Many people find it difficult to make a budget and stick to it. But it’s one of the most basic and effective ways of managing your money. If you’re serious about your financial well-being, then budgeting is a must do.
Budgeting keeps you focused on your financial goals, keeps you aware of where your money is going and helps you organise your spending and savings. This allows you to consistently meet savings goals, keep on top of expenses, and have extra money for leisure and unexpected situations.
Basics of Budgeting
A budget is a personal tool that can be as simple or as complicated as you like, depending on your lifestyle and goals. The most important principle is to identify a timeframe for your budget and ensure spending occurs within the expenditure you allocate for that time. A monthly budget works well in terms of providing a decent and easily understandable picture of your finances.
Start by accounting for annual and quarterly bills. These are the easiest to put into a budget as we know exactly when they come in and approximately how much they cost. This would cover things like home loans, rates, car loans, insurance, utilities etc. Add up grocery receipts from each week into a monthly total under a single category.
Discretionary spending like entertainment, gifts, dining, and holidays take more time to work out but it's the area that offers the most room for savings. Rather than reducing discretionary spending altogether, you should aim to identify and reduce specific costs, for example, $200 a month on alcohol.
Organising Your Spending
Your budget can be set out in a way that suits you. One way is to break down expenditure into categories against your income. You can then allocate parts of your income towards spending money or savings.
● Fixed costs (mortgage, utilities, etc.) - 40% of income
● Investments - 20% of income
● Savings - 10% of income
● Spending money - 25% of income
● Contingency (unexpected costs and emergencies) - 5% of income
This helps you know exactly how much money you can spend guilt-free over every budget period. It allows you to prioritise what you spend your disposable income on without accidentally dipping into other areas.
Remember, there is no need to follow your initial layout militantly. Spending habits are difficult to predict, especially if you’ve never budgeted before, so you may have to make adjustments in your allocations as you go. Be realistic with your budget. There’s no point allocating only 15 per cent of your income to spending money if you’re unlikely to be able to stick to it.
Sticking to Your Budget
When looking for areas to cut costs, focus on weaknesses like impulse purchases or eating out too often. But give yourself reasonable expectations and don’t be too meticulous. Emotions play a big role in successfully budgeting. If you’re miserable or too stressed out, you’re more likely to splurge or abandon the budget altogether.
If you have trouble sticking to your budget, use separate accounts. Set up one account for savings that is difficult to access, one account for fixed expenses and emergencies, and one account for spending. This makes it easier to keep track of your budget and makes it harder for you to dip into areas.
It's important to accept that you will occasionally blow your budget. This often makes people give up but you shouldn't let it dishearten you. One budget blowout a month won't ruin your long term goals and financial security.
There are a variety of tools out there to make budgeting easier, from simple spreadsheets to Smartphone apps. Find a tool that works well for you. Many budgeting apps are free to download and come with a wide range of features. Try out different ones until you find one you like.
Some people find it helpful to speak to a financial service professional about their specific circumstances and goals. But no matter how you approach it, budgeting can only work if you commit to sticking with it.
If you’d like friendly, practical advice from an independent financial services professional, get in touch with Wealth Health. We can build a personalised budget that prioritises your goals and interests. We’re based in Papamoa and can visit clients in Tauranga, Waikato, Mt. Maunganui and the wider Bay of Plenty.
If you’re building a new house and you’re shopping for home loan options, we can help. Call Craig on 027 667 2537 or contact WealthHealth online. We also have a treasure trove of information and tips in our blog section for first home buyers.