Step by step guide to budgeting
What you'll learn in this step: Calculating your budget can help you
work out whether you need to increase your income or reduce your spending.
What are budgets?
Budgets are like your own personal small business statements. They are the
sum of your incomes (wages, salary, dividends, interest, rentals, pensions and
so on) minus the sum of your expenses. What you are left with is your disposable
income. If when you work out your budget, you discover your outgoings are greater
than your incomings, you need to increase your income or reduce your spending.
Why budget?
A budget lets you know if you are living within your means. If you're spending
more than you're earning, you'll be going backwards and have little to show
from the average $4 million you can be expected to earn during your working
lifetime. But a budget also can set you on the road to saving for something
special like a holiday or a car – or building an investment portfolio.
 A
budget is not a millstone; it's a tool to help you manage your finances.
Go to Moneymanager's savings
guide to fine-tune your savings strategy and find the best rates to make
your nest egg grow.
Learn more: Saving private revenue, The
Sydney Morning Herald, 09 Jan 2002
How to win the budgeting war.
Learn more: Best intentions, The Age,
24 Feb 2003
The best way to save money is to start with a plan, writes Peter Weekes.
When to start
There's no time like the present to start a budget, but there are a number of
key events in your life that can trigger the need for a budget. These include:
- Getting married ...or divorced
- The birth of a child
- A new job
- The start of the year
- The start of the financial year
- A new job
- Saving for a key purchase
- Retirement
Learn more: Time to action a budget plan,
Personal Investor, March 2002
Disciplined investing begins with disciplined saving. And the bedrock of saving
is creating and sticking to a sensible budget.
Case study
Janet and Bob have been married for six years and hope to set up their own
business. They describe their financial habits as "sporadic".
Read the full case study |
How do you start?
First you need to list all your income sources and all your expenses. The income
part is probably the easiest and the one that gives you that warm inner glow.
The expenses part is a little harder – some months you have electricity
bills, other months your car insurance is due. The beginning of summer might
see you buy a couple of outfits, or your children might have just had a growth
spurt and need new clothes. It can be easy to overlook and underestimate your
spending. What you need to do is identify your total expenses, remembering the
incidentals and the bills that are annual, half-yearly or quarterly.
Learn more: Don't get sucked in, Sydney
Morning Herald, 24 Jan 2001
There are many ways to unwittingly squander your precious dollars. Find out
the key dos and don'ts.
What you'll learn in this step: Daily tracking of your expenses will
give a good indication of where your money goes. A budget planner is a handy
tool.
There are many ways to work out your budget, but it comes down to gathering
information on your spending and your income. It can be difficult to track all
your spending, but there are a number of reliable methods. One is the "daily
track method", and the other the "deal your cards" method. But you could just
as easily sit down at the table with all your receipts for the last year and
work it out.
Case study
Jillian, 28, is a scientist, and Oliver, 33, is an engineer. They have a
five-month-old baby and want to know how to manage their finances while Jillian
studies medicine and Oliver stays at home with their children.
Read the full case study |
The daily track method
One way to work out your expenses accurately is to track them on a day-to-day
basis for up to two months. This is probably the most accurate method, but it
can be tedious. Every cent you spend – whether it's buying a cup of coffee or
a bus ticket – needs to be recorded. It's advisable to create one sheet of paper
for each of the eight weeks, and then divide each sheet into eight columns,
one for every day of the week and one for the total. This should start to paint
a picture of your spending habits, and if you need to cut corners, you'll be
able to see where savings can be made on little luxuries.
Add the eight weekly totals together, divide by two and then multiply by 13
to give you a figure for 52 weeks. Then add in the other costs that come outside
that two-month period like your home and contents insurance and, say, your annual
club subscriptions. That will give your total annual expenditure. You can then
divide that by 12 for an estimate of your monthly commitments. Of course, not
all your expenses are spread out evenly month-by-month, and there will be some
months when you will spend more than others.
Consider
paying your insurance in monthly instalments to spread the load.
Deal your cards method
Credit cards can be a useful tool for budgeting – if you use them to pay for
most purchases and pay them off in full each month. Your monthly statement will
itemise your spending, including your bills, grocery shopping, and entertainment
costs like restaurant bills. Of course there are incidentals like the odd magazine
or the school excursion you might miss along the way because you paid cash,
but the card statement should pick up most of your spending.
And if you have a card offering rewards, you might also pick up a couple of
free flights or a discount on your car purchase along the way. One good way
to allow for extra expenses is to add 5% to your statement. Again you will need
to look at the pattern from a few months' spending to get the big picture. Just
remember to include all those annual commitments.
See Moneymanager's credit
card guide for streamlining your credit needs with online facilities and
applications forms.
Using a budget planner
The next step is to fill in a budget planner. You can create your own on paper
with a column for income and a column for expenses, but there are also a number
of ready-made planners you can use. You can find budget planners in personal
finance software packages such as Quicken or from one of the planners provided
employed by the major financial institutions. Generally you can download a planner
from the Internet (some require your computer to be able to read an Excel spreadsheet)
or drop into your local bank for a hard-copy budget planner.
Create a budget to manage your finances.
Most
home loan brochures to include a budget planner.
