Alexandra Cain Finance Writer
Budgets sound boring, right? But they are actually 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.
This 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 will stick to.
Step one: Take a look at your incomings
Add up what you earn each 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 non-discretionary expenses – things you can’t do without like food – and your discretionary costs – things 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 non-discretionary 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 non-discretionary items like entertainment and dining out. But if you cut these costs too much, it’s likely you’ll blow your budget because everyone wants to have a bit of fun once in a while. Instead, see where you can make some savings to your non-discretionary costs, by negotiating better rates with your phone and energy provider, for example.
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.
About the author
Alexandra Cain is a finance journalist who contributes regularly to The Australian Financial Review, The Sydney Morning Herald and The Age.
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.