Here are 3 Key Budgeting Principles To Help You Save More Money

Most people struggle to budget because they see it as a torturous, despised process. Conventional budgeting wisdom follows the “Latte Principle”.

The latte principle says that if you don't go out to buy fancy coffee every day you can save for your house or whatever else you want. Another example that we younger people get a lot is if you stop buying avocados, you could buy a home.

The issue is that the math doesn’t agree with this, If we take an average Coffee price of $5 multiplied by 365 days a year, your spending is only $1,825 for the year. Let’s say your house deposit is $50,000, it would take you 27 years to save for your deposit by cutting out coffee! and that’s not even including the cost of making coffee at home that would take the place of the store-bought coffee.

I don’t know about you, but it doesn’t sound like a good budget if it takes you 27 years to reach your savings goal. This traditional approach to budgeting of cutting out the things you enjoy for small savings here and there is not effective.

Here are 3 key budgeting principles to help you save money:

The first is knowing where the money is going, we can’t budget if we don’t know how we spend our money.

Before I set up my first budget, I had no idea where most of my money was going. I tried a few methods of tracking and writing down everything I spent money on that week. If I’m being honest with you, it was an awful process. It didn’t give me a solid grasp on what I was spending my money on. Plus, knowing that I was tracking it that week was influencing my purchasing decisions because I didn’t want my budget to look too bad. I wouldn’t recommend this option, but if you’re uncomfortable with the other options then it’s a good starting point.

The next option I tried was to download some budgeting apps, This was more helpful than writing down what I was spending money on each week but still required me to do a lot of manual input. It was helpful in that it categorized by money neatly, such as fixed expenses or fun spending, but the process was still too manual for my liking.

The final option I found was to use a budgeting app that linked through to my bank account and separated my spending into categories. This way it was a truer representation of what I spent my money on, and I didn't have to manually input data. I found these apps helpful in working out where my money was going each month.

Now that we know where our money is going, the second principle is that we don’t worry about the $5 questions, we focus on the $500 questions.

Focusing on the $5 questions increases our stress levels and decreases our general happiness. Plus, we know now that it doesn’t contribute much to our actual savings goals.

Why would we spend time stressing that we can’t spend a few dollars on coffee when the reality is that it doesn’t make much of a difference in our lives? Instead, we can focus on the $500 questions. By this I mean looking at our big spending, questions like is my rent too high? is my car payment too high?

We need to know the percentages of where our money goes. We can break this up into our fixed/necessary costs, our savings percentage, and our fun percentage.

A good percentage to aim for is 50/20/30 which I first learned from Ramit Sethi’s book “I will teach you to be rich.” Ramit says that 50% of your after-tax income should go to your fixed expenses which include housing, bills, food, and necessary transport.

- As a side note, I make a distinction between Transport and necessary transport because I would never recommend that someone go and lease a $45,000 Truck on an income of 60,000 a year, that’s not necessary transport, that’s indulgent transport.

The next 20% should go to savings or repayment of debts, this is often referred to as paying yourself first. Most people will only save what’s left after a week of spending. By paying yourself first, we save a fixed percentage as soon as we’re paid.

Finally, the remaining 30% should go towards everything else which includes your guilt-free spending. This is money to have fun with.

Knowing your percentages means that you can make informed decisions about where you spend your money, is your rent or mortgage too high? Should you have bought that car? This means that you can make informed choices about whether to try and negotiate a better interest rate or sell your car.

Now if you’ve already nailed your percentages, why not buy that coffee because you’ve already got your savings percentage and you know how much you have in your remaining 30% so that you can buy your coffee every day?

As a side note, for high-cost-of-living areas (trust me I know about them) there can be some flexibility in your fixed costs. Try not to get up to 70% or above, I would still suggest around 60% – 65%.

This concept means that if your fixed costs are 70% of your income then there’s a re-adjustment required, it's time to start looking at your big-ticket spending. Your issue is not that you spend $5 on a coffee every day but can be a result of a much bigger issue.

Focus on the bigger picture and nail your percentages, then you don’t need to sweat the small costs.

50/20/30 is a guide, once you feel more established in your budgeting you can define your own percentages based on your own unique circumstances. The main thing that should be consistent is that you pay a regular percentage into savings each week or month.

The final principle is to think about what you value spending money on.

What I mean by this is, do you value spending $150 at Kmart on random junk or would you rather spend $150 on going out to a nice dinner with your family? We spend so much money on small junk things where we fall for advertising tricks and buy things that we don't need.

When we look at what we value spending money on, a lot of us would realise that we spend a lot of money on things we don’t really care about.

The key takeaway here is that budgeting doesn’t have to be a boring, arduous process. We can shift our mindset and think about our budget as telling us what we CAN spend money on rather than what we CAN’T spend money on.

In summary, my 3 main principles of budgeting are:

- Know where your money goes.

- Don’t sweat the small stuff.

- Focus on what you value spending money on.