With the cost of living rising, it’s harder than ever to reach our financial goals. If you’re struggling to pay off debts or save as quickly as before, it might be time to implement a new budget and get more strategic with your money.
Budgeting methods in summary:
- Get started by looking at your current spending
- The Barefoot Investor method uses five bank accounts to divide your income
- The 50:30:20 splits income towards needs, wants and savings
- Pay yourself first prioritises your savings goals
- The envelope system, which can be adapted for digital payments, sets strict limits for different bills and activities
The basics of budgeting
Before you start a financial budget, it’s important to understand how you’re spending your money at the moment. Looking through your bank statements or downloading an app that tracks your spending can help give you a picture of your income, expenses and savings. From there, you can make the tweaks you need to meet your financial goals.
To help with this, Moneysmart has a Budget Planner you can use to get started.
Everyone in Australia has a different financial situation. From money earned and necessary expenses to the goals they want to achieve. There’s no single system that can help everyone, but here are a few of the most common and popular ways for people to manage their personal finances.
The Barefoot Investor’s bucket system
Scott Pape’s The Barefoot Investor is one of the most well-read finance books in Australia. One of the key takeaways is his bucket system to manage daily finances and grow your savings.
In the very simplest terms, this system puts 70% of income towards regular spending (rent/mortgage, groceries and the like) and the other 30% to savings, debt reduction and rainy day funds.
He breaks this down into three buckets: regular expenses (Blow), an emergency fund (Mojo) and long-term wealth (Grow). The bucket analogy works because as you fill up the first bucket, it overflows into the second which then flows into the third.
On the next level, Pape suggests five separate bank accounts to manage this:
- Daily expenses (60% of income): Used to pay bills, utilities, groceries and other necessities.
- Splurge (10%): Used for ‘fun spending’ – trips to the cinema, going out for drinks and other things you want but don’t necessarily need.
- Smile (10%): A long-term savings account that you use for big purchases like holidays or cars.
- Fire extinguisher (20%): This is to pay off debt or any irregular bills that come up, like car rego and trips to the dentist. If the money isn’t spent in a month, it flows over into your last account.
- Mojo: Pape suggests this account starts with $2000 and then, through the overflow from your fire extinguisher account, grows to cover a month, then three months, then six months of your expenses. This money should only ever be touched in an emergency – say your car breaks down – or once you’ve hit your goal for emergency funds. From there, you can use the overflow from this bucket to build your investments, however that makes sense for your situation.
Elizabeth Warren’s 50:30:20 rule
Popularised by US Senator Elizabeth Warren in All Your Worth: The Ultimate Lifetime Money Plan, the 50:30:20 budget is an easy way to track your expenses:
- 50% goes to essential expenses (such as rent/mortgage and groceries)
- 30% goes to lifestyle spending (like eating out, fashion purchases and buying collectables)
- 20% goes to your savings
For this to work, you need to have a firm understanding of your spending to make sure you don’t overspend in any of the categories.
Like with the Barefoot approach, having three separate bank accounts can help to make this more manageable. Set up automated transfers every payday to make sure each one fills at the right rate and if you’re overspending on essential or lifestyle costs, you’ll soon realise. The answer may be to cut back on some expenses, change the percentages so you have something more like 60:20:20, or renegotiate some of your subscriptions.
George Clason’s pay yourself first strategy
The philosophy behind George Clason’s idea (first published in The Richest Man in Babylon) is that you should focus on your goals and cut back in other areas to make that happen.
First you need to set a goal. That might be to pay off a loan or to build up your savings. And then you need a realistic time frame. Based on that, you can work out how much you need to put towards that goal every week or month.
Following this principle, you would make sure that figure gets automatically transferred every payday. Whatever’s left is what you can spend on other things in your life. To meet your goals you might need to have a few quiet nights in, but once you’ve met your goal you’ll have more spending money again.
The obvious issue here is if you set your savings goal too aggressively you won’t have enough money to pay for your vital expenses and commitments.
Dave Ramsey’s envelope system
The envelope budget was invented when physical cash was more popular, but it can still be adapted for digital payments.
The premise is simple. Every time you get paid, you withdraw your cash and divide it into several envelopes. Each of these would be for very specific purposes: rent/mortgage, groceries, petrol, entertainment and so on. These would either be for a fixed amount or the average spent in a week/month.
Once an envelope is empty, that means no more of that expense until you get paid again. If you go out for drinks on payday, brunch the following morning and then order takeaway that night, you’ll be forced to wait until the next payday before you can go out again.
If there’s any money left over, it’s up to you what you do with it. Some people roll it over to the next envelope so there’s extra available, other people choose to put it in their favourite envelope and others add it to their savings.
In 2025, a lot of people don’t use cash. If you like the idea but not the practicality of it, you can replicate it by using pre-paid cards, opening multiple bank accounts or going half cash and half digital (generally online payments for rent, mobiles etc and then physical cash for spontaneous spending).
Make 2025 the year that works for you
Every journey starts with a single step. If you’re looking to pay off a debt quickly or save up for a big purchase like a car, boat or caravan, taking the time to start a budget may be the first step you need to take.
