When it comes to personal finances, there is no better saying than “If you fail to plan, you are planning to fail!”. The best way to avoid financial failure is through creating a budget and using it to navigate the monetary pitfalls and spending temptations of modern life.
Creating a budget is one thing. Creating a realistic budget that you can stick to can be quite another. We’ve brought together a few ideas to help with this challenge and minimise your daily stress – there’s no need for twenty coffees a day to get by okay! And when it’s that time of year when you’re starting to think about reducing the cost of Christmas, there is no better time than the present to start sorting out your finances.
Before you plan your budget, to make sure it’s realistic and workable, you must decide to commit to adhering to it the best you can, as a long-term commitment. The purpose of the budget is as much about building new positive money habits and behaviour for a lifetime, not simply just saving a few dollars in the short-term.
A budget is not meant to be a killjoy, but to eliminate the most wasteful and unnecessary aspects of your spending to help you achieve your financial goals faster. A budget is also useful to help you work out if you need extra money coming in to achieve those goals. You might not be able to do it through budgeting discipline alone, but some additional income may see you realise your dreams.
What is a budget? The purpose of a budget is to plan for a desired outcome. What is your desired outcome? Paying off debt? Saving for a holiday? Buying a first home? Or, if it is to simply keep your head above water during a tough time, then this is also a legitimate and honourable outcome – the alternative of running ‘in the red’ (at a loss) is definitely something worth avoiding.
Step 1. Gathering
Collect details about your income and expenses. Make sure you have access to a detailed list of money going in and going out. Most people should be able to log into their online banking and view their everyday transaction account (that their eftpos card is linked to), in order to get a complete picture.
Step 2. Select a budget split
This means taking 100% of your income, and deciding a percentage breakdown of how to use it. For example, you might allocate 70% of your income to cover expenses, 20% towards savings, and 10% to debt repayments.
If things aren’t quite as tight financially, another popular split has 50% going to expenses, 30% to wants (non-essentials and extras to make life just a little bit sweeter), and 20% to savings (including any debt repayments above just the minimum payments to reduce principle and, consequently, future payments on interest). A budget split isn’t set in stone and should be flexible enough to change as financial circumstances change over time.
Step 3. Budget creation
Crunch the numbers by establishing your income and adding up all your expenses to see how the two stack up. If your expenses outweigh your total income, you’ll need to start by focusing on cutting down your outgoings to get yourself ‘in the black’ (in the positive, not running at a loss).
Allocate resources according to the split you decided earlier.
- Expenses (needs) include costs such as rent or mortgage payments, groceries, travel (petrol bills, ouch!), insurance, school expenses (uniforms, trips, etc.), clothes, power bills, internet, mobile phones – the list unfortunately goes on!
- Debt repayment commitments including credit cards, hire purchases, car repayments, student loans, unofficial debts to family members, etc. Remember to always pay more than the minimum amounts required, and prioritise repayments on debt that will save you the most in interest in the long run!
- Savings. This includes an emergency fund for unexpected costs such as car repairs and dentist visits, and longer-term ‘nest-egg’ savings. It’s good to have enough money in the emergency fund to avoid having to go into more debt.
- KiwiSaver contributions. If you’ve opted into KiwiSaver, your contributions are automatically taken out of your way, and don’t factor in your budget since you never have that money ‘coming in’. By increasing your KiwiSaver percentage (for example, from the 3% minimum to the 10% maximum), you could have a vastly different financial situation awaiting you at retirement – it’s worth taking some time to use a KiwiSaver calculator.
- Wants (essential non-essentials!). Nobody expects you to live like a monk who took a vow of poverty! Certain things help us to enjoy life while we work hard to achieve financial success, including things like a Netflix subscription, fun outings with the kids, and friday night takeaways!
Step 4. Execution
Lined refill, a shopping list pad, or a spreadsheet will all work as a way to keep track of your spending and make sure you’re achieving your budget targets. These days there are many online tools and phone apps for budgeting. One thing to remember is to choose a solution that allows data exports so you can easily transfer your budget and spending history to a different application should you so wish at some point in the future.
Step 5. Rewards
If your budget is like a stick, then don’t deny yourself a few carrots along the way to keep your spirits up and motivated to stick to your budget commitment! If you plan for treats as a part of your budget, then you can rest easy that you won’t be derailed by impulse purchases and spontaneous splurges.