How to Budget In 9 Easy Steps
Last Updated: 19th October 2022
Budgets can be a great way to take control of your finances, especially when you set clear goals and spending limits. So in this article, we’ll take a look at some ideas on how to make a budget that works for you.
Why do budgets matter?
While they’re not exactly fun or exciting, budgets can give you a clear overview of how much money you’re bringing in and how much you’re spending. Without one, it’s all too easy for your purchases to get out of control. Debts and bills can pile up alongside impulse buys and can quickly drain your bank account.
In contrast, a good budget gives you a roadmap for the future. It shows you how much you need to set aside to keep your budget balanced – or better yet, to boost your savings – and how much you may need to limit your spending.
That’s why we’re going to break down how you might go about making a budget. After all, a quick guide can always make the process a little easier.
How do you make a budget?
Step 1: Get your paperwork together
As the old quote goes, ‘preparation is the key to success’. There’s no point starting your budget if you’re going to have to get up every few minutes to fetch old receipts and information, so it’s better to have all of these ready from the beginning.
Of course, you don’t necessarily need everything, but it should be enough to give you a good idea of your income and expenses. For income, this may include:
- Financial statements
- Payslips from your work
- Bank statements
- Records of government payments (e.g. JobSeeker, Mobility or Carerr Allowance)
And for your expenses, this could include:
- Utility bills
- Credit card bills
- Mortgage repayments
- Other debts (e.g. personal loans)
- Receipts for regular purchases (e.g. grocery bills)
Depending on the frequency of your budget, you’ll want to work out a weekly or monthly average for such costs and earnings. Since things like interest rates and the cost of utilities can fluctuate, you’ll also want to get bills and statements that go back a few months or even years. That way, it’ll be easier to work out the average – as well as whether certain costs might be rising.
Step 2: Make it work for you
The government website Moneysmart recommends setting up a budget to match how often you get paid1. So if you get paid on a weekly basis, you should set up a weekly budget. That way, it’ll be easier to plan around your lifestyle.
You may want to start by making sure the budget suits your planning style. If you prefer an old-school, tactile approach, then a pen and paper should be all you require. However, if you know your way around Google Sheets or Microsoft Excel, then making a digital budget could save you quite a bit of time.
Your schedule should come into it as well. If you can only spare 5 minutes, well, a simple list of earnings and expenses isn’t ideal, but it might be better than nothing. Otherwise, it’s best to set aside a bit more time each week (or month) to get the budget done.
Finally, if you’re planning a family budget, then you’ll want to make something that’s easy to read for both you and your partner, and takes the spending of your entire household into account
Step 3: Set some goals
Setting financial goals can definitely motivate you when trying to stick to a budget. It can give you something to look forward to and strive towards when saving.
So what kind of goals are good to set? Well, research by the famous psychologists Edwin A. Locke and Gary P. Latham suggests that setting specific, challenging goals instead of vague, low-effort goals can lead to better performance and a higher chance of achieving them2.
Today, much of the research surrounding motivation and goal-setting has been appropriated by schools and workplace environments. Among other organisations, Healthdirect Australia3 and Latrobe University4 both tout the importance of ‘SMART goals’. These means goals that are:
- relevant, and
- time-specific goals.
- For instance, you wouldn’t simply set a goal to ‘save more money’ – it’s a good start, but it’s much too vague. Something like ‘save $5000 in six months for an extra mortgage repayment’ works better as a long-term SMART goal: it’s specific, measurable and has a deadline attached.
Step 4: Calculate your income
Now you can get started on the budget itself. Remember, this is a budget for the upcoming week or month – a plan of attack for the future.
The first category for your budget will be your income: how much money you’re bringing in. This can include things like:
- Income from work
- Government benefits
- Gifts from friends and family
- Interest on a savings account
Now, this will be easy enough to estimate if you receive a fixed income every fortnight or so, but it might be a little trickier if what you earn tends to vary
If you do not have a fixed income, you may be able to average out your monthly income over the last three months to determine what your budget could look like in the future.
Step 5: Add up expenses
Next, you’ll want to tally up how much money you’re spending. You can divide these expenses into two different categories:
Fixed expenses stay more-or-less the same every month. They’re predictable, and when they do see a rise, you’ll usually be informed in advance. This may include:
- Rent or mortgage payments
- Electricity, water, gas and utilities
- Council fees
- Debt repayments
- Insurance premiums
- Childcare and school fees
- Phone and internet plans
- Subscription services (e.g. Netflix, Spotify, etc.)
