Diana Clement: Break down your budget into easy chunks

If your housing or other costs are very expensive you might jiggle these percentages to match your reality. Photo / 123RF

OPINION:

We all know we need to budget. But it can feel like a chore unless you have a numbers nerd in the house.

For this reason, you might want to adopt one of several budgeting rules of thumb that make life simpler. Consider whether these tried and tested rules might work for you to break down your budget:

The 70:20:10 rule

Divvy your take-home pay (plus money already deducted for KiwiSaver) into three sums: 70 per cent for living expenses including your mortgage/rent, food, utilities, transport costs and other essentials; 20 per cent for savings, of which your KiwiSaver is part; and 10 per cent for consumer debt repayment. If your housing or other costs are very expensive you might jiggle those percentages to match your reality. Likewise, if you have no consumer debt to repay you could increase savings and investment or commit that 10 per cent to whatever makes you happy: holidays, hobbies or other discretionary spending. Proportional budgeting such as this is about what you value in your life.

The 50:30:20 rule

With this rule you split your take-home pay into 50 per cent for needs, 30 per cent for wants, and 20 per cent on savings and/or paying down debt. Again, the percentages can be juggled. With this rule be super vigilant about what constitutes needs versus wants. Just look at the wine/beer/non-alcoholic drinks and other luxuries in your supermarket trolley, which are wants not needs. Naval gaze. A great example is last week I bought some vanilla bean paste at $8.99, when really the $1.99 Hansells essence would have done the job. I blame Chelsea Winter and her Supergood cookbook for that excess. Consider separating your needs and wants categories at the checkout and paying separately even if just to keep yourself honest. I do this.

The three category rule

If you don't have the time or inclination to track every cent, consider monitoring three problem spending categories. Mine would be coffee, lunches, and what-the-heck spending on holiday. Maybe you know you can do better on groceries, petrol and entertainment. Either give yourself a percentage for these, or a hard dollar figure and spell out what comes under each category. Once you have your categories sorted you could try to game yourself into spending less each week. That might be dropping by a certain number such as $2 or $10 every cycle. To track your categories you need to either buy everything on a card and monitor your statement, carrying a notebook with you, or giving yourself a sum of cash for each category. Is there someone you could compete or collaborate with on your journey? If three categories are too much, reduce it. Start with one or two categories.

Once you have your categories sorted you could try to game yourself into spending less each week. Photo / 123RF

Envelope budgeting

It's psychologically harder to spend cash than pay on plastic. Withdraw your spending money at the beginning of the month in cash, split it into categories and put each sum in a separate envelope. Once the envelope is empty wait until your next pay period to spend again in that category. This method was especially popular in the days when people were paid in cash but can still be done. If your bank allows you multiple accounts for free, then you can use this method electronically. Many banks such as Kiwibank and Westpac have a feature where your pay can be split into multiple accounts as it comes in. This allows you to pay yourself first by putting your savings aside at the beginning of the month, which is another good personal finance rule. It stops you being tempted to spend that money.

Each and every one of us is at a different stage in life and our financial journey. Try not to compare with others or to be too hard on yourself. The important factor is having your own money under control and working for you. Setting up a realistic budget will help you achieve that goal.