Three budgeting methods to help manage your cash in a cost-of-living crisis

With the cost-of-living crisis continuing to bite, many Australians are watching their spending.

But there’s more than one way to budget.

We looked at the pros and cons of three popular budgeting methods and spoke to two financial advisors for their take.

What is a budget?

A budget is a plan for every dollar you have.

It estimates how much money you’ll earn and spend over a certain period of time.

Glen James, creator and host of a podcast called This Is Money, says it’s a way to ensure your income and expenses are in sync.

“A spending plan forms a part of your financial foundations and I encourage everyone to be using one, otherwise you’re guessing with your money,” Mr James tells the ABC.

What’s the best way to budget?

That depends on who you ask.

Mr James says a spending plan is beneficial, but financial educator and author Melissa Browne is against rigid budgeting.

“A budget will tell you if you have enough money for what you need, and essentially whether you can afford what you’re spending on,” Mr James says.

“It also helps you set aside money for saving and investing for your future.”

Essentially, it encourages you to put your money to work in the best way possible to achieve short, mid, or long-term goals.

Ms Browne prefers a different approach, saying budgets can be too restrictive.

“Research has shown that budgets don’t work in the same way that diets don’t work,” she tells the ABC.

“At the end of the budget, people tend to bust out and spend that money on something other than what they had originally intended.”

Work out what works best for you

“The truth is that finance is personal,” Ms Browne says.

“There’s no one size fits all approach that works for most of us.

“The messier and more sustainable approach is figuring out the method and habits that are right for you.”

A looser budgeting option

Ms Browne’s anti-budget approach aims to make people feel less boxed-in.

She says to consider setting up your finances in such a way that you have a choice.

Steps to do this might include:

1. 1.Understand what money goes in and goes out for your main household bills. This might include rent/mortgage, electricity, subscriptions, insurances, school fees, groceries and more
2. 2.Understand what you have and what you owe
3. 3.Create financial goals you’re excited about achieving and figure out what that means for the next 12 months
4. 4.Set up bank accounts for your everyday expenses, bills, buffer, savings and investing, and set up automations to those accounts in line with your bills and your financial goals
5. 5.Reassess every month to make sure you’re on track

“What does work is having shared goals, understanding your money, and setting up your finances in such a way that you’re prioritising your goals while at the same time, being able to enjoy today,” Ms Browne says.

Going back to basics

Mr James’s method also starts with outlining your household income and all your expenses.

He says your expenses will typically fall into two categories:

• Core needs: housing, groceries, transportation, utilities, etc.
• Everything else: lifestyle costs, subscriptions, holidays, clothing, etc.

This should give you an overview of where your money is going and some areas where you can cut back.