I’ve spend a lot of time discussing the importance of budgeting but today I’m getting into the nitty gritty with 5 steps to create a budget. These simple steps will get you started and set up with a simple but thorough budget that you can actually stick to. Grab a pen and some paper and lets get started!
Step 1: Collect all the information you will need
Before you can effectively plan out your budget you need to get together all the information that will be needed when you develop you budget. This list covers what most people will need but you may have some extra items that are specific to your situation. The really important point here is that you collect EXACT values. Don’t just guess or estimate. Get the values right from the start. Don’t panic at the size of this list, all you need to do is collect all the info, you don’t need to calculate anything out yet, just have all the values available.
- Income details (take home pay, which is what goes into your account, not your salary) including frequency
- Any social security/Centrelink payments you receive (if you receive these on a regular basis)
- Child support received
- Child support paid
- Investment income
- Investment expenses
- Any other income
- Account details (what accounts you have, what interest rate you earn, any fees)
- Home loan details (how much you own, what the repayments are, what the interest rate is, any additional charges)
- Details of other debts (credit cards, personal loans, car loans, leases, store cards, student loans- exclude HECS/HELP as it comes out of your salary automatically)
- Home maintenance bills (rates, water, maintenance)
- Insurances (home, contents, car, boat, pet, bike, health, income protection, business)
- Service expenses (cleaner, gardener, pest inspections)
- Car expenses (green slip, petrol, services & maintenance)
- Public transport, tolls & parking
- Groceries (including incidentals like cleaning products, personal care etc) & alcohol
- Personal care expenses (hair cuts, beauty treatments, dry cleaning etc)
- Clothing expenses for adults and children
- Childcare expenses
- Children’s activities & sports (swimming lessons, sports, tutoring etc)
- School fees
- School expenses (uniforms, excursions, stationary)
- Charity & donations
- Holiday budget
- Pet expenses (food, vet etc)
- Birthdays and Christmas
- Take away/eating out
- Personal play money/spending money
- Pay TV
- Subscriptions (magazines, online etc)
- Membership fees (zoo passes etc)
- Professional expenses (conferences etc)
- Utility expenses (gas, electricity, home phone, internet, mobiles)
- Gym & sport expenses
- Health expenses (GP, specialists, medications, contacts or glasses, physio, alternative therapies, dental etc)
- Pocket money for kids
- Adult education
- Regular planned savings
Step 2: Group things into categories
To simplify your budget I recommend grouping your expenses into categories. I personally choose to use 8 broad-ish categories:
- Personal debt (I don’t include mortgage here, I choose to put it in the next category)
- Home & Utilities
- Health & Personal
- Shopping & Transport
- Leisure & Entertainment
- Other (for miscellaneous stuff)
Step 3: Work out yearly values & then budget periods
This is the biggest task you will come up against but once it is done it is fairly easy to update in the future. You can list it all in excel or on paper if you prefer. I am in the process of developing a program that will help you do this super simply so sign up to my newsletter on the sidebar or in the footer if you want to be kept up to date.
The first step here is to work out how much each expenses adds up to on a yearly basis. So if you pay something every week, times it by 52, if it is a fortnightly expense times it by 26.1, monthly times by 12, quarterly by 3 etc.
The reason I suggest you do this is because my budgeting approach is to set aside money for everything on a regular and consistent basis, even if it only needs to be paid once a year. This way the money is there and waiting when you need to spend it. This approach prevents the ups and downs of budgeting where you have heaps of money one week and then a bill comes along and suddenly you have none! It also stops you relying on credit.
Once you have your yearly values it is time to work out how frequently you will budget. By this I mean will you have a weekly, fortnightly or monthly budget. I generally don’t recommend budgeting monthly if you can help it as it is difficult to manage but if you get paid monthly then this might be the best option. In this case I would split each month in half and keep the money for each half in a separate account so you don’t get the false impression that you are rolling in cash at the beginning of every month, only to run out half way through!
When you have worked out how frequently you will budget, divide your yearly expense into these amounts. So 52 for weekly, 26.1 for fortnightly and 12 for monthly.
Step 4: Take stock and make adjustments
So at this point you may just have received a very rude shock as you realise your income is less than your expenses. If this is the case you are going to need to cut some expenses (or work out how to increase your income). From experience the areas most people can save at most easily are groceries & alcohol, personal spending, clothing and insurances. You can check out some of my ideas to save on groceries here and health insurance here. You can also find some great tips on where you are wasting money and simple ways to cut back here and here.
Step 5: Automate it
When I work with clients developing budgets I am all about automation. Set up some online accounts for periodic expenses (things that are less frequent than monthly such as electricity bills, rates, insurances etc) and transfer the relevent amount each week/fortnight/month into these accounts so when the bill comes, the money is there. I personally use Ubank for my accounts as they are free and let you set up a large number of accounts so I have accounts for everything…electricity, gas, rates, car expenses, birthday savings, holiday savings etc. You can also set up automatic savings plans so that each time you are paid, the budgeted amounts are taken from your account automatically and deposited into the relevant account. This way you don’t accidentally spend it!!
I hope these 5 steps to create a budget have been helpful. If you are after a more detailed guide with step by step support I will be running an online DIY budgeting course for the new year as well as releasing my downloadable DIY budgeting packages later this year so if you would like to keep up to date, make sure you’ve signed up to my newsletter (in the sidebar or footer). Happy budgeting!