Budgeting is a great habit and life-long skill that enables you to have more control over your financial situation. It is a helpful tool that enables you to reach your goals through saving and investing your money in a way that works best for you.
Why make a budget
A budget is a spending and saving plan that you create. It helps you to prioritise your expenditure and ensure that you always have enough money for the necessities in life.
When you have a better understand of your spending habits you can create specific and achievable goals such as a holiday, home deposit, or debt reduction.
How to make a budget
1. Set a goal
When setting your goals, ask yourself , “Why do I want to make a budget?”. This can help identify what it is you are saving for. It could be for a holiday, a wedding, or a new home! The goal can be to simply stay on top of your bills or to gain a better understanding of your spending habits. Try to give yourself a realistic timeframe to achieve this goal.
2. See where your money goes
Record your income
How much income do you earn (post-tax) each week / fortnight / month? This includes all forms of income, whether it be your employment income, rental income, government assistance / benefits etc. We suggest working on a monthly figure for simplicity.
Record your expenses
List all your expenses and try to break them up into categories that make sense for you. For example;
Fixed Expenses: e.g., mortgage repayments / rent, personal loan or car loan repayments, credit card repayments, insurances, council rates, body corporate fees
Living Expenses: e.g., utilities bills, food & groceries
Lifestyle Expenses: e.g., café’s, eating out, entertainment, fashion
3. Identify your saving potential
Calculate the remaining income after your expenses are paid each month. Is there room to cut down on some of your expenses? You may be surprised at how much you are spending once your expenses are categorised.
TIP: track all your expenses for one month to gain a better understanding of any potential problem areas.
4. Set your limits
Now that you know how much income is left, you can set the following limits:
Set your spending limit
How much money you will allow yourself to spend on leisurely activities, entertainment etc. You should know at this point how much you usually spend and if there is potential to trim it back.
Set your savings limit
How much money each period will go straight towards your savings goal? Now put a line in the sand and try your best not to cross it!
5. Review your budget regularly
You should regularly review your budget to determine whether it is still practical and achievable. Life is continuously changing. We need to ensure that as our circumstances change, our attitude towards our finances change. If you find that you are under financial stress, or that you are still struggling even with a budget, speak with a licensed financial planner.