Many people use budgets — sometimes more, sometimes less in a structured way, sometimes simply in the form of mental accounts. A study by payment provider Klarna shows that younger generations in particular are increasingly using budgets, as they are generally more interested in personal finance. It's no wonder that (controversial) trends such as the turnover method were also very well received on social media last year. But what exactly is budgeting and are budgets always helpful? And how do you approach the whole thing correctly?

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Budgeting is nothing more than keeping track of income and spending. A budget plan therefore helps you to plan whether you can afford things that you want or need to do.

If you research the topic of “budgets,” you'll quickly come across some rules of thumb and methods. The 50/30/20 rule will probably be the most common. With this method, you divide your monthly income into three pots: 50% for your fixed costs such as rent and electricity costs, 30% for wishes such as holidays, going to restaurants or shopping, and 20% for saving.

This rule of thumb is also a bit more compact than the 60/40 rule, where your fixed spending should not amount to more than 60 percent of your total spending, or even more detailed in the form of the 6-account model, as this is where you divide your money over even more (six) pots. You might also stumble across the zero-based budgeting method. With this, you can even become “cent-specific” by attributing a “specific job”, i.e. a specific benefit, to virtually every cent, so that in the end, no money remains in your account without budget attribution.

However, such rules of thumb and methods for setting budgets are not always helpful and are sometimes outdated. The rule that your rent may account for a maximum of 30 percent of your income dates back to the 1970s, for example, when rental prices were completely different. According to an online survey by YouGov on behalf of Postbank in 2023, more than 40 percent of participants stated that they could “barely afford” their housing costs.

This fact only shows that rules of thumb may provide a framework for guidance, but they are not always appropriate — especially when the economic situation changes. Breaking a set budget makes us feel bad. Non-compliance can therefore demotivate and lead to the assumption that we are not handling money well. There are many different reasons why meeting budgets doesn't always work — this can start with a fluctuating income.

Just keep in mind that finances are personal and individual. Author Melissa Browne writes in her book “Budgets Don't Work (ButThis Does)” that budgeting can be as quick as dieting. It's not about doing without at all, but spending and saving cleverly and healthily.

So how do you use budgets wisely?

1. Organize your finances and keep track of your income and expenses

The first step to creating a budget is understanding your income and expenses. Take time to collect all sources of your income and make a list of your monthly expenses. That means not only the fixed costs such as rent and bills, but also the small expenses that add up over the course of the month. The better you understand your finances, the better you can plan and identify potential savings. When creating the overview, don't forget annual contributions, i.e. amounts charged only once a year, such as insurance.

2. Set yourself financial goals

Budgeting is primarily about why you want to use budgets. Take time to define your short-term and long-term goals. Would you like to reduce debt, buy a house, or save for the future? What is important to you? And what is realistic in particular? By setting clear goals, you can align your budget accordingly and ensure that you're on track to achieve them.

3. Prioritize spending

Not all spending is equally important. Separate your expenses into “necessary” and “optional” expenses. Necessary expenses include things like rent and groceries, while optional expenses include things like entertainment and travel. By prioritizing your spending, you can ensure that you have enough money for the things that matter while leaving room for flexibility and fun. In the process, also check whether you can find cheaper alternatives.

As part of prioritization, set aside a fixed amount for unforeseen events. Because, as research shows, we're good at estimating and setting budgets when it comes to regular and normal expenses such as rent or groceries, but quickly underestimate the frequency of special, unplanned spending. This can result in you not being able to meet budgets and spending more than planned.

4. Track your spending

A budget is only as good as its implementation. Find a way to keep track of your spending regularly, whether by keeping a budget book, an Excel spreadsheet, or using a budget app. By keeping an eye on your spending, you can see where you might not be meeting or exhausting your budget and make adjustments.

5. Stay flexible

Life is unpredictable, so your budget should be flexible. Be prepared to adjust your budget as your financial situation changes. Whether it's a pay rise, a job change, or unexpected expenses, flexibility is key. By staying flexible and adapting to changing circumstances, you can ensure that your budget continues to work for you. After all, it's about your personal finances.

Budgeting, in the form of (good) budgeting, is often equated with good money management. Many existing budget rules are not practicable for all people, even though rules of thumb can provide guidance. Budgets can help you to keep control and overview of your finances, to be prepared and to make a good effort. Failure to comply with existing rules of thumb should not demotivate. Because budgets should above all fit your life and contribute to your goals. It is then more likely to meet these budgets. In the end, your budget should be a tool for you to keep control of your finances. The design is therefore up to you and should not be based solely on rules of thumb.

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