We’ve been talking about setting, achieving (or not) and re-setting your financial goals. These are all good things to think about, but to make practical changes, you need to have a clear view of how much money you earn, and how much money you spend. In other words: you need a budget.
Having a budget gives you control. If you know where your money is going each month, it’s a lot easier to make adjustments to help you reach your financial goals. This is a lot more difficult if you don’t have a budget! It’s also a great opportunity to prioritise your money into things that you enjoy and that make you feel good. Even if you end up not making any changes, it’s still worthwhile to go through the budget process now and again, so you at least know where your money’s going.
But don’t panic! It’s easy to think of a budget as a real fun sponge, where you’re meticulously tracking every single cent you spend, trying to spend as little as humanly possible. In fact, a good budget should allow you the money you need to spend on the things you enjoy. Let’s take a look at the ingredients for one way of creating a budget...
Step 1: How much are you earning and spending?
First off, you want to see how much you’re earning, and how much you’re spending. The best place to find this out is through your online banking. Login and download three months of online banking transactions. This is a good number because it should include for those less-common, but high, expenses like dental bills and car repairs.
Now, it’s time to get adding. You want to find out how much you spend and how much you earn. You can do this by:
Putting your transactions in a spreadsheet, or
Using a personal finance app, or
Adding everything up with a calculator
It’s useful to find out how much you spend and earn per pay period because your pay period creates a natural “cycle” of money coming in against your money going out. So divide your totals by the number of pay periods in three months. If you’re paid once a week, you’ll divide your total by 12. If you get paid fortnightly, you’ll divide by 6. And if you’re paid once a month—you guessed it—divide by three.
Now you have a really clear view of how much you spend against how much you earn. Hopefully you spend less than you earn!
Step 2: Get categorising
After you’ve figured out how much you make and how much you spend, you can get into the details by going back to those transactions you downloaded and dividing your spending into categories. Your income, on the other hand, will be pretty obvious—not to mention hard to change in the short term.
Your rent or mortgage payments will probably be your biggest category, so start with that one. Then work your way down. Keep your categories nice and broad to make the process easier. For example, you could track your takeaway coffee, lunches, meals out with friends, and drinks at bars, all in the same category—“meals out”. That’s a lot easier than painstakingly dividing everything into separate categories. Same goes for things like power, internet and phone bills. Just wrap these all into one: “utilities”.
Finally, don’t feel like you need to account for every single dollar you spend. Start with the big categories first, and work your way down. If you work through a few categories, and you’ve accounted for 90% of your spending, don’t worry about that last 10%. Just call it all “other.” It’s also not an exercise to make you feel guilty—so try remember the good times that some of this spending created too!
Step 3: Drill down further and choose some priorities
Now that you have everything divided into broad categories, you can go into more detail where you need to. For example, if the “meals out” category is sucking up a lot of your money, you could categorise further to find out why. Are you spending loads on takeaway coffee? Or are you going out to bars heaps?
Once you’ve done this, it’s time to make some decisions. What spending truly makes you happy? Is it the money you spent with friends, the donation to charity, your investments? And on the other side, what could you cut out? By making these decisions about the things that are eating up the biggest portion of your budget, you can focus on the areas that will make the biggest impact.
Step 4: Build your budget
Now it’s time to build your budget. There are all kinds of ways you can do this, but here are a few examples:
You can be very specific and set a certain amount to spend on each category.
You can have a 50/30/20 budget: 50% needs (like rent and groceries), 30% wants (like going to the movies, or traveling), 20% savings (or investments). Easy!
You can have an 80/20 budget: invest 20% of your income, then the rest is yours to do whatever you want with.
You can set a daily budget (that’s what our CEO Brooke did a couple years ago).
These budgets are pretty simple, but you still need to find out where your money’s going before you start using one. That way, if you do an 80/20 budget (for example), you know where you need to make cuts to free up 20% of your income for investing.
Step 5: Track and check in
Once you’ve created your budget, be sure to check back in now and again. This doesn’t need to be an arduous process. Rather, you just need to take a look at your spending, and compare it to your budget. Are you sticking to the budget you set for yourself? Or are you missing it? If you need to make changes, what would those changes look like?
When you’re doing this, remember that if something isn’t working for you, you can always change it! There’s no point in persisting with a budget that isn’t working for you. Over the course of a few months, experiment with a few different budget approaches until you find something that works. After all, it’s your money, so manage it your way!
In the coming months, we’ll be looking at how different people manage their money to make investing work for them. If you have any budgeting tips or tricks you’d be keen to share, get in touch at [email protected]!