Simple ways to budget and save money | ABC News

Summary

In this video, Emily Stewart provides three effective budgeting methods to help manage finances, especially for those on a lower income. She introduces the cash envelope system, which involves physically separating money into envelopes for different categories; the balanced money formula, a 50/30/20 breakdown of needs, savings, and wants; and the traditional budget, which involves tracking income and expenses in detail. Each method has its pros and cons, but all aim to bring greater control over personal finances. Stewart also emphasizes the importance of budgeting consistency and offers advice on seeking financial counselling when needed.

Takeaways

• 😀 Track your spending for a couple of weeks before starting a budget to identify where your money is going.
• 😀 A spending diary helps you evaluate both big and small expenses, like rent and coffee, to cut unnecessary costs.
• 😀 The cash envelope system helps control overspending by dividing cash into envelopes for specific categories (e.g., groceries, fuel).
• 😀 The cash envelope method works best for daily expenses, as big bills like rent are usually paid electronically.
• 😀 The balanced money formula splits income into 50% needs, 20% savings, and 30% wants, which can be automated with multiple bank accounts.
• 😀 Automating your budget with separate accounts makes it easier to stick to, but ensure you choose low-fee accounts.
• 😀 The traditional budget offers a detailed, line-by-line overview of income and expenses but is time-consuming to create and maintain.
• 😀 The MoneySmart budget tool allows you to input your income and expenses to see if you're spending within your means.
• 😀 Ensure your budget is reasonable and sustainable, avoiding tight restrictions that make it hard to stick to.
• 😀 If you're struggling with debt, seek free, independent financial advice from a financial counselor to help you manage your finances.

Q & A

Why is budgeting particularly important for people on lower incomes?

Budgeting is crucial for lower-income individuals because every dollar needs to be accounted for to ensure that essential needs are met and spending does not exceed income.

What is the purpose of keeping a spending diary before starting a budget?

A spending diary helps you track and understand where your money is going, providing a clear picture of both major and minor expenses, which can highlight areas where you might cut back.

What is the cash envelope system and who might benefit from it?

The cash envelope system involves dividing cash into different envelopes for specific categories of expenses. It's most beneficial for people prone to overspending, as it physically limits spending once the cash is gone.

What are some of the advantages of using the cash envelope system?

The main advantages are its simplicity and the way it physically prevents overspending, making it easier to stick to the allocated amount for each category.

What are some downsides of the cash envelope system?

Downsides include the lack of traceability (if the cash is lost or stolen, it's gone), and it doesn't allow the money to earn interest or work harder, as the funds are kept in cash rather than in a bank account.

Can you explain the Balanced Money Formula and its basic categories?

The Balanced Money Formula divides income into three categories: 50% for needs (essential expenses), 20% for savings, and 30% for wants (non-essential expenses). This method helps maintain a balanced financial life.

What is the Barefoot Investor’s approach to budgeting, and how does it differ from the Balanced Money Formula?

The Barefoot Investor’s approach also divides income but adds an emergency savings fund and includes recommendations for specific bank accounts for different categories. It's similar to the Balanced Money Formula but with a greater emphasis on building savings and emergency funds.

What are the advantages of using the Balanced Money Formula?

The formula is simple and offers a broad overview, focusing on big-picture financial categories without requiring detailed tracking of every expense.

What are the downsides to using the Balanced Money Formula?

The main downside is that it's still easy to overspend, particularly in the 'wants' category, and it may lead people to borrow from their 'needs' category to satisfy their 'wants.'

How does the traditional budget differ from the other methods mentioned?

The traditional budget is more detailed and involves listing all income and expenses to create a comprehensive financial picture. It may take more time to set up and maintain but offers a clearer view of spending habits.