The word ‘budget’ can have frightening and scary connotations; however, it doesn’t have to! Think of a budget as a simple plan for where your hard-earned money goes each month.
If you’re saving for your first home, a budget is essential. Lenders need to see that you are responsible with your money. Having a budget and savings pattern demonstrates a consistent and disciplined approach to your finances making you a more attractive applicant.
According to a 2019 study that looked at how millennials manage money, 80% of millennials are likely to have a budget compared to 67% of older Australians. However, only 36% regularly save. If you’re in this boat and you don’t feel like you’re making progress it might be time to review your overall financial health and adjust your budget.
What’s your goal?
While having a budget for the sake of it isn’t a bad thing, it can be more motivating when you have a specific goal or target in mind whether it’s saving for a new home, going on an overseas trip or buying a new car.
Knowing what you’re saving for and having a rough idea of how much it costs makes it easier to determine a timeline and to set milestones along the way.
For instance, if you need $50,000 for a deposit on your first home, and you’re hoping you can save this within 2 years you can easily determine that 24 months divided by $50,000 equates to saving about $2,083.33 per month on average.
Understand your expenses
It’s time to review your current financial position. We recommend doing an extensive review of all of your bank accounts, your discretionary spending, your debt and your income.
We’ve created a handy checklist for you below:
- How many bank accounts do you have? How much $$ do you have in each?
- How many credit cards do you have? Do you have any outstanding items on a Buy Now Pay Later (BNPL) service like Afterpay? How much is owing on each?
- Create a comprehensive list of all of your annual and monthly direct debits. Consider things like insurance, Netflix, gym memberships, etc.
- List other regular fixed expenses like rent, car registration and phone plans
- Finally, estimate additional regular expenses you may incur. For instance, petrol, utility bills, grocery shopping and social occasions
By listing these, you can quickly determine your financial commitments and spending habits. This can be an eye-opening experience and it may be worth assessing whether there’s anything you can cut back on. For example, do you really need Netflix, Stan and Hulu?
You may also be able to reduce some of your other expenses. If you’re simply hitting the renew button on your insurance it’s worth using a comparison site like compare the market to see if there are better and more cost effective options available.
You can also compare and review your utilities to see if there are better offers available using Victorian Energy Compare.
In addition to this, additional expenses will always occur like birthday presents, flat tyres, unexpected medical events and so on. We suggest always putting a little extra aside to ensure you’ve got some flexibility for those times unexpected costs arise.
Know your income
This might sound surprising, but a lot of people don’t check their payslips each week and sometimes, they don’t even know how much they’re paid! It’s time to pay attention!
You should also include your side hustle as well as any income from investments if you have any.
Dispersing your money
Once you know how much you make and you what your regular outgoings are, you’re in a position to start determining your regular financial allocation.
We suggest creating separate accounts for each of your financial allocations. You may want to have accounts for the following: savings, bills, rainy day and an everyday account. However, we understand that everyone’s financial journey looks different so we suggest you create however many accounts you need, keeping in mind there may potentially be account keeping fees across multiple accounts.
If you’re wondering how much you should save each week there isn’t a magic amount. The 50/30/20 rule established by Sen. Elizabeth Warren, is often the most popular route, meaning you spend 50% of your income on essential items like food and rent, 30% on discretionary spending (play money) and 20% into your savings. However, you need to consider what amounts are practical for you and what will help you to achieve your goals.
Budget planning tools
In our digital world, there are countless free and low-cost money apps and tools available at the touch of your fingers. Frugal and Thriving has put together a great overview here.
There’s also a free government budget planning tool which even allows you to change the currency! Check it out here.
If you prefer to keep it simple, you can use Google sheets if you don’t have Excel – it’s free!
Stay on track!
Creating a budget isn’t a set and forget type of activity. It’s something that should be regularly reviewed and tweaked along the way. Keep yourself on track by:
- Create direct debits so your pay is automatically split and transferred into the appropriate bank accounts
- Set up direct debits for your bills so there is never a risk of late fees
- Track your discretionary spending to determine areas where you may be able to cut costs
- If your original estimations were unrealistic, adjust your budget
- If you’re splitting the bill with friends, make sure you don’t end up paying more than you’re comfortable with
Now, you’ve read through our ‘how to,’ it’s time to start!
If you have great budgeting tips, let us know below.