How to Budget Like a Boss
Budgets? So boring! If you’re anything like me in the past you’ve written one before and promptly forgot about it or realised it was totally unrealistic and given up before you even got started.
But as boring as budgets are, they can be the difference between sharing a can of baked beans with your cats for dinner in retirement or living it up with champagne and camembert on a yacht in the Mediterranean. I know what I’m working towards, and it doesn’t come with cats!
A 2018 study by UBank reported a staggering 86% of Australians don’t know how much money they are spending every month, so you’re not alone. But if you want to get in control of your money and stop your money controlling you, the most essential thing you can do is create a budget, AND STICK TO IT. Sure, you might want to get prepared for some short term pain but getting back in control of your money will ultimately mean you can do MORE of what you want to do (did someone mention the Mediterranean??).
In fact, budgets are so boring let’s try not to use the word. I prefer the term Spending Plan – a spending plan makes me feel like I’m more in control of the decisions I make about how I spend my money, empowering right? We can do this! Got your pen and paper, spreadsheet or budget (ahem spending plan) app ready?
Let’s Make a Spending Plan!
Step 1: What’s Your Why?
Start with a bit of fun and create some goals. Why are you budgeting? Defining your “why”, whether it be a short-term purchase or to retire early, having a why will provide strong motivation to start saving. Having a target to aim towards makes managing your money more meaningful and the whole process a lot easier. Your goals should be measurable, specific and time based. Consider short, mid and long-term financial goals.
Short-term Financial Goals
These are smaller financial targets that can be reached within a year. This includes things like establishing an emergency fund, getting on top of your Zip Pay account or something fun like a family holiday or trip away with the girls.
Mid-term Financial Goals
Typically, mid-term goals take about three to five years to achieve. They might seem a little intimidating but are definitely achievable with discipline and hard work. Paying off a credit card balance, a car loan or saving for your kids’ education could be included under here.
Long-term Financial Goals
This type of goal usually takes much more than 5 years to achieve. Some examples of long-term goals are saving for a new home or spending a good chunk of your retirement in the Mediterranean.
Step 2: Show Me the Money!
Figure out how much you’ve got to work with each month. Record what you get paid after taxes and include any extra incomes (who isn’t a hustler these days?). Do you earn any interest or investment income from that rainy-day account your parents opened for you and you subsequently forgot about? Any government contributions? Add them all to the list of your monthly income. Don’t worry if it changes, it doesn’t need to be exact – just work out an average.
Step 3: Adulting Isn’t Cheap.
Do you remember the first time you realised you were an adult? For me it was eating a whole tub of ice cream with no one telling me I couldn’t (unfortunately)! The second time was paying for my own car insurance.
The next step to creating your spending plan is to review your bank and credit card statements. You need to list all your ‘fixed ’non-negotiable adult expenses so you can figure out where a fair chunk of that money from step 1 is going. They’re normally the expenses that don’t bring much obvious joy to your life, like rent or mortgage repayments, phone and internet bills, power, various insurances – the responsibilities we didn’t picture ourselves with as teenagers and now we just have! No, smashed avocado on sour dough and cappuccinos are not included as non-negotiable.
Not all these expenses are a fixed amount or paid regularly, but you should be able to work out an average monthly amount. If you’re currently saving for your emergency fund or repaying debt high five you! Just don’t forget to include any savings here too. Also include an indication of your doctor and pharmacy costs and your vet bills – turns out all those cats aren’t so cheap to keep after all.
Step 4: But Splurging is Fun!
This is where it’s going to get hard, go back through those bank and credit card statements and identify all those variable expenses that are nice to have. Include your groceries in here, yes I know a man’s gotta eat but do you really need that pricey truffle brie when a home brand cheddar will do the trick (who am I kidding? who doesn’t need truffle?!).
Other variables expenses to include are:
- Gym membership
- TV & music subscriptions
- Clothes shopping
- Friday night drinks with the boys
- Sunday brunch with the girls
Step 5: Do You Want to Hear the Bad News or Good News?
Add all your fixed and variable expenses together. Minus these from your income and you will have an amount left over (hopefully!) that you can direct into funding those goals (remember Step 1?).
If you’re not sure how you should be spending your income consider the 50/30/20 budget rule. The breakdown is that you spend 50% on necessities (such as rent/mortgage, power, phone, transport, debts etc), 30% on indulgences such as like dining out or entertainment, and 20% on your financial goals.
Make saving a priority over spending, you can do this by paying yourself first. Decide how much you want to save each pay packet and direct it automatically to a savings account where you can further distribute it to paying back extra to credit card debt or into a special long term investment account to meet with your financial goals.
