Whilst tapping a piece of plastic on an EFTPOS machine seems like such a simple action, it's these everyday transactions that put the most pressure on your financial situation.
Creating a budget to reign in spending might seem limiting, but when you're paying attention to your spending and saving habits, you can make smart financial decisions and create good habits that can position you for success in the long run.
Creating a budget may sound simple, but a flawed plan can leave you struggling to reach the goals you have set. Sometimes the collective decisions you make on your everyday spending have a material impact on your longer-term goals. Fortunately, a combination of tried-and-true practices and modern tools can help you find your way.
Here are five steps that will help you avoid money-related stress and make smart spending and saving decisions:
1. Determine Your Income Specifically, you’ll want to determine your average monthly income. This may be a simple matter of reviewing your take-home pay on your pay check—the amount left after taxes and other withholding. However, if your income varies by month, estimate by averaging the past six to 12 months of income. To be most conservative, work with the income amount from the month with the lowest income during that time. If you’re self-employed, be sure to deduct the estimated taxes you will owe and other business expenses from your gross income.
2. Figure Out Your Fixed Expenses Fixed expenses are those regular expenditures that don’t change much from month to month. Some of these may include rent or mortgage; utility bills such as water, electricity, internet, and cell phone; insurance premiums; transportation costs; and debt payments like student loans, or car loans. Consider contributing to your savings as a fixed expense. Decide on a percentage of your income that you’d like to save every month and treat it like a bill you must pay. Before you know it, you won’t miss that money at all.
Some banks offer online 'goal accounts' where you can set up an automatic deposit and it will track your progress and tell you the percentage of the goal you have reached. This is especially useful for people that have difficult saving for long-term goals. Hitting a target percentage provides a short-term goal to work towards in long-term saving journey.
3. Estimate Your Variable Expenses Variable expenses are those that you may consider “extras” or non-essentials, which aren’t always the same from month to month. They may include things such as entertainment, eating out, shopping, travel, and more. Look back at your past few credit card bills or bank statements to gain a sense of roughly how much you spend in each category on a regular basis. Total those up for a monthly average and figure out where you should be cutting back if necessary.
Remember to keep in mind those expenses that don’t happen every month like presents, and vacations. To make sure that these one-offs don’t catch you by surprise later, try estimating how much they cost you on an annual basis. Then divide by 12 so you can budget for them and put that money aside throughout the year.
4. Put It All Together and Do the Math You don't need to be an accountant to do the math for this one. Add up your fixed and variable expenses and deduct them from your monthly income after taxes. If you’re left with a negative number, you’re spending more than you’re making, and something needs to change. Your focus should be on making this number positive as soon as possible. Once you’re making more than you spend, you can start to think of your future finances.
5. Know Your Priorities and Track Your Progress List your top priorities, such as building up your emergency fund or down payment fund if you’re planning to buy a home soon. That will help you figure out how to use any extra funds in your budget after you pay your bills.
Don't forget to regularly track your process. Take the time once a month to ensure that you're sticking to your budget. If you discover that you're spending more in some categories than you first expected, reign in your spending or decide on a more realistic figure.
One of our favourite budgeting tools to use is the Count Budget Calculator.
This calculator is a great place to start and gives you a good idea of your financial position, but you should also consider talking to a financial adviser who can provide personal financial advice specific to your circumstances.
Verve Group offers free initial consultations for financial planning. Our advisers Matthew Carberry and Craig Holly are friendly and approachable professionals that are committed to helping you reach your financial goals... and we're not the only ones who think so! Verve Group has been awarded the 2019 Member Firm of the Year award from Count Financial.