The new year should bring a new budget. So in this post, I will go through my 2021 Budget.
From 2020, I changed the way I budget. I have been using a Zero-Based Budget or ZBB, and I became a fan. In a nutshell, it’s all about giving every € a destination and end-up the year with zero.
Yes zero! It assumes you have already covered your savings, living costs and entertainment expenses. It’s all pre-planned. You can read the full explanation here.
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The Starting Point
I’ve started my 2021 Budget based solely on my 2020 full-time job income. While I expect to have extra income in 2021 (salary increase, dividends and side hustles), I did not take that into consideration. Any extra income shall be invested 100%.
Since I have been budgeting for a few months, I do know what are my average expenses per month. I have allocated a budget into 7 buckets:
- Housing (Mortgage and Utilities)
- Debt (Personal Loans)
- Transportation (Fuel, Insurance, Tax)
- Daily Living (Groceries, Personal Care, Clothing,…)
- Health (Pharmacy, Consultations)
- Entertainment (Vacations, Hobbies)
I will go in further detail for each bucket but based on 12 months, I came up with the following distribution with some room for deviations.
If we want something done, we need to to prioritize it. In a budget it’s the same!
The main priority is to pay ourselves first. In other words, money going into savings/investments is set first to a target that you are almost sure to achieve if nothing in our lives change dramatically.
Secondly, we need to pay for the mandatory expenses such as a mortgage/rent, food and transportation. Only then, we should assign “fun” money.
As you can see, the savings bucket takes the largest portion of my budget. It’s based on a 40% target which I am almost sure to hit. While I expect to increase my savings rate in 2021, I prefer to be conservative with my target.
That conservative feeling mainly relates to my Housing bucket predictions. As I’m moving to a new apartment, I do not know for sure my monthly running costs. The gap might not be overwhelming but once again better to have a target that you can hit, than something completely off.
The Big 3 Expenses
Once we settled with a savings rate target, I can then allocate the remaining 60% to the 3 largest money takers: Housing, Daily Living and Debt.
In the Housing bucket, I cover the mortgage and all the utilities. The main question mark relates to the monthly charges of living in an apartment complex. As what is supposed to be included is not clear yet, we only have a range of what this cost might be.
Some front costs are to be expected until the dust settles, but I’ve allocated 25% of my annual budget to it. In the coming months, I will check if my prediction was accurate.
The next big thing is Daily Living. In this bucket, I include groceries, clothing, personal care, restaurants and household spending. For many, this is a bucket hard to manage. This is why a budget helps with the monthly shopping. If you overspend in a category, make the effort to cut on others. By my calculation, this normally should take 11% of my 2021 budget.
Lastly, we have the Debt bucket. This relates to some personal debt which will be tackled this year and should reduce our liabilities. I would normally pay it off, but with such low interest rates we are better off putting that money to work than cleaning our balance sheet. Debt takes around 12% of the budget.
The “Fun” Money
While I agree that we should be disciplined with our money and budget according to our goals, life should be enjoyed as well. I may be frugal in some domains but I do enjoy travelling and fun experiences.
Since 2020 is a very limited year in terms of travelling, I do hope for a 2021 with less restrictions. Therefore, 7.5% of my income will be spend on having a good time.
2021 will bring lower transportation costs as public transportation is free and I have less need to use my personal car. Some money was also allocated to the Health bucket targeted to the double of last year.
Important to mention, is that I also left around 4% of my budget as a buffer in case of overspending! If not spent, this money will be added to my emergency fund.
I strongly advise my readers to do a similar exercise with their money. Remember to be grateful for what you have and work towards your own personal/financial goals.