Creating a successful budget
Almost every client I meet is afraid of the word ‘budget.’ With all those crazy TV shows and the media seeming to confirm everyone’s worst fears – a budget means you’ll have to stop doing the things you enjoy, in order to save money. This often isn’t the case at all, and the number one question to ask yourself about your budget is “is this sustainable and comfortable long term?”
Following below is a short 3 step guide to set up and maintain a simple household budget. While a budget will never be a sexy topic of conversation, it’s an important adult thing that everyone should do in order to achieve their goals.
Get your last 2 months of bank statements and household bills handy. There’s no excuse for not being able to do this, with online bank transaction histories and most suppliers emailing bills these days. You really need to be honest with yourself in this step. I usually find clients have very little idea of the exact amounts they spend on things. Comments like ‘we spend maybe $50 a week eating out’ or ‘I only put petrol in once a month’ are quickly cleared up by looking through bank statements. It’s all there in black and white!
Get out your trusty notepad and pen and start writing things down. You want to itemise all your recurring expenses and have a value next to them. If you get paid monthly, break everything into monthly chunks. If it’s payday every fortnight, divide the bills into equal fortnightly amounts instead.
Have your last two payslips handy so you know exactly what you’re being paid each period. Have a look over your payslips even if you’re on a salary, so you know how much tax is being taken, if you’re still contributing to the social club etc. Write down the net amount (amount that is paid into your bank account each period)
Next, we need to compare your income amount to the amount of your expenses as defined in step 1. Hopefully your pay is more than your allocated expenses... Assuming this is the case, you then need to make sure each pay period you set aside the amount required to pay all of your bills.
For example: if your mortgage is $3,000 a month that’s easy – you need to put $3,000 aside each month to pay this bill. As your power bill will usually be paid quarterly, you take the last bill amount (let’s use $700) and divide it by 3 as we want to get a monthly payment amount. In this case we need to put aside $233.33 each month to ensure we have spare cash when the power bill comes due.
I find the easiest way to set this up is the have 3 accounts. Account 1 is where your salary goes, your debit card is linked to it and you spend money from here. Account 2 is your bills account, this is where we transfer $233.33 each month for the power bill as above. Account 3 is your new savings account. Check out my other blog for some tips on what to look for in a good savings account. Even if you’re not a good saver or have never tried it’s all about setting yourself up for success. Start moving in the right direction by having a dedicated account for savings.
Write down what your goals are, and how long you think you will need to achieve them. Almost everyone I meet is saving towards a house deposit. This is a tough one and will take time but is certainly worth the effort. After step 1 you should know what your budget surplus is (the amount left over each pay after all of your expenses and spending money have been taken into account) This is the amount you should feel comfortable to devote to your new savings account. If, for example you had a monthly surplus of $1,000 to put towards your house deposit and needed to save $25,000 it’s going to take just over a year to steadily save this amount. Keep in mind that all your bills will be sorted now we’ve established the bills account so your monthly surplus will actually be yours to save, as long as you’ve been realistic about your expenses.
Things like tax returns, bonuses or overtime can also be confidently put towards your savings goals to help shorten the time frame to success. It’s all about working towards something that motivates you, so you’re determined to make your budget work long term.
Once your accounts are in place it’s time to start transferring! Every payday you need to devote about 10 minutes to sitting down and moving all your money around. It’s a small time investment and once you get the hang of it, it might even be quicker. I find having a note saved in my iPhone allows me to do my transfers on payday when I sit down for lunch. First I check my pay has been deposited into my salary account correctly. Then, I get my total figure for ‘bills’ and transfer it straight into my bills account. I’ve set up all of my direct debits to come from my bills account, so once the money is in there I don’t have to worry about anything – the payments come out on time every month. Then I transfer my surplus money into my savings account, leaving enough in my salary account to cover all my entertainment and spending money until next payday rolls around.
Successful budgeting is all about being honest with yourself in the beginning and making the process as simple as possible moving forward. Once you get over the initial fear of having to relinquish your morning coffee/hairdressing appointment/splurge you’ll see just how easy it is to work towards your goals. There’s no better feeling then being in control of your money!