Learning how to budget, creating a budget plan and sticking to it might seem like a daunting task. It doesn’t have to be. A budget is like a map to your financial success. You might be able to get by without one but creating a budget will ensure that you stay on top of your bills and change the outcome of your future finances for the rest of your life.
Why can’t we stick to a budget?
Most of us have tried to budget before and failed. It didn’t work out for a variety of reasons. The reasons it didn’t work however, don’t outweigh the reasons we started it in the first place.
Maybe you wanted to save, but you just didn’t know how.
Maybe you think your income isn’t high enough to put money aside to save.
Maybe you are just simply sick and tired of living week to week without any savings.
Trust me, you are not alone. I know exactly how that feels. I was in your shoes for a good portion of my younger years. I’ve lived paycheck to paycheck for a long time. It didn’t matter how much money I earned; I just couldn’t save a single cent for the future.
Learning how to put together a proper budget and actually sticking to it was one of the best things I’ve ever done.
Here are a few financial advantages I learned about budgeting:
- It ensures that I don’t spend money I don’t have
- It enables me to save for a better future
- It keeps me aware of where I’m at with my finances
- When there is an emergency, I can rely on my emergency fund
- It makes me decide in advance what I can and can’t do with my money
- It has helped me stop all my bad spending habits
Basically, it has given me control over my money and my lifestyle!
How to make a budget in simple steps
I refer to my budget as a simple-science-budget. It may not make sense to anyone else, but I have a good reason for calling it that. For me, science was the hardest subject when I was going through school and I never paid much attention to it. When I was in Grade 9 though, my parents hired a science tutor which changed EVERYTHING! My tutor taught me how to look at science from a different perspective and it became so much simpler after that.
Budgeting works in exactly the same way.
In my 20s I was shocking with money. I never thought much about the future, so I didn’t think it was important to monitor what was going in and out of my account. One day I decided I was sick and tired of wasting money and being broke, so I decided to get my life together (this is a story for another day). Once I made that decision and started researching and seeing financial advisors everything became so much simpler.
I even figured out a budgeting solution that worked for me, because tracking every last dollar on a spreadsheet was way too overwhelming. I could manage my money every time my income changed. I managed to find money in places I never thought I had any before. The best part was that I didn’t even have to make drastic changes to my lifestyle. I could still get my hair cut at a barber and could have takeaway for dinner every so often.
I’m going to share my secrets here with you today!
Now, most people only have one bank account. Their pay comes in, everything else goes out and they blindly hope that they’ll have enough cash to cover them until their next paycheck. That’s what we’re here to change today.
Every process needs a starting point. The starting point for budgeting is grabbing a pen and paper, sitting down and following the steps below to write out your basic budget. It’s important to jot it down because this is not something you can track in your head (unless you’re a super genius, but you’ve probably already got your money sorted if that’s the case).
Calculate income and expenses first
The first step of basic budgeting is to check your pay slips for the last 3 months and calculate your average income. This takes into account incomes that vary slightly month to month. You want your numbers to be as close to exact as possible, rather than estimating based on potential future earnings. If you’ve already got some savings set aside, account for the interest you’re earning on that too.
Then write down all your monthly expenses. When I say all of them, I mean all of them. Mortgage, rent, takeaway meals, holidays – anything you spend money on. Then divide them into 2 categories: fixed expenses and variable expenses.
Fixed expenses are essential expenses that are always there and are likely to be a similar amount each time you pay them:
- Mortgage or rent
- Utilities bills
- Council rates
- Insurances (house & content, health, car)
- Credit card and personal loan repayments
Variable expenses are inconsistent or non-essential expenses where the amount tends to vary each time you pay them:
- Takeaway food
- Household goods
- School uniforms, textbooks and stationery
- Medical/dental fees
- Car/travel expenses
- Entertainment (Netflix, Stan, etc.)
I remember the first time I actually wrote down my income and expenses on a piece of paper. I was quite shocked to realize all the silly things I spent money on. My expenses were higher than my income. No wonder I was broke and in so much debt.
The next thing I did was go through my expenses to see where I could save money. Initially I wanted to bring my expenses down to 60% of my income. At the same time, I wanted it to be a realistic plan. The best I could manage at that stage was to bring it down to 70% because my debt repayments were so high. It’s ok to adjust your goals within the transitional period.
Separate your money
Now, once you’ve worked out your simple budget, you need to separate your money.
I decided to set up 4 different bank accounts; two were transactional, two were for savings.
Here’s how I grouped them:
Everyday Account – 60-70% of your income
This was my main transaction account. I had a debit card connected to this account. All my fixed expenses and some of my variable expenses were debited out of this account. Every time I had a pay come in, I would leave 70% (this has now been changed to my original goal of 60%) of that in this account and transfer the rest between the other three accounts. I’d suggest ensuring that you have one extra week of your income left in this account at all times as a buffer.
Entertainment account – 15% of your income
This account is the fun account. 15% of your income goes into this account. If you decide to go out with your friends for a drink or five, take the family out to a nice restaurant or buy a surprise birthday or anniversary present for your partner this is the account to use. Make sure you have a debit card connected to this account as well. If there is no money left in the account that means you don’t go out drinking with your friends until your next pay comes in. I know it sounds harsh, but you just have to be strong until you get used to this new lifestyle. Trust me, it’s worth it!
Travel Account – any extra income
I guess the name says it all. This is the account you use for your long-term investments and any extra or leftover money should be kept here. A holiday, major house renovation, an upgrade to your current car, etc. This account will give you the opportunity to look forward to nicer things in life. This account usually motivates me to find extra work, that way I can reach my target sooner than I originally planned.
Emergency account – 15% of your income
This is the account you use in case of an unexpected financial expense or an emergency. 15% of your income will go into this account. An emergency fund will absorb your financial shocks without having to dig into your savings or having to pay emergency expenses on a credit card.
Make a start today!
The key is to start your emergency account with $2000 in it within the next two weeks. I understand if you don’t have it right now but there are many ways to find extra money.
Take these suggestions, for example:
- Go through all the salable items at home. If you haven’t used them in a while sell them on Gumtree, eBay or Facebook Marketplace.
- Start doing some Uber or Uber Eats after work for few hours until you have this buffer in your emergency account.
- Airtasker is also a great way to pick up extra money here and there. You can find pretty much every task imaginable listed there.
Ideally, an emergency fund should have at least 3 to 6 months’ worth of living expenses saved in it. This means knowing that no matter what happens, you will be financially comfortable while you figure out a plan. It may take you time to reach the total financial buffer you need but you just have to start somewhere. Remember, every dollar you put away now is one you won’t need to find when things get tough. I understand that this budget is mainly for people with an average income, but you can always adjust the percentages according to your situation. Try this out for three months. If you stick with it, you will see a huge difference in your financial situation. Don’t just take my word for it – start your own simple-science-budget today!