How to Save Money Using Personal Budgeting

If you’d like to improve your current lifestyle and attain your future dreams, it’s vital to learn how to save money.

The number one principle of personal budgeting is to live within your means. In other words, you limit your spending to your income. If you earn take-home pay of $5,000 a month, that’s your spending limit. If you earn $3,000 a month, that’s your limit.

If you’re paying a large bill, for example buying a holiday, that comes from your holiday savings account. Living within your means entails never reaching for a credit card, nor taking on other consumer debt. (The only exception may be a mortgage for buying your home).

Should You Budget Savings?

Yes, for sure. Once you’ve committed to living within your means, the next step is to budget to put money aside for savings and investment. Every month, you put a portion of your monthly income towards building a better future, one where you will have greater financial security and more freedom of choice.

You may be saving for a specific purpose – like a new car or a wedding or the deposit for a home. Or you could be investing longer-term for retirement. Either way, you’re budgeting for your dreams.

50 30 20 Savings

How much of your income should you allocate to savings and investments? When you are just starting out with personal budgeting, it might be a challenge to save anything for the future – particularly if you are paying off debts. But bear in mind that getting rid of credit card debt is a key part of building a more secure financial future.

A good long-term target is to allocate 80% of your take-home income to funding your current lifestyle, and the remaining 20% to longer term savings. The book ‘All Your Worth’ gives the following rule of thumb:

50% of your income for necessities
30% of your income to enjoy life now
20% of your income to save for the future, or to repay debt early

But where are you going to find this 20% out of your monthly income? There are various strategies you can use, including:

Kakeibo
Paying Yourself First
The Envelope Method
ZBB zero based budgeting

Kakeibo Saving Method

Kakeibo is a Japanese method of household budgeting from the start of the last century, but it’s still popular. Also, it’s quite a simple way to start learning how to save money. As always with personal budgeting, you live within your means.

Start by listing your income for the month ahead
Then list your fixed monthly outgoings
Deduct these fixed items from your income to give ‘money available for the month’
Decide how much you want to save for the month
Deduct your savings target from your ‘money available’ to give your ‘spending budget’
This spending budget is what you can spend on necessities and treats in the month
Track your day to day spending
At the end of the month, review how much you spent and how much you were able to save

Kakeibo is a good budgeting method, and I use it for our regular household spending account. However, it runs the danger of overspending and, so, saving less than the target amount.

How to Save Money by Paying Yourself First

Paying yourself first is a very interesting concept in personal budgeting. If you apply this to the kakeibo method I’ve outlined above, you wouldn’t wait until the end of the month to see how much you'd saved for the future. Instead, you’d treat the amount you want to save as a necessary outgoing.

So, the steps might be:

Start with your income
Pay yourself first (transfer your target savings to a separate savings account)
Deduct the other necessary spend, as with Kakeibo
This gives you ‘money available for the month’ for spending

The difference is that if you don’t allow yourself to ‘borrow’ out of your savings to fund your lifestyle, or to use your credit card, you are forced to limit your spending to the money available.

Envelope Method of Saving Money

Some people use the envelope method for their personal budgeting. They use cash for some or all their spending, and never resort to credit cards nor, unless it’s a last resort, to taking money from the ‘wrong’ envelope. With the envelope method, you convert your pay check into cash and then allocate the cash to various envelopes, each of which is for a different budget category. One of these categories is for savings.

The only time I use cash is for my monthly ‘treats money’, which I spend mostly at cafés. I find it to be a good way of capping my spend. But, for savings, I use bank transfers and digital sinking funds.

Savings Sinking Fund

A sinking fund is a separate savings account you set up to cover a specific future cost. For example, I pay a set amount each month into a holiday account. When it comes time to pay for the holiday, I draw the funds out of this account. Otherwise, paying for the holiday would blow a hole in my monthly budget.

You can set up these sinking funds for various purposes, for example house repairs, car purchase, Christmas and so on. Any saving other than your long term investments.

ZBB Zero Based Budgeting

A quick word on zbb zero based budgeting. You use zbb to plan how you are going to allocate your pay check and other monthly income to your various budget categories (including savings).

It’s a bit like kakeibo but with the added element that you drill down into more detail on how much you intend to spend. If you follow the 50 30 20 budgeting rule, you already have your ‘umbrella’ categories of 50% necessities, 30% treats and 20% investments (or debt reduction). Then you go another layer down, planning how much you will spend on sub-categories such as:

Food
Pharmacy
Car
Clothes
Sinking Funds
Investments
Repaying specific debts (debt snowball)

Whatever budget strategy you use, the principles of how to save money are the same.

Live within your means
No credit
Limit your spending on ‘today’ to less than your income

This way, you can put aside money, month by month, to save for your dreams and long-term financial freedom