Expenses
There are six broad areas of expenses – household, transport, personal (clothes,
gifts, education and so on), food and groceries, insurance and entertainment.
Case study
Dion, 24, is a real estate agent who wants to become more financially independent and get out of debt.
Read the full case study, The Age,
11 Nov 2002 |
Household expenses
Household expenses include rent or mortgage payments, rates, water, electricity,
gas and telephone bills. It will depend on the budget planner you use whether
your home and contents insurance is included here.
Transport expenses
Ever stopped to add up the cost of running a car? The NRMA puts the average
weekly cost of running a Holden Commodore at just over $200 a week. This includes
finance, registration, insurance, maintenance, petrol and depreciation. While
you're not laying out the funds for depreciation, it's still a cost to you.
Also, when working out transport expenses, don't forget to add in train and
bus tickets as well as the occasional cab.
Personal expenses
Clothes, haircuts, education, doctor's visits, the dentist and optometrists
all should be included here. And don't underestimate the amount you spend on
clothes. Look at this season's wardrobe – what did you really spend?
Food and groceries
Well, you've got to eat! Check your recent supermarket dockets, and don't forget
what you spend on a daily basis – the loaf of bread, the milk or the visit to
the butchers.
Entertainment
Entertainment is probably where the cuts can be made, if you have to. Movies,
eating out, magazine, books, CDs and holidays. And remember to include any annual
club memberships.
Insurance
Insurance costs can take up a fair chunk of your income. There's your home
and contents, your car, your health, life and maybe even income protection insurance.
If you pay these annually, make sure to include them all.
What you'll learn in this step: Once you know where you stand financially,
you can start to put a plan into operation.
Your budget is likely to show you one of three possible outcomes.
- Your income is greater than your expenses so you can afford to save.
- Your total expenses are greater than your income but you are able to make
cuts without impacting on your essential expenditure
- Your income is not even meeting your essential expenses. If this is the
case you need to closely look at your financial position and perhaps contact
a professional to help with a solution.
Now that you have set up a budget, you should try and stick to it. While doing
a budget may be boring, it does provide you with more control over your expenses.
Remember, most people don’t plan to fail – they fail to plan.
While you have set yourself up with a budget, should also look for other ways
of saving money and one is through streamlining your bill payments.
Learn more: Budget your way to financial
security, The Age, 6/11/2000
Find out out about the tools available to household treasurers working on
their budgets.
Case study
Karen is an executive assistant and her husband, Martin, is a registered
nurse, studying the final year of his architecture degree. They want to
have a child next year and are keen to develop a long-term plan for their
finances. "We want to minimise our tax and ensure we're putting enough away
for a comfortable retirement," Karen says.
Read the full case study |
The credit card method
The emergence of electronic banking and BPay along with the use of credit cards
has changed the way you can control your expenses. Now you can keep all your
money in the bank (possibly in your mortgage offset account) and make all your
payments with your credit card. Once your card falls due, you pay it off in
full.
Be
careful not to spend more than your credit card limit or the amount you can
afford to repay each month.
See Moneymanager's guide
to credit cards to learn how cards differ.
Compare credit cards
by rates and feature.
Online method
Online banking allows you to organise your bill paying in advance. At the start
of each month, you can sit down with your bills and schedule your payments.
Or you can organise direct debits where the phone company, credit card or utility
company takes from your account the amount you owe at the due date.
Online financial calculators can now be found on most financial web sites.
These tools help you determine how much you need to save to reach certain goals.
They are extremely useful and allow you to insert your own figures that you
can vary to see the effect of different saving scenarios.
Make
sure you have enough money in your account to cover the payments when they fall
due.
What you'll learn in this step: Setting unrealistic goals may undermine
your savings plan. You don't have to forgo all of life's luxuries to maintain
a workable budget.
Budgets usually fail because people have set unrealistic goals. You don't have
to go without all the luxuries in life. In fact, if you want your budget to
be successful, ensure you don’t forgo all treats. If you start taking sandwiches
to work, allow yourself a bought lunch once a week or once a fortnight. Don't
give up going to movies; just switch the time you go to the cheap nights.
Case study
"I want to be able to save and enjoy life as best I can," says Roslyn, who
is seeking professional help to improve her budget. She is a great believer
in budgeting but, despite having a plan for the past five years, she thinks
her saving habits could be better.
Read the full case study |
Budgets also become unstuck when people stray from them for a couple months
and feel they’ve failed. It's a bit like being on a diet. Just because you eat
a piece of chocolate cake doesn't mean you have to throw away the whole diet.
You can start again tomorrow. Working out the right budget will always take
fine tuning – sometimes you will underestimate what things cost, sometimes you
will have to allow for an emergency, such as expensive vet bills – it's all
about finding the right balance. You need to monitor your budget for a few months
and then revisit it once a year to check you're on track.
Don't do it alone. If you're part of a family, it is vital you communicate
what you’re doing. There's no point in your sticking to a budget when the rest
of the family is carrying on spending without considering what they’re spending
on.
Learn more: Best laid plan, The Age,
18 Feb 2002
The strategy: To get the best from my financial adviser.
Learn more: Sense and sensibility, The
Sydney Morning Herald, 20 March 2002
Teaching children how to handle money is crucial to managing finances as adults.
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Each week financial advisor Noel Whittaker answers your
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