How do I start budgeting?
Budgeting your money is the first step towards saving for your financial future and having the security that comes with knowing there’s money to fall back on. But with the cost-of-living crisis biting, how can you save money for the future?
Why is budgeting important?
Whether you’re saving for a mortgage, you need to try and get some of your debts under control or you just want to make your money work better for you, budgeting is the first step to achieving your financial goals.
In the end, budgeting simply comes down to having a plan for your money and sticking to it as best you can.
It’s easy to fall into the trap of thinking that budgeting is about depriving yourself of things, but it’s actually the opposite.
Without budgeting, you can find yourself spending too much on things you may not need at the start of the month, only to have to miss out and deprive yourself of the things you will need later on.
If anything, budgeting is about making sure you can afford the things that you want, and not losing control of your finances beforehand.
budgeting is the first step to achieving your financial goals
What should my saving goal be?
Whatever your financial goals are, setting a saving goal and coming up with a budgeting strategy to help you get there is extremely important.
To come up with a saving goal, first think about your personal circumstances.
Are you a recent graduate with student debts? Do you have higher than average credit card debts? Are you planning to start a family and in need of a larger home? Or are you looking to set some money aside to invest?
There are lots of different saving goals you can pursue.
Which goals are right for you, your family and your needs is completely up to you.
How to review your spending
Working out your monthly limits will involve looking back at previous months and averaging out how much you spend on a monthly basis.
There are inevitably going to be larger than normal expenses, such as making deposits or moving houses, but by coming to a rough figure, you will have a better idea of how much you currently spend each month, and how much you should spend if you want to reach your goals.
Reviewing your spending will also help you notice certain things that you could likely do without.
Whether it’s getting takeout or dining out more frequently than you should, you’ll have a good idea of things you could cut down on, which will help you to start budgeting efficiently.
Budgeting quick wins
If you only need to make some small adjustments to your budget, there could be some quick and easy things you can do that can make an immediate impact:
Switch to generic brands: Buying the top brands can quickly rack up costs when generic brands do just fine. Consider switching.
Cut multiple streaming services: If you have different streaming memberships, it’s likely that you use some more than others. Cut the ones you don’t use and save dozens of dollars every month.
Cut the takeout: Restaurants deliver food that you could make at home for less. Even cutting down to just one a month can make a difference.
Downsize the car: If you’re not using your car frequently enough to get the right value out of it, you could be throwing money away. If you have two cars, try cutting down to one. Could you perhaps even get by without a car at all?
What is the right budgeting strategy for me?
There are lots of different saving strategies, so you’ll need to look around and experiment a little before coming to a decision on which one works for you.
However, one of the most popular budgeting strategies is the 50/30/20 rule.
This works by allotting:
50 per cent of your income to your needs, including rent, mortgage payments, food and transport.
30 per cent to your wants, such as clothes, tickets and entertainment.
20 per cent to saving, meaning that you’re topping up your savings and building for the future.
By following this strategy, you’ll have all your essentials covered, have some money to spend and still be able to put your money towards your future goals.
How can I stick to a budget?
No budgeting strategy is ever completely foolproof and there are going to be months when you need to spend more than your budgeted funds for some essential needs.
Whether your car has broken down or you need to see a doctor, there are always going to be some costs you can’t predict.
Although there’s no way to get money back for emergency costs, there are ways that you can improve your budgeting skills if it’s mainly your own personal spending that you’re struggling with.
One tip that could help you is to create pots within your accounts that you can directly pay portions of your paycheck into.
Lots of digital banks offer this service, but you can do it perfectly well without them.
If you receive $1,800 in post-tax income, you could immediately set aside 50 per cent of this into a pot for your essentials, leaving you with $900.
You can then split these into separate pots, letting you visualize much more clearly what your individual budgets are.
How to adjust your budgets if you overspend?
But overspending is inevitable even with the best budgeting skills, so make sure not to beat yourself up about it.
Instead, think about how you can re-adjust your budgets going forward to offset some of the overspend that has occurred.
It can take a few months and some experimenting to settle on a budget that suits you, so if you overspend at first, try not to worry.
If the overspending continues though, you may need to make adjustments, particularly to your personal spending.
It’s not always pleasant to cut back on the nice things, but remember, budgeting will set you up for the future, so always try to keep those long-term goals in mind.
Budgeting isn’t always easy, but with the right advice and planning, you can take control of your finances and achieve those big future milestones.
Kate has written for leading publications and blue chip companies over the last 20 years.