Budgets sound boring, right? Well, they are. But at the end of a few hours of setting up a spreadsheet or budgeting app, looking at numbers and flicking through statements, you'll have your key to financial freedom.
Many of us fly blind when it comes to working out a household budget, hoping we’ll have enough to pay our expenses, but not really knowing whether we can.
Although tempting, the stick-your-head-in-the sand approach isn’t the best way to manage your finances. A much better approach is to itemise your incomings and outgoings so you know how much you have to spend, invest and play with. Here are the essential steps to preparing a budget you'll stick to.
Step one: Take a look at your incomings
Add up what you earn each fortnight or month in terms of your salary and other income such as investment returns and interest that accrues to you.
Step two: Track your costs
The idea is to itemise both your 'can't live without' expenses – things like food and your rent or mortgage – and your 'want but don't necessarily need' costs – like holidays.
The best way to take stock of your expenses costs is to refer to your bank statement. As most of us pay for many things with a debit or credit card, it’s easy to see what you have spent on your most common costs.
Calculate what you have spent on items like food, clothes, bills, your rent or mortgage and transport over a month to get the average figure for the period. Then, do the same thing with your not-so-important expenses. This process will give you a clear view of how much you are spending.
Step three: Do your sums
You should now know what you spend and earn each month. To get the full picture, it can help to enter these into a spreadsheet or use a budget calculator.
If you’re spending more than you’re earning, you will need to make some changes to reduce your expenses.
Step four: Cut costs
Here’s where the skill comes into budgeting. If you do need to cut your costs the obvious place is the not-so-important things like going to the movies and eating out. But if you cut these costs too much, it’s likely you’ll blow your budget. Everyone wants to have a bit of fun and if you cut these things out completely, life just won't be the same.
Instead, see where you can make some savings to your not-so-important costs, by negotiating better rates with your phone and energy provider, for example. You could also consider cutting smaller costs like eating lunch out at work or your daily coffee because these are the ones that add up.
Step five: Prepare your budget
Once you’ve worked out how to ensure your expenses don’t overshadow your income, you can set your budget, apportioning an amount each month to expenses like petrol costs, based on what you have actually spent in the past.
Sticking with a budget means regularly reviewing it to make sure you are spending in line with it. So once you have prepared it, don’t just pop it in the drawer never to be seen again. Instead, take it out each week and track your spending against it. It’s a great way of taking control of your finances and your life.
Make it easier and use an app that can work with your bank and track your expenses.
What are your top budgeting tips? Let us know!
Please note that this article is not financial product advice and does not take into account any person’s individual objectives, financial circumstances or needs.