I've Never Had A Budget Before
Tuesday, July 8, 2014
Crafting your first budget
If you’re trying to save money, you’re inevitably going to have to tackle living within a budget. While it’s a relatively straightforward process, making your first budget is something many people struggle with even well into adulthood.
In my experience, people don’t struggle with budgeting because it’s a particularly difficult or cumbersome task. We all hate paperwork, of course – but that’s not really the barrier. When I talk to people and remember my own experiences putting together my first budget (and how long it took me to do it), it’s a delay that seems to come down to issues of confidence and fear.
From a personal standpoint, I didn’t have confidence in myself to be able to create and stick to a budget. I feared I was too impulsive, too undisciplined. Not smart enough, even. A budget was asking too much of me. I think a lot of people feel similarly. “I’d do a budget – but I wouldn’t stick to it so I may as well not bother.”
When I’ve spoken to others, I’ve found fear is a big factor. A word like ‘budget’ is a bit like a word like ‘diet’. There are a lot of unpleasant associations that come along with it. Some people have the idea that living on a budget means you won’t be able to have any fun. Your money will all be locked away or tied up. A bit like how people presume being on a diet means all lettuce and no chocolate.
But neither of those things are true. In its most basic terms, a budget is simply how much money you have to spend. A diet is simply what you choose to eat every day. Whether you ever get around to drawing up an official budget, you’re always going to have one. Creating your first budget is just about helping you do what you want to do with your money quicker and more easily.
Do you want to buy a house? A budget will help you save for a house. Do you want to have more money to spend on the weekend? A budget will help you do that too. It’s entirely about what you want to do with your money. For years, my budget was simply devoted to helping me buy new pieces of musical equipment.
And, if, like me, you’re not that confident you can make or stick to a budget, I’m absolutely confident that you can and that you’ll feel similarly confident when you realise how easy it can be to put together. If you’re willing to rely on technology a little bit, you’ll find that most of the work is done for you.
In actual fact, you can easily set-up a budget on pretty much auto-pilot with an app like Pocketbook. It’ll keep track of your spending, divide it into categories, and help you to calculate a budget. But, if you’re not comfortable with using that approach, creating your first budget is still just a matter of following seven easy steps.
To create your budget, you simply need to:
1. Figure out why you’re making a budget
As above, your budget can be geared to do whatever you want it to with your money. Do you want to save money? Is it about getting out of debt? It’s important to be clear. The goal of your budget will change how you go about shaping it.
2. Make a note of your income, and your expenditures
How much do you make a week/month? How much do you spend? As a word of advice; don’t make any assumptions when you’re working this stuff out. Check bank statements. You could be spending more money than you think.
3. Split your expenditure into Essential and Non-Essential expenses
What expenses are unavoidable? Think of things like rent, electricity, water, medicine. What are you spending your money on that you could do without? How much are your luxuries costing you?
4. Split your Essential and Non-Essential expenses into smaller categories
Where specifically is your money going? Under your Essential/Non-Essential subheadings, break it down into categories like Food, Bills, Entertainment, Fuel. How much money are you spending each week/month in each category?
5. Figure out what each expense is costing as a percentage of your income
As an example, if you make $850 a week and your rent is $150, you would write down that 17.6% is going to rent. If you can’t remember how to figure out percentages, it’s simply a matter of thinking of it as a division equation (e.g. 150/850, 150 divided by 850) and multiplying the answer by 100.
6. Figure out what percentage of your income each expense should cost
By now, you know how much you’re actually spending. To complete your budget, work out how much you should be spending in each category. Are you spending too much on groceries, for example?
If you’re not sure how much should be spent in each category, you might want to look at this report from the Australian Bureau of Statistics – if you scroll down to table 9.8, you’ll find a detailed breakdown of how much Australian households generally spend on expenses like rent and food.
Bear in mind; your spending may be different for a myriad of reasons. You should just use those statistics as a rough guide.
7. Figure out what to do with the leftovers
You’ve figured out your income. You’ve figured out your expenses. You’ve figured out what you’d like your expenses to be. Now, theoretically, you should have some income left over. Decide what to do with it and your first budget is effectively complete. Do you want to invest? Save money? Spend a little bit more on entertainment? Buy a dog? All up to you.
In any regard, you’ll have created your very first budget. Wasn’t that hard, was it?