Budgeting helps you to feel in control of your money. You can put aside money for big bills when they arrive, and plan savings to achieve your money goals.
You don’t need an accountant or special software to set up your own budget. Start by looking at where you are right now and where you want to be.
Set your money goals
First, work out why you want to do a budget. This can help you to decide where you want your money to go.
Ask yourself: what is my goal? It could be to stay on top of bills, save for emergencies, pay for your children's education, Invest in your future, or save for a holiday or a house deposit.
Short-term and long-term goals might seem self-explanatory, but some cases aren’t exactly clear-cut. Here are a few ways to identify your goals, plus budget and save for them accordingly.
What are short-term financial goals?
Short-term goals are your more immediate expenses. Although timelines vary, these are the things you’ll spend money on generally within a few months or years.
Short-term goal examples:
Payments toward rent, insurance or student loans.
Credit card debt payments.
Minor repairs and home improvements.
What are long-term financial goals?
Long-term goals are usually your big-picture costs. These goals may take several years or even decades to reach. Your distant goals typically involve more money and regular attention than short-term goals.
Long-term goal examples:
Paying off a mortgage.
Starting a business.
Saving for a child’s college tuition.
The grey area
There is often overlap between the two categories that can make things fuzzy. Medium- or mid-term goals fall between short-term and long-term goals and tend to take a few years to achieve.
Mid-term goal examples:
Buying a car.
Saving for a down payment.
Paying off debt.
Other goal periods can be tougher to estimate. For example, you might not need an emergency fund for several years, or you might need it right away. There’s no way to know when car repairs or medical bills will pop up. And the amount of time it takes to chip away at your debt depends on how much money you’re willing and able to contribute.
See where your money goes
Having a clear picture of your regular expenses and spending habits will help you set up your budget.
To do this, track your spending over a week, a fortnight or a month. I do this by printing out my bank statement at the start of a month to see what I spent the month before, and highlight everything that was a want not a need. My goal is to see how much of my spending are wants and not needs, then identify how I can fix the spending accordingly.
Setting up your own budget
1. Record your income
Record how much money is coming in and when. If you don't have a regular amount of income, work out an average amount.
Make a list of all money coming in, including:
- how much
- where from
- how often (weekly, fortnightly, monthly or yearly)
This money could be from your wages, pension, government benefit or payment, or income from investments.
2. Add up your expenses
Record your regular expenses, including:
- what for
- how much
Regular expenses are your 'needs' — the essential items you need to pay for to live. These include:
Fixed expenses, for example:
- rent or mortgage payments
- electricity, gas and phone bills
- council rates
- household expenses, like food and groceries
- medical costs and insurance
- transport costs, like car registration and public transport
- family costs, like baby products, child care, school fees and sporting activities
Debt expenses, for example:
- personal loan repayments
- credit card payments
- mortgage repayments
Unexpected expenses, for example:
- car repairs and services
- medical bills
- extra school costs
- pet costs
To make sure you've recorded all your expenses, look at your bills or bank statements. If you tracked your spending, use your list of transactions.
How to Choose the Right Budget System
- Figure out your after-tax income. If you get a regular paycheck, the amount you receive is probably it, but if you have automatic deductions for superannuation, savings, and health and life insurance, add those back in to give yourself a true picture of your savings and expenditures. If you have other types of income — perhaps you make money from side gigs — subtract anything that reduces it, such as taxes and business expenses.
- Choose a budgeting plan. Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future. Budgeting plan examples include the 50/30/20 system, envelope system and the zero-based budget.
- Automate your savings. Automate as much as possible so the money you’ve allocated for a specific purpose gets there with minimal effort on your part. Set up schedule bank transfers from certain accounts after your pay days to make sure you don't even see all the money before it is split.
- Revisit your budget as needed. Your income, expenses and priorities will change over time. Adjust your budget accordingly, but always have one.
Personally, I am a massive fan of The Barefoot Investor - Scott Pape and his 3 Bucket Strategy:
- Blow (Expenses - Roughly 60% of take home pay)
- Mojo (Safety Money - $2,000 once off, unless used)
- Grow (What is left of take home pay) - Used for Investing
Break down of his Blow Bucket:
- Daily Expenses (Needs) - 60%
- Spluge (Short-Term Wants) - 10%
- Smile (Long-Term Wants) - 10%
- Fire Extinguisher (Safety Net) - 20%
Budgeting Mistakes and How to Fix Them
1. Failing to track expenses
The accuracy of your budget and your ability to make progress toward financial goals depends on knowing what you’re spending. Being vague with these figures could set you up for failure.
2. Neglecting your retirement
A goal that’s many decades away is an easy goal to neglect. But whether you’re middle-aged with a family or fresh out of college, you need to save for retirement — it should be the single biggest financial priority in your life.
3. Assuming your partner is on the same page
“Let’s talk about money” can be fightin’ words in some households, but failing to align on your budgeting and long-term financial goals is a major mistake.