01.Get back on track
Step 1. How much comes in?
Most people are getting income from one source — a salary. However, with increasingly complicated employment and the odd savvy person making money from investments, it might not be that simple. The key to determining your income is to be strict with yourself. Don’t include bonuses or pay rises you might not get or depend on the kindness of others.
- The best budget is the one that works for you.
- A budget is as much about what you do as what you’d like to do.
- Remember to pay yourself — first and last.
- A budget isn’t carved in stone. It needs to be flexible and keep up with your priorities and the things you do day to day.
- Don’t kid yourself. To work, your budget needs to reflect reality. If you spend $100 a week on beer, it needs to be in there.
Please note: this information was current as of April 2009 but is still a useful guide to today's market..
Step 2. How much goes out?
A good way to work out where your money goes is to keep a log for a fortnight or a month. Write down for what and how much and when it goes. Also take note of any automatic deductions from your accounts and what they’re for. Your bank statement can be a useful budgeting tool. Of course, if you have more than one account, you’ll need to do it for each one.
There are three types of expense you need to consider at this point:
Fixed costs: You can’t change when you pay these or how much you pay — for example, your rent or loan repayments.
Variable costs: These payments need to be met regularly but their amount can vary — for example, phone bills or groceries.
Discretionary spending: It’s your choice entirely to spend this money so you need to be honest — all entertainment and extravagance needs to be included here.
Then look at where you’re spending your money and decide if each item is:
- Nice to have.
- An indulgence.
- A key goal.
Step 3. The new plan
At this point you need to start thinking about what you want to do and how. This goes for everything from putting together money to meet your goals, to finding the money for that life-drawing class you’ve always wanted to take.
There are three new ‘funds’ we need to add:
The splurge fund: Accept that you’re going to spend money having a good time and build it into the budget.
The emergency fund: Your emergency fund should be both short and long term to account for all sorts of issues that come up: unexpected repairs to the car, having something to live on between jobs or moving house at short notice are emergencies.
The goal fund: A holiday, this year's Christmas presents or a new car: your goal fund could have all its income dedicated to one goal or you might have a few you want to meet.
The aim of your new budget is to create a balance between your goals, your fixed, variable and discretionary costs, your emergency fund and your splurge fund. In order to achieve this balance you need to conduct an assessment of your outgoings.
In the easiest cases you’ll recognise what’s dispensable and swap one item for another.
In the most complicated scenario you could find your fixed costs are eating up your entire income so you’ve got a lot of work to do. If you sound more like the latter you might need to consider simplifying things a bit — for example, if your car repayments are expensive it might be time to consider a cheaper model or using public transport if possible.
* Edited extract from the CHOICE book Saving, Spending, Splurging and other stuff about money by Kate Beddoe. (Out-of-stock)