I want to get you saving. When you have a savings regime, you build wealth and, in doing so, gain choice. There are plenty of gurus out there telling you that they have the solution to get your money sorted. If there truly were one ‘best of the best’ way that worked for everyone, though, then why haven’t we all adopted it, and why aren’t we all in our financial happy place?
Here’s the truth: beyond the fundamental requirement to spend less than you earn, there is no single money-management approach that works for all people, all of the time. So, I’m providing six strategies, each quite different and likely to suit different people. These are:
- the 50/20/30 method
- the bucket strategy
- the reverse budget
- the big cut strategy
- the track your spending approach
- zero-based budgeting.
Nobody’s perfect when it comes to money management, but having some sort of system is infinitely better than no system at all. Don’t let the quest for perfection stop you from achieving huge progress on your financial autonomy goals – make a start, have a go, adapt, evolve and discard as necessary.
You’ll find short descriptions for each strategy below and you might want to have a read of each and decide from there which you want to embrace. For those who are in more of a hurry, though, I’ve provided a self-assessment tool a little further down. Respond to its 10 statements to find out which strategy is most likely to deliver success for you – there’s even a ‘Plan B’ if the first recommendation doesn’t resonate.
1. The 50/20/30 method
The 50/20/30 method is a good, easy strategy to implement that doesn’t require you to monitor every dollar you spend. You can have it up and running in five minutes. With this approach, you divide up your after-tax income as follows:
- 50% to spend on must-haves (needs)
- 20% for savings and extra debt repayment
- 30% to spend on wants
Simplicity is the beauty of this cash-flow strategy. There’s no need to analyse how you’re currently spending your money or to spend hours each month updating complex spreadsheets. It’s also a strategy that you can dive into straight away. Often, getting started is the hardest part – this strategy’s set allocation makes implementation easy.
There are a number of structures you could use which involve your savings component staying in your main bank account (this could be an offset account). The money you’ll be spending on your needs and wants goes into a separate account(s).
I encourage you to fine-tune your allocations after running with it a few months. Maybe the right split for you is 30% savings and 20% for wants; or perhaps you have a large mortgage and so need 60% in must-haves. Maybe 60/15/25 is the right answer for you. Don’t be afraid to modify it for your circumstances.
2. The bucket strategy
The bucket strategy has many variations but, as a broad approach, it’s probably the most popular of the standard budgeting strategies. As with the 50/20/30 strategy, you have multiple bank accounts, with automatic transfers to each. Unlike 50/20/30, though, the amount of each transfer is determined by you after you have reviewed your current expenses. You make an active decision on where you want your money allocated.
The key elements of the approach are as follows:
- having multiple bank accounts – each with a purpose
- using automated fixed transfers to spread money across the accounts
- needing to first calculate what you’re spending on bills and so on in order to determine the amount that should go into each account.
3. The reverse budget
The reverse budget is another cash-flow strategy that has the benefit of being easy to implement – an important criterion when the potential for procrastination and inaction is ever-present. Sometimes called ‘pay yourself first’, the reverse budget dictates that you save a fixed amount, then spend the rest however you like. Pretty easy, right?
The key is to set aside money for savings first. This is the opposite of what most people without a cash-flow plan do. Their plan is to save whatever is left over at the end of the fortnight or month – which, of course, more often than not ends up being zero. Under the reverse budget approach, money goes to savings first, almost like it’s another bill. If you’re choosing to pay more than the minimum monthly repayment on your home loan, you’re implementing this strategy already without even knowing it.
As with most cash-flow strategies, automated transfers are an essential ingredient for success. If the savings component is left to personal self-discipline and routine, the potential for failure grows enormously. It’s now so easy to automate your financial arrangements, though: why wouldn’t you want to take advantage?
4. The big cut strategy
The big cut strategy is a no-mucking-around, rip-the-Band-Aid-off approach that I like a lot.
It’s really simple: review how you’re currently spending your money and find one significant thing that you can eliminate. This isn’t easy, though, and typically requires a lifestyle change. It could involve getting rid of one car in the household, or moving to a smaller home so that you have a smaller mortgage or become mortgage-free, ceasing all take-away food or giving up a vice like tobacco, alcohol or gambling. Make one big cut, and then live life as normal in all other respects.
This strategy can be particularly useful if you find yourself struggling with your expenses exceeding your income. Your one big cut should deliver you back into a balanced situation; hopefully even into a position where your income exceeds expenses, so that you can save again.
