”A budget is telling your money where to go instead of wondering where it went” Dave Ramsey
We can hear the groans from here. Talking about finances and budgets? Boring!
As beige and bland as it may sound, the benefits of managing the household budget well can’t be understated.
Money is consistently ranked high on the list of things that cause stress and worry in people’s lives and typically is one of the main causes of conflict within relationships. For some it means living from pay to pay and in the worst cases it can result in families struggling to make ends meet and can ultimately lead to homelessness. Scarily studies have shown that it can transcend through generations and significantly impacts the lives of so many people.
So it makes sense that we actively keep an eye on our finances and put some guardrails in place as we ride the roller-coaster of life.
So where do we begin?
There are 3 main components to managing the household budget effectively.
Tracking money in & money out
This first step is typically the easiest one. It’s a case of understanding and making a note of the money you have coming in such as your income, tax refund and other forms of income you might have.
Slightly more challenging is identifying the money going out which forms your expenses. We’d suggest putting these into logical groups that make sense to you such as:
- Household – food, electricity, water, rent, home & contents insurance etc.
- Transport – car payments, fuel, service & tyres, car insurance, public transport etc.
- Entertainment & spending – dinner, drinks, movies, shopping etc.
- General – any other regular expenses you might incur
This step is about getting your finances on a page and we’d encourage you to be as honest as possible. You may not like what you see and may want to shy away from including all of your expenses however you’ll get the most value possible from this only if you capture everything. It’ll also help prevent unwanted surprises down the track.
Setting your target state
This step is the most fun. It involves synthesising your finances to incorporate the life you live now and the life you’d like to live or things you’d like to do in the future. The output you’re looking for will detail your current income, provide an allocation for the different groups of expenses you have and ideally have a little left over; this will form your regular savings.
A few things to note that will make this worth the effort.
Firstly, create your budget according to the period of time that your regular pay comes in; this will likely be weekly, fortnightly or monthly.
Secondly, ensure you put aside enough of your pay to cover your necessary expenses and then an allotment for entertainment and spending. Don’t cut corners and be honest with yourself – you don’t want surprises down the track.
Finally, we recommend having a particular goal in mind that will support your regular savings. This might be saving for your own home, buying a new car, booking your next holiday etc. Whatever the goal is, it needs to be important enough to override the emotional part of your brain that will try and force impulse decisions along the way – think your 30th pair of shoes or that new driver that was just released.
Stay the course
Arguably the most difficult, this step is about actioning the steps you need to get to your target state.
We’re realists and we understand that for some people, there may not be much or anything left over after your necessary expenses come out. There aren’t too many people we know with a heap of disposal income swirling around. However we also know that in today’s world consumerism is at an all-time high and with some discipline and difficult choices we could all be in a far better financial position.
The key here is to start saving any way and any amount that you can. Regardless of the amount, the behaviour of saving is a positive and virtuous one. Even if you’re saving $10 per week now, you’re starting to build the habits that will help you save more in the future. If your expenses change or you get a pay increase you may find that amount increases over time. Equally, you’ll be surprised at how powerful a motivator seeing the money in your bank grow can be, particularly if you set goal in mind on how you’ll use it that is important to you.
There are a range of tools and templates widely available on the web and apps that can be downloaded to help you get started. In fact there are even organisations that have centred their business on helping people create and implement budgets albeit taking a cut to do so. Like most things in life, simple solutions generally get the job done so we’d recommend starting with a paper and pen or computer (we manage our budget on a Microsoft Excel spreadsheet and it works a treat).
Ultimately it’s less about the tool you use and more about the mindset and behaviour that a budget creates. However with some minor effort now and reasonable discipline along the way, you can make significant inroads into a life of financial freedom.
Action for the week:
- We’d suggest the best place to start is spending 15 minutes thinking about what your life would like if you had more financial freedom and how you’d use this new found savings
- From there you’ll be in a great position to begin tracking your money in and money out and getting your finances on a page
- Finally you can set your target state which may involve subtle tweaks or mass changes to how your managing your finances now
With a clear view of what’s happening now, what you’d like to do moving forward and the reward you’ll receive for doing this, you’ll have started the course towards your goal. As you stay the course and be disciplined over time, you’ll be well on your way to a life of financial freedom which is crucial when living a healthy and balanced life.
In our next post we’re going to talk about what some may see as a taboo subject. That is the subject of selfishness and when it’s ok to put yourself first.
We’d love to hear how you’ve gone with introducing a budget or budgeting tips that have worked for you in the past, and any other comments or questions you have. Please reach out to us at any of our social media channels.