Learning how to budget is one of the keys to financial health. With living costs on the rise and wages stagnant, many Australians are having a hard time managing their money.
Recent surveys on Australians’ money woes have found that 17% of households can’t pay their utility bills on time, while another quarter has less than $1000 in cash savings.
What is a budget?
A budget is a personalised spending plan that tracks your income and your expenses. With a budget, you gain control over your money instead of letting it control you. We’ll cover how to make a budget in more detail below.
How important is it to make a budget?
Why do people hesitate to make a budget? People put off budgeting because they think a budget is restrictive.
But knowing you have enough money to pay your bills, cover a costly emergency, and reach your financial goals is a form of priceless freedom.
Here’s how to budget in five easy steps.
Step 1: Find out how much money you have coming in
You can’t create an adequate budget if you don’t know how much money you have coming in first.
While your financial goals will determine what you do with your budget, your salary is going to be the foundation from which you build.
Remember, a budget is custom-made, and your personal budget won’t look the same as someone else’s. A personal budget is also going to be very different from a family budget.
What’s the easiest way to find out how much money you have coming in?
The best way to figure out your total amount of money coming in is not to look at your total salary, but at how much money you actually receive into your bank account each pay day.
People who are first start budgeting will often make the mistake of overestimating what they can spend because they’ll base their budget on the number of their total salary.
You’ll need to remember to subtract your deductions, like taxes, first when creating your budget.
The final amount you get after all of the deductions have been subtracted is your take-home pay or net income.
The number you come up with will be the foundation you use to build your solid financial house.
Step 2: Track how much money you have going out.
One of the benefits a budget gives you is the control over your money. With a budget, you’re telling your money to go where you want it to go.
The next step for creating a budget is to track your spending and where the money is going.
Without a budget in place, most people don’t know precisely what they’re spending their money on and where it’s going.
Tracking your spending can also help you figure out where to cut costs and allocate funds to other goals. Tracking your money can show you how to get out of debt, and what steps you can take to repair your credit.
The first thing you’ll need to do for this step in the budget creation process is to categorise and list your expenses.
Start by listing your fixed monthly expenses, such as rent payments, car payments, and insurance, utility bills, or a mortgage.
Fixed costs are bills you have to pay no matter what. In many cases, your fixed expenses won’t change much, if at all, from one month to the next.
The good news is they are pretty easy to track. Unfortunately, there is very little you can do to change them.
But knowing how much of your net pay is going to fixed monthly bills can help flesh out your budget and give you some clarity into how to improve your financial health.
Next, you’ll want to list all of your variable expenses – spending that changes from one month to the next.
Clothing, groceries, outings, and entertainment would all count as variable expenses. Variable expenses give you a prime opportunity for cutting back.
What’s the easiest way to find out your variable expenses? Combing through your credit card statements and bank statements will give you an insight into how much you spend on discretionary items every month.
Go line by line on a bank or credit card statement. Use different coloured highlighters for each category of expense, then add them together.
Step 3: Determine your short and long-term financial goals.
There is a reason why it’s called personal finance because it’s personal.
Everyone’s financial picture is going to look different.
Someone who has a lot of credit card debt may want to make paying that off a priority, while another will want to make building a robust emergency fund their number one financial goal.
Once you get your overall picture for your budget, that is your net pay, and then expenses tracked, determining your short and long-term financial goals is crucial.
Before you start picking apart your expenses, make a list of both short and long-term financial goals, you have that you want your new budget to help you achieve.
A basic rule of thumb is that short term goals will be things that will take you a year or less to accomplish, while long-term goals can take years.
Funding a retirement account would be considered a long-term goal.
Your goals can be flexible, but identifying your financial priorities for your budget will help you plan accordingly, and it can also help you visualise success.
Step 4: Adjust your spending habits to reach your goals.
Your categorised and tracked fixed and variable expenses will help you predict how much you have to budget.
It’s a good idea to determine your needs versus your wants so you can allocate funds accordingly to reach your goals.
After you’ve evaluated needs versus wants and have cut down on your discretionary spending, you might be able to cut on needs-based expenses next.
For example, you may need internet service at home, but it probably doesn’t need to be the fastest.
Could you change your thermostat settings to cut back on energy costs? You need groceries, but do you have to buy steak?
Despite our best efforts and intentions, sometimes the numbers don’t add up. This is where you might have to make some tough choices to get your budget balanced and put out financial fires.
Your home is a need. Does it have to be so big? Could you downsize and opt for a smaller place with a smaller mortgage?
What about if you have a rent payment. Can you move to a less expensive rental once the lease is up?
Practically everyone needs a car to get to and from work, but you don’t have to have the newest model with the latest gadgets.