It’s called ‘the big cut’, but remember that cash-flow management has two elements – expenses and income. You could flip this strategy and instead of cutting expenses, find a way of making a big leap in your income – by taking a second job or chasing a new, higher-paying role, perhaps. The trick here would be not to fall for the all-too-common problem of lifestyle inflation. For a ‘big leap’ to propel you along the path to gaining choice, you’d need your expenses to remain unchanged, so that the extra income becomes savings and then wealth.
5. The track your spending approach
This is the no-budget budget. I understand that tech-savvy people in particular quite like this strategy, because it works well if you’re comfortable using apps to track spending and income.
The name really gives the game away, but to implement the ‘track your spending’ cash-flow strategy you:
- track where your money goes via an app or spreadsheet
- lock in a time each month to review the data – say, the first Sunday of every month, after dinner. The question to ask yourself is whether you’re happy with your choices
This strategy relies on personal self-reflection and changing your money habits – sometimes, just being conscious of where your money goes is enough to change your habits. Ideally, you want to determine in percentage terms how much of your income is spent on different categories.
Most of the money-management apps will do this for you, but if you’re uncomfortable providing your bank login details to these providers (I am), you can instead extract your transaction data from your online banking service into a spreadsheet and track things that way.
In addition to checking that you’re happy with the spending choices you made in the prior month, you should monitor how your spending changes over time. Hopefully this will show trends that provide positive reinforcement for you.
6. Zero-based budgeting
Zero-based budgeting is the most hardcore of the cash-flow strategies, as it requires work and commitment. However, if you’re in a tight spot financially, and especially if your expenses exceed your income and/or you have persistent credit card debt, this strategy could provide the adrenaline shot you need.
The zero-based budgeting approach requires that you sit down every month and do two things:
- Review your previous month’s spending against your plan for that month – how did you go and what can you learn?
- Create a new spending plan for how to spend every dollar in the upcoming month
Every dollar coming gets allocated to expenses or savings in advance. For large annual expenses like Christmas presents, you can put a little away each month for several months, or perhaps all year.
The great thing about zero-based budgeting is that you gain a great sense of where your money is going, and as a result you can be very deliberate in how you spend your money.
Still not sure which strategy is right for you? Complete the self-assessment below.
1. I’m a detail-oriented person – I like precise answers
a) That’s me
c) That’s definitely not me
2. My main goal is to pay off debt as quickly as possible
c) Not at all
3. I like to focus on the big picture
c) That’s me
4. I’m time-poor
a) Not really
5. I’m great with a spreadsheet
c) What’s a spreadsheet?
6. I’ve got a pretty good handle on where my money goes each month
b) In most cases
7. I’ve been pretty good at saving in the past
8. I’m comfortable talking about money with my partner/friends
a) Not at all
b) Reasonably comfortable
9. I clear my credit card every month
a) I wish!
c) I don’t have a credit card
10. I’m really fired up and driven to retire as soon as possible
a) That’s me
c) Not my goal
Which budgeting strategy is right for you?
Add up how many times you answered a), b) and c) respectively, and then calculate your score. Every a) answer is worth 3 points, every b) answer is worth 2 points and every c) answer is worth 1 point.
|Your score||Recommended strategy||Plan B strategy|
|14–15||The big cut||50/20/30|
|16–18||50/20/30||Bucket or reverse budget|
|19–22||Bucket or reverse budget||Bucket or reverse budget|
|23–26||Track your spending||Bucket|
|27–30||Zero-based||Track your spending|
This is an edited extract from Financial Autonomy (Major Street Publishing, $29.95), exclusive to Canstar, and republished with permission.
The comparison table below shows some of the Savings Accounts on Canstar’s database for a regular saver in NSW with links to the providers’ websites. The results shown are based on an investment of $100,000 in a personal savings account and are sorted by Star Rating (highest to lowest), then provider name (alphabetically). For more information and to confirm whether a particular product will be suitable for you, check upfront with your provider and read the Product Disclosure Statement before making a decision.
Paul Benson has been providing financial planning advice for more than 20 years and launched his Financial Autonomy podcast in 2017. Paul holds a Bachelor of Business in Economics and Finance, and is a Certified Financial Planner.
This article was reviewed by Editorial Campaigns Manager Maria Bekiaris before it was published as part of our fact-checking process.
Main image source: SewCream (Shutterstock)