Variable expenses, on the other hand, are more prone to sudden decreases and increases. Among these, you can count:
- Medical costs
- Renovations and home maintenance
- Dining out
- Clothing and cosmetics
- Gifts to friends and family
- Entertainment costs, such as tickets for museums, movies or the theatre
- Transport costs, such as money for gas, car repairs, taxis and tickets for public transport
You could start with an estimate that’s based on how much you’ve spent over the last few weeks or months
You might also want to break down the expenses into the sub-categories mentioned above, such as groceries or entertainment. Not only will this give you an idea of where your money is going, it will also help you tailor your budgets and adjust your spending – which we’ll talk about a few steps down.
Step 6: Work out your balance
Is your income higher than your expenses? If it is, then that’s certainly cause for celebration! It means that you’re bringing in more than you’re spending, and can set this money aside for emergency funds, extra purchases or saving.
However, if your expenses are higher than your income, then this could be cause for concern. To cover your expenses, you might be dipping into your savings or sinking into debt. Depending on your circumstances, you might want to address this as soon as possible.
Fortunately, your budget might be able to help here too.
Step 7: Reign in that spending
Ideally, you should set a spending limit for your ‘wants’. These can usually be found in your variable expenses; they’re the things that spice up your day and make life more fun, but you could go without if need be.
This could include the money spent on social events, holidays, the latest clothing and technology, or even that extra $5 you spend on an orange mocha Frappuccino every Friday.
Popularised by US senator Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan, this rule has a simple premise: save 50% of your income for essentials like rent and groceries, 30% for your wants, and 20% for savings or investments.
How you’ll save the 20% is up to you. Depending on your circumstances, you might want to set aside this money as an emergency fund or deposit it into a savings account. Some people even invest a portion of their savings into real estate or the stock market – but if this is something you haven’t done before then it’s usually best to do your research first and seek guidance from a qualified financial advisor.
Step 8: Adjust your expenses
Now you’ll want to revisit your expenses. Again, if your projected expenses exceed your income, or if they’re making it hard to hit your financial goals, this might be a problem.
However, if you want to reduce your spending, one option might be to look through your list of variable expenses and check what you can cut back on. For instance, let’s say you spent $200 last month on dining out and social events last month. If you make more meals at home or go out a little less, you might be able to reduce this amount to $100.
You’d then write this new amount into the expenses column. This will serve as your spending limit for these expenses in the coming week or month.
Step 9: Revise, review, retool
Now comes the moment of truth: you actually have to try and follow your budget for the days and weeks to come!
What happens next will show you whether the budget was realistic or not. You might follow it better than you expected or you might go over what you planned to spend; in either case, you can adjust your next budget accordingly.
If you’re saving more than you expected then maybe you’ll want to set your goals a little higher. Or maybe you’ve cut back on social events but now it’s giving you cabin fever; it might be possible to chip away at another expense so you can free up money to go out again.
The important thing is that the budget makes it easier to manage your finances, so feel free to change it as needed.
How else can I track my spending?
One great way to keep track of your budget is with a tracking tool like the Moneysmart budget planner or one of many available personal spend-tracking apps available for mobile phones.
Not only can these tools provide a great visual example of what a budget should like, but they’re an easy way to keep a record of your spending and keep yourself accountable. For instance, they can give you a clear overview of where you tend to spend the most money as well as the potential savings you may have made over a period of time.
Start by saving all your receipts and adding them to your tracker at the end of each week. Don’t worry too much about how much you’ve spent at this stage, just focus on getting into the habit of record-keeping.
As you become more consistent, you’ll see some patterns emerge. You might also like to check in every three months to compare those patterns at a macro-level.
Some months may show more spending than others, but before you roll your eyes in disappointment at yourself, look a little closer. You’ll probably find the cause is more likely to be your quarterly energy bill or annual car insurance premium than a pair of Yeezy’s burning a hole in your pocket.
What are some other ways I might be able to cut down my expenses?
Moneysmart has some excellent tips on their website when it comes to tracking your spending and expenses.
However, if cutting down on your variable expenses still hasn’t balanced your budget, then it may be worth looking into your fixed expenses. Among other things, shopping around for utility providers or products like car or health insurance might help you find more competitive prices for these necessities.
For this reason, iSelect* offers a range of comparison services for many different providers and plans. Among other things, we cover Home Loans, Gas & Electricity, Health Insurance, Home & Contents Insurance and different internet plans. So if you’re interested, why not start comparing with us today?
2 Source: Locke, E. A., & Latham, G. P. (2002). Building a practically useful theory of goal setting and task motivation: A 35-year odyssey.
American Psychologist, 57(9), 706.
3 Source: Goal setting | healthdirect
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