Let’s face it: for most people, dealing with and talking about money is intensely personal. You’ve worked hard for your paycheck, and it can be disappointing to watch it disappear with every bill paid and item bought. It’s a very emotional topic for many people, too. In a culture where money – or high-end things – indicate success, there is pressure to spend money without considering how it impacts your goals. Whether you’re looking for a way to make ends meet, trying to move away from carrying debt, or looking down the road long term for retirement or a home purchase, it’s important to have a plan to get there.
To meet your goals, you’ll have to sit down and honestly evaluate your current financial situation.
The easiest way to do that is with a budget.
Budgeting serves many purposes, but it’s important to point out what it is not. A budget is not a guess as to your expenses. It’s not a guideline for your spending. Budgets aren’t wish lists for a future pay raise, or a plan for all the things you’d like to buy. A budget is a rulebook for your bank account, and a contract with yourself and your family about how you’ll work together to achieve your goals.
How to Begin a Budget
Budgets are based off your real expenses and income and help you to plan out your next month’s spending. Start by determining how much after-tax income your household will be taking home this month. Next, account for all your recurring expenses. These should include things like living expenses, utilities, food, insurance, car costs, and any recurring costs like medicines, pet care, and services. Depending on your own style and commitment to financial control, you can choose how stringently you plan out your month. Some people choose to create a monthly line item for small expenses like Netflix or coffee, whereas others prefer to lump it together into a discretionary spending category.
There are many great tools out there to help you budget, too. Try ASIC's MoneySmart Budget Planner for a tool that helps you account for all your expenses. Or you can explore you bank's tools for ways to help you budget. If you're thinking of buying your first home, or looking to refinance your current home, you can also try our free home loan calculator to learn how much you could be saving on your mortgage repayments.
Budgeting Pro-Tip: Don’t forget about future expenses like
- car maintenance
- large upcoming purchases like cars
- school fees
Plan for Your Future
Regardless of how you choose to budget, the most important thing is to have a plan for every cent you own. Money that you don’t plan to spend on other things isn’t “free” money – instead, this is your savings and investment in your future. A good rule of thumb is to save 20% of your take-home income. This helps you grow your savings, ensuring that you build up a cushion for hard times, large costs like home deposits, holidays, new cars, and retirement.
When you have a plan like this in place and you stick to it, you’ll gain some real control over your finances.
The Side Effects of Financial Control
For many people, that control leads to less stress over money and more focus on enjoying your life.
Budgets have a lot of fringe benefits, too. For people in committed partnerships, budgets can eliminate a common source of stress and strife. By creating and sticking to a budget, you create an open dialogue with one another that allows you to reassess your current expenses and plan for your future together. Budgets help you identify those things which are most important to you both and work together to achieve them.
For others, budgets shed light on the perennial questions, like “Where did my paycheck go?” or “Can I afford such-and-such?” Many people don’t realise how much money they’ve been spending on things like impulse purchases, eating out, and coffee shops. While your cappuccino doesn’t cost a lot of money now, these small bills add up over the month.
As you implement your budget, remember that a budget is a planning tool, not a way to deprive yourself and squirrel away every last cent. You may be in a financial position that allows you to purchase the new iPhone easily, but you should still plan out your purchase. Even if you have the means to afford it, you shouldn’t blow your budget just because you can. When you treat your budget like a suggestion, that’s what it becomes and you lose the insight that you worked so hard for.
Creating and meeting a budget is not hard, but it does take discipline.
It means respecting the limits you and your family set, and saying “no” to things you might want that fall outside the budget. But the upsides – the financial health, the plans for the future, the relief from financial anxiety – are well worth it. And you’ll find that the hard choices you had to make, the fear for your future, and the uncertainty about your own situation disappear. Because with a plan for the future and the steps to get you there, you’ll be a whole lot closer to reaching your goals.