27th November, 2020 by elmads

In today’s era, Millenials and Gen Zs have entered the very competitive employment world, they are either still looking for the right job for them or have already set foot into their dream work or businesses. While the older generations are either still working just for enjoyment and passion or have already reap the benefits of what they have sown. The contentment, happiness and stability of doing the work that we love while receiving an income is the best feeling that we could ever achieve in our working lifetime, even though we get stressed with it at time to time. With the life we enjoy during or even off work, has always have a corresponding cost of living that we need to maintain, in order to continue with our activities of daily living, such as the basic food, shelter and clothing. That is why budgeting our hard-earned money is very important, as we do not want to be at the other end of the positive cash flow spectrum which is going into deficit cash flow per month due to spending more than what we earn to the point that we will not even be able to pay for our basic life needs. Other people sink themselves even further to the spectrum by going into debt which just goes deeply further to a downward spiral of more negative cash flow and debt altogether.

Budgeting is telling your money where to go, it is also a manifestation of your eagerness to control your money, your behaviour and not the other way around. Who in this world would choose to be controlled by money rather than controlling it? I am sure that either you and I do not want that to happen to ourselves and our family. That is why my dear readers, I am glad that you are here, which shows your determination to expound your knowledge about budgeting your own money and to control your own finances.

The 4 Strategies

There are several ways to allocate and budget your money. I will present the common strategies used by most people worldwide. Just remember that there is no single budgeting plan that fits all. All money allocation techniques always depend in each and every person, you adjust it based on your needs not on other’s needs, you do it for yourself and your family. Without further ado here are now the 4 most popular budgeting strategies used by most people around the world.

1. 50/30/20 Budget

This is one of the renowned budgeting strategy used, due to its straightforward allocation plan. In here 50% of your total income per month goes to the essential expenses/basic needs which are the things that you will always require for your life to function on a daily basis. Namely, Electricity, Water, Rent/Mortgage, Internet subscription, housing & car maintenance, car insurance and others. While 30% of your salary per month goes to your non-essential/personal expenses which will sustain your hobbies that makes you happy and contented during your spare time like eating out, purchasing clothes, personal care items and others more. While, the remaining 20% of your income is for savings. This is saving money for a specific goal in the long run such as retirement, buying a home, car or a travel tour.

This budgeting plan is effective for persons who does not want to stress in a detailed budgeting technique as there are only 3 buckets listed. That being said, you could still enjoy spending your money with your personal expenses while saving some amount of it for your future use. Moreover, there is another variation of this budgeting plan which is the 80/20 budgeting, in which 80% goes to basic needs plus personal expenses while 20% for savings. Basically the 50% and 30% were just combined while still saving 20% of your income.

2. Cash/Envelope Budget

Before the information age started, people have been using this method for a very long time. It is a classic way of budgeting one’s money. To start, individuals need to withdraw their income to obtain the physical cash then allocate it in envelopes that have their own corresponding purposes. All of your transactions will be paid and be received in cash through this money allocation strategy.

This budgeting method is beneficial for people who still prefers; cash in doing transactions rather than bank or online transfers, who are adamant to control their spending, see where every dime of their money goes, and for persons living in areas that do not have access on banks or ATMs.

Such people who mostly prefer this strategy are the silent generations and the baby boomers who does not want to learn about digital transactions anymore, also people who lives in countries that are still using cash transactions. Just like in my country, The Philippines, our economy has not yet fully transitioned into a cashless based transactions, that is why I used this kind of budgeting method before, when I was still living there. This had been significantly helpful especially with my transportation expenses and savings method.

3. Multi-Bank Budget

This money allocation method is actually the same with cash budgeting, the only difference is, we are now utilizing the digital age system into our own benefit which is the cashless based transactions. It is just like an upgraded cash budgeting. In this strategy we will be using different debit cards and bank accounts with mobile applications or webpage sites instead of envelopes. Once we receive our salary per month into our salary bank account, we will transfer a specified amount (depending on your budgeting percentage allocation) into another bank account that has a defined purpose, which can be for essential, personal, savings or others. For example,

1. Monzo bank – the money here is for own personal use expenditures.
2. Starling bank – for personal family use (eat out, movie & travel)
3. Barclays bank – where we receive our payslip & for basic needs spending
4. Barclays savings account- for savings
5. Freetrade online investment brokerage – for investing
6. HSBC bank – for emergency fund and rainy day fund

Disclaimer: this is just an example and not an advice. I am not a financial advisor/planner. Seek professional advice.

