The idea of setting a budget probably doesn't sit at the top of everyone's to-do list. Going through your spending habits can be a daunting and stressful experience. But if you stop and think, having a personal budget helps put you in control of your finances and stay on track to achieving your savings goals. We've put together some steps to help guide you through the process of setting a budget and, most importantly, sticking to it!
Define your goal
Before setting a budget, it's best to have a savings goal in mind. A savings goal could be anything that's important to you such as:
• Buying a house
• Getting married
• Going on a holiday
• Buying a car
• Paying off debt
• Planning for your retirement.
Of course, these are just some of our suggestions and everyone's savings goals will be different. It's important to remember though that a good budget will clearly outline your personal savings goal.
Gather all the information
When creating your budget, it's important to get an honest overview of what your income and expenses are, as these will become the foundation of your budget.
Your income can come from many sources, such as your regular pay, any side income you have or Government assistance you might receive. Remember to use the after-tax amount you receive for any income amounts.
Your expenses are what you spend your income on and could include:
- • Rent/mortgage payments
• Insurance premiums (health, car, home)
• Loan repayments
• Supermarket expenses
• Childcare payments
• Transportation (car, fuel, weekly public transport)
• Gym membership
• Electricity, water and gas bills
• Entertainment (concerts, movies, Netflix subscription)
• Eating out (bars, restaurants, daily coffees)
List your monthly income versus your monthly expenses and this begins your budget!
Set your budget
Before creating your budget, it's useful to create a few ground rules:
1. Use an online budget planning tool – An online budget planner tool such as the People's Choice budget tracker can help you get an understanding of your finances easily and quickly.
2. Keep it simple – A complex budget that takes hours to update each month is probably going to discourage you from the start.
3. The 50/30/20 budget rule – This rule allows you to categorise your expenses in well-defined segments:
- • 50% on essential expenses. These are essential items you can't live without. This category could include housing costs, minimum debt repayments, household bills, insurance, transportation, education, food and childcare costs.
• 30% on discretionary expenses. You still want to enjoy life, but do it now with your goal in mind. This category could include entertainment, gym, eating out, paid subscriptions, sporting membership, travel and shopping.
• 20% towards your savings. Try and allocate 20% of your budget to your savings category. This can also include paying extra payments towards your debt. We know it's not easy and that's why you need to have a clear goal in mind before you start the budgeting process.
4. Trim it – Take a close look at your spending habits and what you can do without. It'll be hard at first, but it's important to be honest. The money you save here could go towards your savings goal and help you reach it sooner.
Track your budget
Now your budget is set up, it's important to monitor your spending habits to ensure you're staying on track. You don't have to get this perfect from day one either, as it may take a couple of months of refinement before you're comfortable with your new budget. Here are a few quick tips to help you with your budget tracking:
- • Use technology and go paperless. There are plenty of apps out there to help you track your budget automatically.
• Don't make your budget so strict that it's impossible to follow. It might take two to three months to get a full understanding of your spending habits.
• Don't get down on yourself if you don't stay on track. If you overspend in one category don't punish yourself or stop the process all together. Think about how you could make this up in a category that's more flexible, like eating out or shopping.
• It's important to share your successes. Creating a budget and staying on track is an amazing achievement. Don't keep this to yourself, share your tips with friends and family.
• When you're budgeting it's a good idea to surround yourself with like-minded people – you can learn from them too!
To stop your budget from becoming a personal burden, it's important to celebrate success along the way. Don't wait until you've reached your final savings goal before you reward yourself, as treating yourself along the way can help incentivise you to reach your goal sooner.
You could do this by celebrating milestones along your savings journey. These don't need to be extravagant; it could be your favourite takeaway meal or a short trip away with friends. Celebrating these milestones can keep you motivated and on track with your savings goal.
Try these strategies when starting out on your next budget. You might surprise yourself with how successful you are in budgeting if you're well prepared, have a clear understanding of your spending habits and have a well-defined savings goal in mind.