Creating a budget isn't about living on bread and water, but ensuring you're using your money for the things you really want.

So the first step in creating an effective budget is to decide why you're doing it. What are your goals – saving for a deposit for a home, a holiday, some money for emergencies or paying off your mortgage? Next, decide how much money you need to reach these goals. Now you're ready to start.

Step 1 – what comes in?

Your main source of income is most likely your salary. Also include any Centrelink payments such as family assistance, interest on your savings and investments, and regular payments such as rent from an investment property. Be strict: pay rises and bonuses you may or may not get don't belong in your budget.

Step 2 – what goes out?

Start with your bank statements and credit card bills to keep track of rent, loan repayments, insurance and bills such as phone and electricity. For variable costs such as groceries, petrol, entertainment and the odd extravagant purchase it's best to log them on the go for at least a few weeks. Use your best guess if there's anything you can’t find and include maintenance costs, like servicing your car.

ASIC has a useful free app – but if you don't want to use your phone or don't have a smartphone, old-fashioned pen and paper will do the trick.

Step 3 – to the cutting block

Adding up all your expenses may prove an eye-opener:

  • How much do your regular cappuccinos add up to?
  • How much do you spend on sandwiches and takeaways?
  • Do you have expensive extras health insurance but don't have the time to go to the physio, don't wear glasses and your last visit to the dentist was more than a year ago?
  • How much debt do you carry on your credit card and what's the interest rate?
  • How much do you pay in bank fees – especially those pesky foreign ATM fees?

There are often lots of savings you can easily identify. The easiest one could be to switch to a low-interest credit card. Also, next time your insurance is due shop around – our health, car and home insurance best buys can help to reduce those costs.

Easy savings tips

  • Reduce your electricity costs by turning off appliances at the power point.
  • Pay your health insurance policy before 1 April for the next 12 months and avoid this year's price increase.
  • Spread the cost of buying Christmas presents over the year – start saving now.
  • Reclaim your pantry – plan some easy and inexpensive meals using things you already have.
  • Make a shopping list and go for a big shop once a week. Buy your essentials at Aldi, and get fruit and veggies that are in season and on special at the greengrocer. Check the specials in the big supermarkets.
  • Do a big cook- and bake-up one weekend each month and freeze portion-size meals for delicious, healthy school and work lunches.
  • More savings tips.

Step 4 – where do you stand?

Once you've identified any savings, check how you fare:

  • Do you spend more than you earn?
  • Do you transfer what's left at the end of the month to your savings or do you just spend your whole pay cheque?
  • Do you have an emergency fund and if so, how long would it last you?

Then divide all costs into four different columns

  • Must haves – such as rent and groceries.
  • Nice to haves – movie nights, drinks with friends, takeaways.
  • Once-in-a-while indulgences – massages, beauty treatments and going to concerts and sports events.
  • Goals – savings for emergencies, a new car, starting a family or your retirement.

Are you meeting your goals at the moment? If you keep up your savings plan, how long will it take until you have saved enough?

Step 5 – new beginnings

Now you're ready to draw up a new plan. Make sure you don't set unrealistic goals, and allow yourself some treats. Making a budget is not about stopping doing the things you enjoy, but perhaps reducing some costs. For example, go to the movies on the cheap nights. Remember, the best budget is the one that works for you.

  • The basics:
  • The splurge fund:
  • Your goals

Budgeting basics

  • First, make sure you have enough money for your day-to-day living expenses such as regular costs and bills. Remember quarterly bills and flexible costs such as your winter electricity bill.
  • Start with small achievable goals and include some rewards to keep yourself motivated. For example, go out to dinner once you've paid off the credit card with the lowest balance.
  • Make regular deductions from your transaction account to your savings. Turbo-charge your savings by using a high-interest savings account.
  • Be flexible – sometimes bills just start to mount. Accept that you won't be able to put away as much this month. That's perfectly fine as long as it doesn't become a regular occurrence. In that case, you'd need to review and revise your budget.
  • Monitor your budget for a few months and then revisit it to see if it needs some fine-tuning. Review it regularly to check if you're on track.
  • If you get an unexpected windfall like a bonus or tax return, direct it straight to your savings.

What if I need help?

If you're spending more than you earn, a financial counsellor can help you draw up a budget to get back on track. For a free and independent financial counsellor in your area, call 1800 007 007 (9.30am – 4.30pm, Monday to Friday). This number will automatically put you through to the service closest to you.

Tip – there are some people around using high-pressure sales tactics for their 'budgeting services'. Don't fall for them; those budgets usually involve totally unrealistic sacrifices.