This is an example that can be done with this kind of strategy. we only use a specific debit card for paying a certain purchased product or service, this will depend on where we personally categorize that purchase. Based on the given example above, if we buy a new phone then we will use our Monzo debit card, if we pay our rent then we’ll use our Barclays debit card and so on and so forth. It is less time consuming doing this method as we will not endure a long queue when paying bills. Essential expenses are usually done with cash transactions, and we can pay for products and services wherever we are as long as we have internet access and our card details.

This budgeting method is very useful for everyone who are tech savvy individuals like the Millenials and gen Zs. The downside of this strategy is the effort of opening various bank accounts especially if we are the type of person who wants all categories of our budgeting into different banks. Also, the fact that we will need to bring several debit cards with us every time we go out and spend is just a hustle.

4. Zero-based Budget

This is the hands on method of budgeting our money, this is what the DYI savers like you and me do. We allocate every pound (depends on the currency you use in your country) of our money to a specific category, and take note this is not just the basic categories of 50/30/20 budget which are Essentials, Non-essential and Savings, it will still be broken down further into subcategories. In addition, if we will be using this allocation plan we must know what our own priorities and spending amounts, as the money allocated will be based on our 1^st to the last priorities. Step by step plans are as follows;

• Know our income stream per month – this is easy for people who have a stable monthly salary compared to individuals who have varied monthly income. Nonetheless, with persons with varied income it is always prudent to estimate your average salary per month in order to arrive into a feasible monthly income projection into the short to mid term time horizon. (I have a pending blog to be posted about income projection strategies. I will be posting it soon.)
• Track our spending – It is very important for every people to track their spending, so as to know if where our money goes. We could always check our bank account statements to see when, where and how we spend our money in a daily, weekly and monthly basis. It is helpful if we write down all of our spending in a day and or utilize a spreadsheet for a less time consuming method for us. It will be hard at first, especially when we are not used to it, but eventually we will feel a sense of control with our finances once we know where our money goes. Subsequently, once we get to know our spending habits, look for ways to lower down our expenditures especially with our personal expenses, because it is the easiest and most flexible category of our spending that we could adjust significantly. I have a blog that discuss the necessity of tracking our spending, just click the link here “Why knowing our spending habits is important before saving money”.
• Expand our buckets of savings and expenses – this could be very tricky for every person as it will be different for each one of us. This is where prioritization enters, some people prioritizes to ramp up emergency fund up to 6 months and focus a significant amount of their monthly income in it, others could prioritize family savings for a travel tour, home purchase or a car. Some would want to pay their debt as soon as possible while other people would just allocate an equal amount to their respective buckets. As much as possible you should have a name for every bucket which will help you to know where your money will go. Down below are illustrations of possible different scenarios of prioritization.

• Always track our savings – this will always and a must be priority for budgeting. Stay consistent, motivated and on track with our saving goals. Spend what is left after saving, not the other way around! I cannot emphasize it more but saving money and investing for the long run will be our best decision and gift to our future self and our family. I assure you that your 10, 20, 30, 40, 50 plus years of your future self will hug you tightly and kiss you with joy for what you have done today.

On the other hand, the downside of this Zero-based strategy is that it takes a lot of time and effort to do it. Well what would we expect, DIY projects have always been time consuming and tiring, yet the learnings, knowledge and experiences that people get from it is a treasure that no one will be able to take away from us. Moreover, at first, it will be an arduous task to embark in this kind of budgeting method because there can be instances in which our computation does not tally with our salary, or our other buckets might go into negative, meaning it exceeded our salary. It will be learning through trial and error method until we find the best one for us.

To sum it up

There is no specific strategy for everyone, as it will all depend on what type of person we are, and which one will suit us better depending on our financial goals and needs. We could mix some of these budgeting methods if we find it comfortable. I myself, practices Zero-based, multi-bank and a few cash budgeting for emergency fund. Remember my dear readers, we are budgeting our money to have a hold in our financial life, many things are out of our control, but financial literacy and financial independence are not one of them. By focusing on what we can grasp and improve, will considerably bring us into our life goals of joy and fulfilment.

Knowledge is my Sword and Patience is my Shield,

Evan Louise Madriñan /elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.