Best budgeting strategies

Barefoot Investor budget

Bestselling finance author Scott Pape, the "Barefoot Investor", popularised this "back of the serviette" budgeting strategy. He suggests dividing your income between 3 separate buckets, each with its own bank account, that allows you to cover your day-to-day living expenses, build your wealth and leave enough spare to cover any emergencies.

How it works

When first setting up your buckets, it's easiest to schedule automatic transfers so that your funds are immediately directed to the right account. The 3 accounts are divided like this:

1. You Inc (~60% of your income)

This is your main bucket and is used to cover all your regular living expenses. This will include rent (or mortgage repayments), utilities, groceries and all the other costs that crop up in your day-to-day life. While it's recommended you devote around 60% of your income to cover these costs, this percentage may be higher or lower depending on your income and standard of living. Either way, having a clear understanding of how much you need to cover your living expenses each month is extremely useful.

2. Savings (20% of your income)

This bucket should first be used to pay off any existing debts, and then to build your savings via a high-interest savings account. If you have multiple debts, concentrate on paying off the smallest first, and then knock them over one by one.

3. Splurge (20% of your income)

Once you've covered your living expenses and emergency fund, the remaining 20% of your income can be devoted to a separate account that can be used on things that make you happy. This could be anything from a holiday to a new TV, but Pape recommends trying to avoid "lifestyle creep" as your income increases or you save more money. While you may be able to afford a new car after a promotion, that money might be better spent on something that truly makes you smile.

Pros

• Highly structured and automated
• Easy to follow for beginners

Cons

• May not work for all incomes
• Relatively conservative approach to saving

Who is the Barefoot Investor budget good for?

The Barefoot Investor budget approach should suit those looking for a structured budget that is still relatively hands-off. By using separate accounts with automatic transfers, the budget should take care of itself, and give you a better sense of where you're spending your money each month.

Pay yourself first

Also known as the "anti-budget", this approach flips the usual spending breakdown. Instead of starting with your living expenses, you decide how much you want to save and work backwards from there. This might be a defined amount, such as enough to cover a house deposit, or it might be a certain percentage of your income. For example, say you wanted to save $6,000 over the course of a year. You'd need to set aside $500 each month, and can then spend the rest of your income as needed.

How it works

1. Work out your savings goal, whether it's a specific figure or percentage.
2. Set up an automatic transfer so that the required savings amount is sent to a dedicated account each time you get paid.
3. Use the rest of your money to cover your living expenses and discretionary spending.

Pros

• Offers a clear budgeting goal to strive for
• More flexibility with how you spend the rest of your money

Cons

• Requires discipline
• Spending habits won't necessarily improve

Who is the "anti-budget" good for?

The pay yourself first approach is a good option for anyone with a clearly defined savings goal, or looking for a temporary budgeting approach. However, those looking to get a better overall handle on their spending or improve their finances long-term may want to consider a more structured budgeting strategy.