Step 2: Take a snapshot

What you'll learn in this step: Without a budget, it’s easy to find yourself spending more than you earn.

You may think you're on top of your finances, but try writing all your spending down and you might be shocked to realise just how much you're spending – and on what.

Two coffees a working day, at $3 each, adds up to nearly $800 over a year. You might reckon you spend a few hundred dollars a year on clothes, when the reality is it's in the thousands.

So the first step is to see where you are now – then you can think about how to get to where you want to be in the future.

First, think about whether you're going to operate on a weekly, fortnightly or monthly budget – it's a good idea to match your pay cycle. For our purposes, we'll work on monthly figures.

Next, list all your sources of income. For many people, particularly younger people, there'll be only one entry in this column – their wages. For others, there might be rental income from an investment property, interest earned on a bank account, or dividends on shares.

Now for the hard part – listing your expenses. It's probably best to think about these in groups of daily/weekly, fortnightly/monthly and quarterly or annual expenses.

Your daily or weekly expenses will be small-ticket things like food, coffee and the newspaper you buy on the way to work. You probably pay cash for these, so it may pay to keep a money diary for a few months so you can see where your cash goes. Use this information to work out how much you spend on average per month.

Fortnightly or monthly expenses are things like transport passes, your mortgage payment, gym membership, haircuts and petrol. Jot these down too.

Quarterly and annual bills include electricity, gas, health and life insurance, rates and the cost of servicing your car. Add those up and divide them so you have a monthly average.

Then there's the irregular spending that's a little harder to track. Do you know how much you spend on clothes, toiletries, expenses such as spectacles and contact lenses, hobbies (photography, music lessons), alcohol, dining out, Christmas presents, gardening and other home maintenance, books, toys, holidays?

A money diary could come in handy again, or financial software that allows you to assign spending to such 'categories'.

Credit cards can also come in handy in tracking your spending, especially if you use them for most purchases and then pay them off in full each month. Your monthly statement will itemise your spending, allowing you to work out where the money's going.

Again, look at the pattern over a few months – preferably a year – and work out a monthly average.

Now you should have a pretty good picture of how much you're spending, and whether it matches – or exceeds – your income.

Tool: See our Smart Guide to Credit Cards for more information.

 

Checklist: In tracking your spending, think about:

• Daily expenses, such as lunches and coffees
• Weekly expenses, such as bus passes and petrol
• Monthly expenses, such as haircuts and gym membership
• Quarterly expenses, such as electricity and car servicing
• Annual expenses, such as life insurance and holidays