You often hear about companies having budgets – but what is a budget in a personal context, and how do you go about starting one? We explain all.
What is a personal budget?
A personal budget summarises your income and expenses for a specific period, so you can track and compare your finances. Expenses might be regular (e.g. mortgage, insurance, rent, council rates, broadband) or variable (e.g. eating out, entertainment.)
You can use a budget as a financial planning tool so you can plan how much you spend or save e.g. every month. A budget is especially useful when money is tight (income versus expenses) and you need to control your spending, or when you wish to work towards a financial goal (e.g. clearing debt, saving for a house or holiday, investing or savings.)
Sometimes a budget can be surprising to see where your money is coming from, how much is there, and where it all goes each month. The information can help you improve your finances through actively managing your incoming and outgoings.
Time to create a budget – Step 1 – Find somewhere to record your income and expenses
Whether you download a budget spreadsheet template or use a budget app, choose one that you find easy to work with. The designated fields for income and expenses, categories and formulas will help you easily work out your surplus or shortfall.
Step 2 – Gather your financial statements / paperwork
These include bank statements, credit card statements, utility bills, receipts and mortgage statements etc. The aim is to understand all aspects of your income and expenses so you can record and categorise them.
Step 3 – Work out your income
If you get a regular PAYG salary, this is fairly simple and you can use the normal monthly net figure. If you have other income such as Centrelink, you should include this in your total. If you have a variable income, find an average monthly net income figure to use for budgeting purposes.
Step 4 – List your expenses
Monthly expenses might be rent or mortgage, childcare, phone, internet, insurance, electricity, transport costs, shopping, eating out etc.
Step 5 – Classify your expenses
Fixed expenses are the ones you pay every month and are the same amount. These could be mortgage payments, internet, insurance etc. Also If you plan to save a fixed amount or pay off a certain amount of debt each month, also include savings and debt repayment as fixed expenses. Variable expenses vary (of course!) and may be e.g. shopping, fuel, eating out. It’s also wise to create a category called “surprise expenses” that pop up without warning. Put each expense into a category of your choosing, and estimate average variable expenses.
Step 6 – Add up your monthly income and expenses
Hopefully your income exceeds your expenses – then you can consider how best to use excess money (e.g. extra mortgage repayments, more savings, paying off debt.)
Step 7 – Adjust budgeted expenses where necessary
If expenses exceed income, it’s time to rein in that overspending. Look at your variable expenses or categories where you can save money. E.g. less eating out, cancel Netflix. If you need to find more savings, look at how you can lower fixed expenses or increase your income.
Step 8 – Aim for balance
Your income and expense columns should be equal. This means all of your income is accounted for and budgeted toward a specific expense or savings goal.
Step 9 – Keep monitoring and tracking
Keep recording your monthly expense and income totals, to keep you from overspending and help you identify unnecessary expenses or problematic spending patterns. Once you have reached your spending limit in a category, you need to stop that type of spending for the month or move money from another category to cover additional expenses. Your goal in using your budget should be to keep your expenses lower than your income for the month. Then you can truly be in control of your finances and well on your way to achieving your financial goals.
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