So you’ve decided you want to take control of your finances, and you’ve heard that a budget is important, but why? You already know how much you earn, you don’t need a budget. Do you?
After all, it takes time to go through everything thoroughly and really examine what you spend. Who can be bothered, am I right?
Well, if you dream of paying down debt, owing a home, having family holidays, and a comfortable retirement, you need a game plan, aka a budget. Unfortunately, these things generally don’t just happen. We need to plan for them, work for them, and set goals to achieve them.
The first step to creating a budget, and a more financially secure future, is to be aware of exactly how much money you earn, and how you spend it. For example, did you know that on average, Australians spend approximately $14.1 billion a year on alcohol according to moneysmart.gov.au.
Or that Australians are currently spending roughly 20% more then what they are earning? You cant spend more then you have without running into trouble. Having a budget is simply crucial for anyone wanting to take complete control over there finances so they can properly keep track of exactly where there money is going.
I like to look at our finances as a journey and a budget as a map. If you go on a long road trip, would you get in the car and start driving, without some sort of a map, and just hope you ended up getting to where you wanted to go? Probably not. And its the same with our finances. If you do happen to have a big finance goal you want to achieve, then you really do need a budget. It doesn’t have to be anything extravagant or fancy ( download our free budget planner booklet here) but it does have to be realistic.
A big mistake people often make when making a budget is taking drastic cuts, such as allocating $50 a week for grocery shopping for a family of 8 for example. That is simply unrealistic.
A good place to start when first working out a budget is to look over the last 6 to 12 months of your expenses, and list EVERYTHING. How much do you really spend per week on groceries? What about every month on the phone bill, internet, insurance, or savings? List everything you spend money on. This is also a good time to start categorising each item into essentials and none essential. This will make it easier later on if cutbacks are needed.
Things like groceries, phone, water and power, insurances and rent/ mortgages are essentials where as things like Foxtel, Netflix, or even that meal delivery service you may have are things you can live without if needed.
Having a good budget helps make it easier when planning for another financial goal. If you know exactly what your working with to begin with, it makes it easier to plan .
Things like paying down debt or saving for a house can be achieved easier and quicker if you know how much your able to allocate to savings. Depending on your goal and budget, I find putting away 10% of your income to savings as a good starting point. After 3 months, if your not noticing the difference, try increasing this to 15%, then 20%. The idea is to make everything manageable, so you don’t feel like your missing out on a lot.
If saving for something big like a house, allocating a little to a splurge category can be good, as it helps create a reward. Say you decide that for every $5000 you save, you can go out for a nice dinner at a fancy restaurant. Having have saved a little each week for that splurge means you get a little luxury without taking any out of tour hard earned savings.
The first thing I recommend saving for however, if you don’t already have one, is an emergency fund. More on that next week.
If you need to cut back a little to reach your goals, have a look over your none essential expenses list that you created earlier and see where a cutback might be possible. Cutting back a little on grocery luxuries, or changing a phone plan can be a good place to start.
Once you have a clear budget and plan in place, you can start to hit your goals aggressively. Paying down debt is always a good first choice for a financial goal.
Having a budget also allows for a more structured plan for retirement. This is something that is often left til later in life, but should be a major player in your financial plan from a younger age to allow the benefit of time to work on your side. ( see Is salary sacrificing into super really worth it?)
Finally, having a budget give you the knowledge of if you can afford something or not. Having everything laid out, you can easily see if you have enough room in your budget for say a new tv. Simply having that peace of mind is worth the initial work of creating a budget.
If you are currently experiences financial hardship, or need any advice on anything else finance related, I encourage you to follow this link and join my free Facebook community
Disclaimer: I am not a financial adviser and this should not be taken as specific financial advice. This is general financial advice only.