These significant, fixed expenses can be cut if you have the willpower, determination, and need to do so.
Step 5: Regularly review your budget.
Your income may change, and your financial goals could too. Emergencies happen, and you may need to adjust your spending accordingly.
For people who work freelance, variable incomes can also make it necessary to review their budgets regularly and make adjustments.
Periodically reviewing your budget and financial plans can also help you determine if you’re on track to reach your goals, or if circumstances call for you to change course.
The thing with budgets is to remember that a budget works for you and gives you control over money, not the other way around.
It can be overwhelming to know that your money situation can change on a dime if you were to lose your job, get sick, or have the rent raised. Good things can happen too, like getting a better paying job.
Having your budget in place gives you a solid foundation to work from if your finances change, and it’s important to remember that budgets can and should be flexible.
And once you reach a financial goal, you can move on to the next one with a budget that you know will support you to reach it. Keep checking your budget to make sure it is aligned with your situation, by repeating Steps 1 to 4 as required.
Our top budgeting tips
Once you’ve created your budget, how do you ensure that it keeps working for you in the long term?
Here’s our top tips to make a budget work for you:
1. Make it easy on yourself and track your spending automatically
There are many spending tracker apps on the market today that are free and easy to use and can help you figure out where your money is going.
Spending a small amount of time ensuring that every transaction is recorded automatically as it happens can make it super simple to manage your spending, and see how you’re doing in comparison to your budget.
2. Know your essential monthly expenses
Knowing what’s an absolute necessity and having money set aside for the essentials can protect you from overspending and not having enough to cover them.
Remember, the essentials will look different for everyone, but may include things like rent, groceries and utilities. But regardless, you’ll need to determine what yours are for your personal budget.
Knowing where you have any money left over can also help you flesh out your budget.
For example, let’s say you have to drive to work every Monday through Friday. The petrol you need to get to work would count as a need and it’s probably not feasible for you to cut that expense.
However, a streaming video service would be an expense that could count as a “want” and can be reduced. You could instead allocate the funds that would typically go to the video service to say, pay off a credit card.
Where do you have money left over? Is it possible to cut back on something discretionary?
Knowing the difference between wants and essentials or needs and where you can cut expenses can make all the difference when it comes to balancing your budget and reaching your goals.
Sure, you may have a lot of “wants,” like going to see that new movie with your favorite actor in it. But you could instead opt to stay home and put your movie money towards another financial goal.
3. Keep your budget simple
Simplicity with finance can help you reach your goals faster. A simple, straightforward budget is more likely to set you up for a win since it will be easier to stick to.
Simplifying your budget also ties in with tip number one – automatically tracking your expenses. Using financial budgeting technology can help free up much-needed headspace and make the entire process less stressful or overwhelming.
While it’s true that you should follow step five in our guide, continuously tracking your expenses can add a complication to the process that you don’t really need.
Plus if you feel like you aren’t moving fast enough to reach your goals, you can get discouraged and give up. Simplicity will keep it feeling easy.
4. Give yourself an allowance
Austerity isn’t fun. And when you work for a living, you’ll want to use some of your hard-earned money to treat yourself.
Set aside a small amount of “fun money” in your budget. This is a set amount that you can spend freely on whatever you want, without feeling guilty.
5. Create systems to help you automatically manage your finances
For example, if you have a goal of padding your emergency account, set it up to automatically withdraw an amount from your main bank account into your savings account. You won’t see the money, and it will be out of sight, out of mind.
When you use automation to handle your finances, it can be less stressful to stick to a budget when your spendings and savings are set to run on autopilot.
6. Shop around for better deals
Maybe it’s true you need an internet connection at home. But you might be able to shop at a few different internet service providers to get a better deal.
Take a look at your tracked expenses and see where it could be possible to find a cheaper alternative. You’d be surprised at how much you can save by switching providers or plans, just make sure that you’re still getting good value for your money.
7. Get advice for debt problems
Do you struggle with debt?
You’re not alone. Australia’s personal debt is some of the highest in the world.
Debt can kill your financial health and wellbeing, and make it tougher to reach your financial goals.
When you’re in debt, you don’t have financial freedom, and every hiccup in your income can be a devastating earthquake for your household budget.
If you’ve got an issue with debt, get advice from the professionals.
At Debt Negotiators, we specialise in helping Australians get out of debt and give themselves financial breathing room.
We offer a range of debt solutions for our valued clients around:
We also have a free debt consolidation calculator that you can use.
You can see precisely what your debt repayments would be with a debt agreement or debt consolidation loan.
Contact Debt Negotiators today for a free debt assessment and get back on your feet.