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Is it better to budget savings or spending first?

When you’re budgeting should spending or saving come first?

It sounds like a chicken or egg question and it sort of is. I think it’s a good idea for nearly every household to have a budget.

You don’t have to follow the budget religiously down to the last dollar necessarily, it can be more of a general plan. The point is that you know you’re not over-allocating or overspending in any category.

Initially I think money should be allocated for the roof over your head, basic utilities, transportation and supermarket shopping.

But after that I believe it’s important to set aside money first for your financial goals like investing or saving for a house before you spend money at Village Roadshow Ltd (ASX: VRL) or Lovisa Holdings Ltd (ASX: LOV).

If you do it the other way around, and spend first and hope you’ll have money at the end to save, you may find you save considerably less than if you had committed saving at the start of the month.

At the moment my household is running a dual system for our budget. We save $X amount per month towards our house deposit fund and then we add whatever we don’t spend to the house deposit at the end of the month as well.

With most of our spending categories we like to overestimate how much we’re going to spend and try to ‘beat’ that.

For example, we say allocate around $20 a week more for our supermarket shopping so that we aren’t living close to the edge with our money over the course of the year. We do the same thing with our energy and other things so we don’t feel too limited.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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