don’t have to track every cent we spend.
How I Made a Simple Budget That Works
A budget is a plan for your pay. That means deciding how 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 we get paid fortnightly, and I find it’s easier to budget for a pay cycle.
(Actually, we get paid fortnightly and monthly, so I budget some expenses fortnightly, like groceries, and some expenses monthly.)
Below I take you through the steps I use to create a budget. But I have a few useful tips that helped us before I begin…
Useful Data Before You Start a Budget
For a budget to be useful, it needs to be based on actual spending patterns.
After years of budgeting (including creating business budgets), I’ve found wishful thinking doesn’t work. A budget needs to be based on reality.
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 can be an eye-opener just how much small expenses can add up!
Budgets are more accurate if they are based on actual spending patterns, even if the aim is to reduce spending.
Budgets don’t save money; habits do.
Budgeting how much money you intend to spend (or not spend) on work lunches, for instance, doesn’t mean much if you don’t get into the habit of taking your lunch to work.
So here’s what I’ve found to be the foundation of our budgeting success: before changing our 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 we do before creating a budget:
- Track expenses for a month and categorise expenses as explained in this article.
- Log into our bank and download a year’s worth of statements for our transaction accounts and credit cards. This helps us work out our income and budget for the bills etc.
- I start with a piece of paper, a pen, and a calculator. I get fancy with spreadsheets later, but a pen, paper and calculator are easy and writing out a first budget helps us get a handle on the numbers. There are a bazillion apps you can use instead of spreadsheets, but I still prefer a good spreadsheet – that’s just me.
1. Write Down How Much We 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. A budget would include my pay, my partner’s pay (if applicable), and any other income we receive during a normal pay cycle.
The next step is to calculate our “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 we allocate some of our income to go to savings.
There have been times when money has been super tight for us. Sometimes all we’ve put aside is $2 per pay cycle. It doesn’t seem like much (it’s not, let’s be honest), but I’ve found establishing and maintaining the habit of saving is more important than the amount when you’re just getting started.
When we started reducing expenses, we already have a saving habit to build on – all we had to do is adjust our savings amount!
Creating a regular savings habit also allows you to establish and build an emergency fund, which makes life easier when unexpected expenses pop up.
3. Calculate Expenses
The next step is to write down expenses for the same pay period as the income.
Some expenses will be easy (to write down, not necessarily to pay), like rent or mortgage, so it’s easier to start with these expenses first.
Subscriptions and regular direct deposits are all fixed expenses. We check our transaction statements to make sure we’ve covered all the expenses we would normally have in a pay period.
I try to make expenses fortnightly to match our budget, but if I can’t, I either leave enough in a transaction account to cover them or treat them like irregular expenses below.
Discretionary and Variable Expenses
The tracking exercise for a month or so gives us a good idea of how much we spend on variable expenses, like groceries and petrol, and discretionary expenses, like entertainment.
From what we’ve tracked, we can write down a ballpark figure for these types of expenses. To start with, I’ve found it helpful to write down what we really spend, not what we hope to spend. Even overestimating is better because it gives us a little wiggle room.
Finally, we come to irregular bills like the electricity bill, where we only pay them once every few months.
A big bill like this can really blow the budget, right?
It’s hard when you suddenly have to pay the rego or the electricity bill on top of all the regular expenses.
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.
To do that, we use our budget (weekly/fortnightly/monthly) to allocate a regular portion of our pay to go towards the bills every payday.
For instance, we might put $20 aside every fortnight (or whatever the amount might be) to go towards the electricity bill, so when it comes in, we have enough to cover it.
That’s the old envelope system, but instead of putting the money in an envelope, we put it in a bank account just for these expenses (I track the amount in a spreadsheet, but it’s not essential, just what I like to do).
When the bills come in, we’re paying them using the money already saved, not that fortnight’s pay. That fortnight’s pay gets allocated the same as every other fortnight.
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. Debt Repayments
The last outgoing we 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.
5. Balance and Adjust The Budget and Add a “YES! Buffer”
The final step in our budget is we add up all our “outgoings” (expenses, savings and debt repayments) and write down the total.
Then take away this total amount from our income.
Income – Outgoings
If there is any money left over, we’re spending less than we earn. Yay! If the expenses total more than the income, the budget will need adjusting.
As noted, in a traditional zero-based budget, the aim is to get this income minus expenses amount to equal zero so that every cent is allocated.
But I like to leave a little leftover 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.
It may seem weird, but this personal spending money gives us freedom while still contributing to the household kitty.
While it’s not practical to pay cash for everything, especially these days, it can certainly help us stick to a budget without having to track every cent because an empty wallet = no more spending.
As an alternative to cash, I use a prepaid debit card for my fun money that I can top up every payday. It’s sort of the same as cash in that once the money is gone, I can’t spend any more. And there’s an app to keep track of how much is left.
Because of rising costs, I need to check in with this automation every now and then and juggle the amounts (which means cutting back somewhere else because wage stagnation!).
So, that’s how we’ve been budgeting for the last few years. Of all the budgeting techniques I’ve tried (as an accountant, 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.