How Do I Budget?

So you know you need to work out what your budget is – because otherwise how do you know what you are earning and spending? Or you have gotten yourself into a bit of financial strife and need to budget to get yourself out of it.

For whatever reason you need to budget, we think everyone should, whether you are just starting out in your first job or you’ve worked your way up the corporate ladder.

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Doing a budget helps you get off the treadmill of living from one pay packet or payment to the next. It enables you to sort out your money priorities and find the right balance between spending and saving.

A budget lets you pay off a credit card or loan, plan better for when your big bills are due, and save up for a holiday or big purchase. It also allows you to avoid falling for payday lenders or racking up big credit card bills because you’ve run out of money.

Choose a time period that works for you

Usually, it’s easier to set your budget up in accordance with your pay schedule. If you are paid weekly, do a weekly budget, or if you are paid monthly, you could do a monthly budget. Whatever you decide should work for you.

Use your bank statements to track income and expenditure

Make a record of every transaction that comes in and out of your bank accounts, including how much cash you withdraw. Just remember that there are expenses that may only roll around once a year, like insurance, so make sure you are working off at least a year’s worth of bank statements.

If your income is variable, it is better to under-estimate rather than over-estimate.

Work out what your responsibilities are

How much do you need to meet all your financial obligations? This will include loan repayments, insurances, bills, and food. You need to put this away each time period without fail to make sure you have enough to cover your obligations, and to ensure that you don’t spend it.

Next consider savings

budget, how do I budget, debt, managing moneySaving should also be considered non-negotiable. What you put aside will cover large, unexpected expenses, time off work for illness or to save for a holiday. You’ll be able to avoid paying credit card interest by managing your money in a more proactive way.

What if you are spending more than you are making?

In regard to budgeting money, Charles Dickens once said,

“Annual income twenty pounds, annual expenditure nineteen—result happiness. Annual income twenty pounds, annual expenditure twenty-one pounds—result misery.”

What he said was true – the fast path to money misery is to spend more than you earn. This includes spending money on credit cards – because the money is not truly yours. You have to pay it back, with interest tacked on.

You do need to take action to fix this. Check your budget to make sure you’ve got all the amounts right and look at your expenses to see if there are any you could reduce. What could you cut out or cut back?

If you have anything left over, be wise.

Yes, of course it’s fun to buy shoes or guitars. Once you have a properly functioning budget, you can even set aside money for the fun things in life. But if you have regular amount each pay period that is surplus, think about what you could do with it rather than spending it. Contribute it to super or invest it? The options depend on your age, how close you are to retiring, and whether you have a family.

What are your financial goals?

budget, how do I budget, financial planning, investment adviceDo you want to buy your first home? Do you want to retire comfortably? Do you want to be able to cut back on your working hours? Whatever your financial goals, it’s important to articulate them and have a plan for reaching them. Setting clear priorities for yourself makes it easier to make tough financial decisions. Turning priorities (what’s important to you) into actionable and achievable goals (spending choices) will help you solve your money troubles and get back on track.

How to protect yourself from financial emergency

Financial emergency can befall anyone – whether it’s the loss of a job, a downturn in the economy, or a natural disaster. How can you prepare for disaster, should it fall?

Create an emergency savings account

Ideally you should always have at least 1 to 3 month’s worth of income in savings to tie you over in case you lose your job, suffer a health problem or experience a family emergency, but you have to start somewhere. So begin by at least saving a few hundred dollars and put it in a separate emergency savings account. This might mean that the next time you unexpectedly receive a small gift, bonus, or refund, you save it. This is one way to jump start a savings account quickly. Odds are you’ll end up using this money for vehicle repairs or some other unforeseen expense, so increase it to $1,000 or more as soon as you can.

Don’t over use your credit cards

You can’t predict when a disaster will strike or when you can’t make your payments. If you are unable to make your credit card payments because a disaster interrupts your income and you aren’t able to make your full payments on time, there is no guarantee that the bank will understand.

Start by trying to pay off your credit card balances in full each month, and if you do need to carry a balance on your card for a short time, try not to owe more than you can comfortably pay off in three months. In an emergency, the last thing you need is a maxed-out credit card.

budget, how do I budget, investment adviceMake a plan to pay down your debt

If your credit card balances are high, make a plan to pay them off as quickly as possible and give yourself some breathing room. Unforeseen events can often be the straw that breaks the camel’s back and propels people towards bankruptcy or losing their home.

If you are in financial difficulty, talk to your bank.

If you fall behind in your mortgage payments or think you are about to fall behind, it’s essential that you keep your lender informed about your circumstances, ask them for a hardship variation and tell them the steps you are taking to keep up your payments.

If you fail to keep them advised about your circumstances, they will eventually start action to repossess your home.

You should contact your lender early and apply for a hardship variation to your loan during this period because a lender can commence legal proceedings to take possession of your home if:

  • you are in default of the mortgage by failing to pay a single instalment; and
  • they have served you a default notice in writing requesting payment according to the loan agreement; and
  • you have not made the required payment within 30 days (or the time specified in the notice), or you miss another payment within that 30 days.

We can help you to achieve your financial goals. Contact one of our experienced financial planners today.