How To Budget Money. Start Building Wealth!

Do you spend more time planning your holiday than managing your finances? Would you like to build your wealth but you don’t know how to start? It’s super quick and easy to take control of your finances and free up your time for more exciting things with this how to budget money guide.

Regardless of your age, don’t be discouraged if you’re just starting out on your wealth-building journey. It’s never too late to set yourself up for success. 

How? The underlying concept is very simple: earn, save and invest. Start and you could get rich!

Firstly, set your financial goals and create a budget – it’s quick and painless with our how to budget money advice below. 

Secondly, track and live by them – this sounds like a hassle, but will be absolutely worth it! Budgeting apps will do the work for you.

How to budget money - 4 income buckets - monthly spend, dream, security and growth
How to budget money

1. Divide Your Income Into 4 Buckets

Define 4 buckets: 

  • Monthly expenses – we can’t avoid them when budgeting money but we can make an effort to reduce them 
  • Your dreams – it’s important to have them 🙂
  • Financial security – think emergency fund, your home and pension 
  • Growth – this is where you can multiply your money and grow your personal wealth. Attention: risk involved! 

How you distribute your income among these buckets is fully up to you, keep reading for best practices!

And don’t just take our word for it. We have adapted the bucket system from the work of Tony Robbins and Ray Dalio. In addition, many of the following recommendations have been developed by Dave Ramsey in the popular 7-Baby-Steps framework.

2. Aim to spend no more than 50-60% of your income for monthly expenses

Never spend all of your money on monthly expenses. Aim for 50%, while 80% should be your worst case (please note, a monthly mortgage repayment belongs to this bucket as well). If you’re living beyond your means, you have 2 options: increase your income or cut your expenses

3. Build-up an emergency fund of min. £1000

Your security bucket should include at least £1000 in emergency cash. If you have got it already – congratulations – move on to the next point. If not, check for the highest-interest regular saver account and start saving today.

4. Pay off your debt

Once you’ve got a minimum emergency fund (£1000), direct all your efforts to getting rid of your debt (i.e. unpaid credit cards, overdraft, bank loans other than mortgage). Thus, if you have any. If not, well done – skip this step. 

In case of debt – we’d recommend to:

  • Always pay the minimum required on all your debts 
  • Try to pay-off in full, every month, high-interest debts, like credit cards.  This avoids building up further debt through interest payments (so-called snowballing)
  • Check if you can transfer the debt to lower cost (lower interest rate) options

5. Increase your emergency fund to 3-6x monthly living cost

When your debt is paid off (except mortgage), start increasing your savings up to 6x monthly spend equivalent. This is especially important for times of critical illness or recession when jobs are not safe. With this, you protect against slipping back into debt. In parallel, start investing in your future and contribute more to a company or private pension.

6. Invest In Your Future (15% of Pre-Tax Income For Retirement Purposes)

Dave Ramsey proposes to invest 15% of your gross income for retirement purposes. Make an honest assessment. How much do you need to contribute based on your age and the level of previous payments?  Alternatively, you can try the following steps to diversify your retirement savings.

Firstly, allocate a great proportion of the effort to your security bucket, namely your pension. In the UK you don’t pay income tax on your pension contributions and many employers match or multiply your contributions on top of that. These are essentially FREE MONEY. So definitely max out your employer’s contributions.

Secondly, you can open a Stocks & Shares ISA – this will be your growth bucket where you can invest in funds and stocks and experiment for larger returns. This is a riskier but also more rewarding option if you do it right. Depending on how much time and energy you want to give, we have a few investment ideas for you.

How much money you allocate between these 2 options, is totally up to you but don’t forget to diversify your investments.

7. Pay off your mortgage early

While completing the emergency fund savings and finding your ideal pension contribution – distribute your remaining monthly security bucket money to other great things. 

Why not save for a down-payment on a house or pay off your existing mortgage early? See here for a step-by-step guide to property purchasing.

In case you don’t want to own a house, there are other alternatives to allocate and grow your available funds – please see the illustration above.

The Bottom Line

How to budget money - 7 simple tips

Whether you’re just starting to gain control of your finances or have always been financially savvy and want to ensure that you’re set up for retirement, this  – how to budget money guide – is designed to help you move forward and master your finances! Use the tips – in the provided sequence – and take a step towards your dreams. Get closer every day.

Check out our blog for more resources on financial planning, passive income streams and money in general.

Posted: March 9, 2020