If your leftovers aren’t enough this is where you need to sit down and evaluate your spending plan. It’s time to get real about where your money is actually going and if there are better ways you could be spending it. Are you genuinely happy with how much you’re saving, or do you really need three different TV and music subscriptions, can you find better deals for your mobile phone data or car insurance?
Saving is Sexy…
…and having a spending plan can be empowering! Be proud to tell your friends that you have priorities for your hard-earned dollars that don’t include expensive coffees or smashed avo every weekend.
If You’re Keen to Kick-start Your Savings, Here’s Some Handy Hacks to Get You Started:
- Rent/Mortgage – Rent is normally a quarter to a third of your pay cheque. If you have the space, get yourself a roommate you can tolerate living with and cut your rent costs and energy bills in half.
- Food – Start making weekend breakfast at home and inviting your friends or family round to your place. You’ll be surprised how much you can save over time, you get to see more of your favourite people and there’s no waitress waiting to move you on out as soon as you put down your fork.
- Coffee – buy a reusable coffee cup, which will likely come with a café discount and the feel good factor of putting less waste into the world.
- Clothes – limit your clothes purchases each month and train yourself to only buy a few necessary and good-quality items. You’ll save money and becomes less obsessed over time with the fast fashion cycle.
- Make money from your wardrobe – if limiting your clothes spending will be difficult, start going through your wardrobe and sell what you no longer wear so that you appreciate what you already have and put the money you make towards your savings.
- Apply the 24 Hour Rule – found something online you want to buy? Try adding it to your cart and leaving it there for 24 hours. Often, when retailers see you’ve got something in your cart that you haven’t yet paid for they’ll send you a discount code to lock in the sale. Might not work every time, but it’s certainly worth a try! A self-imposed 24-hour rule might also help with those impulse purchases. After waiting 24 hours you might find you no longer have the urge to buy it, especially if it’s an impulse purchase you don’t actually need.
- Go to the library – Buying new books can cost upwards of $30 and they’re often something you’ll only read once. It’s free to join your local library and you can borrow books, magazines and even movies for a month or two at a time and while you’re there read the paper. I got through the COVID-19 lockdown binge listening to audiobooks and reading magazines that I downloaded for free from my local library.
- Don’t pay the lazy tax – When was the last time you shopped around for better deals for your various bills? If it’s been a while, you’re probably paying a ‘lazy tax’. Do some research before you renew your insurance, power or mobile phone policies. Check that you are not paying more bank fees than necessary. There are some useful online comparison sites available – it could be the most money you’ve made for only for a 30-minute investment in your time. It’s also worth asking your current provider what they can do to keep your business, you may be surprised.
- Unsubscribe from all those marketing emails – Avoid temptation from marketing emails and texts from stores where you’re likely to spend money. If you’re not getting these sent to your inbox or phone every other day, you won’t be tempted to shop for things you don’t need. Out of sight, out of mind.
- Change a spending habit – Small spending changes add up to big savings over time. Just three less takeaway coffees a week can save more than $12. This adds up to more than $600 a year. Brown bag your lunch. Saving even $5 a day on lunch add ups to over $1,200 a year.
- Write a list before you go shopping – and stick to it. One of the easiest ways to save money is to only shop when you have a list. Because when you’re without one, you typically end up making impulse buys and unplanned purchases – all things that cost money. Not only can it help you buy items that fit with your meal plan, but it can also help you avoid buying food you might waste. Always create a list and, more importantly, stick to it.
- Share your dreams – This seems like an odd way to save money, but think about it. If you spend time with the people you love the most and come to some consensus about your dreams, it becomes easy for you all to plan for it. Set a big, audacious goal together and encourage each other to be financially fit – soon, you’ll find you’re doing it naturally and your dreams are coming closer than ever.
Step 6: Don’t Set & Forget!
A budget (or financial plan) isn’t something that you set up once and forget about. You’ll need to routinely check whether you’re hitting your monthly goal and monitor if you’re overspending each month. Don’t worry if things don’t go to plan straight away. Simply review and make the adjustments you need to get back on track. As income levels change or expenses go up or down, you will need to adjust things accordingly. For instance, if you get a raise, decide how that money will be spent. Consider paying off your credit card bill or investing it.
Dedicating just an hour or two every month to managing your budget means that you’ll always be in control of your finances, rather than letting them control you.
A big part of budgeting is balancing your wants of today with your priorities of tomorrow. If you love travel but can’t keep yourself from spending $200 a month on shoes, you’ll never get to drink champagne on that yacht in the Mediterranean.
It might seem hard now but your future self will thank you for it.
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