Basic Budgeting - Where it all begins

They used to say, 'take care of the pennies, and the dollars will take care of themselves. Still valid for basic budgeting, but no one even sees pennies anymore, so the expression has fallen into disuse.

Everyone says budget, budget, budget, but if you don’t know how, or you

have never been shown how to budget; it can be a challenge.

Simply, budgeting is understanding what you spend your money on. To know this well, you must track your spending for a few months. A good exercise is to guess what you spend on things in a paper budget and then compare what you actually spend by analysing your bank statement. The difference between what you think you spend on some things and what you actually spend might surprise you. If you’re good on a computer, download your bank transactions for a month and categorise them.

If you’re not so good at computers, make a chart with columns and categorise your money that way. Add up what you spend in each category, like rent, food (groceries and eating out should be separate), entertainment, music, clothes, doctors, etc. Spend a couple of hours with your money habits every month to understand where you are spending and where you might be able to make savings. This is an exercise to know where you are spending NOW. This isn’t a budget, although it may form the basis of one in the next step.

Simply, budgeting is understanding where your money goes and planning for it.

In most months, there will be one-off costs that aren’t always in your budget. Birthday presents, insurance, and one-off medicals keep those things to one side but track them in a Misc. column.

Income is much easier to track. Add up what you bring in each month from one source or many. If your income is variable, average it over a few months.

Simply, budgeting is understanding where your money goes and planning for it.

Learning how to budget is one of the most important things you will ever learn. There are a lot of different tools online to help you do this – spreadsheets, tracking apps, etc. A great source of templates and information is MoneySmart, a resource put together by the Australian Government.

The first thing you need to do when sorting out your budget is to get everything on the same payment schedule. By this, I mean if you get paid weekly, pay your bills weekly; if you get paid monthly, sort your payments monthly. It makes it much more manageable. For example:

This is (fictional) Jen’s first pass at her budget.

Item	Amount	Timing
Income	$1277	Every 2 weeks
Rent	$300	Weekly
Power	$75	Quarterly
Food	$60	Weekly
Gym	$70	Monthly
Transport	$40	Weekly

This isn't helpful because everything is in a different period. So her first task is to get everything into the same period.

Item	Amount	Timing
Income	$1277	Every 2 weeks
Rent	$300 x 2 = $600	Every 2 weeks
Power	$75 / 6 = $12.50	Every 2 weeks
Food	$60 x 2 = $120	Every 2 weeks
Gym	$70 / 2 = $35	Every 2 weeks
Transport	$40 x 2 = $80	Every 2 weeks

With everything in the one pay period (fortnightly), Jen can see that after expenses, she has $429.50 left over for everything else, or approximately $215 a week.

Get your expenses into the same pay period as your wages or income. Then pay them that way. The power people don’t care if you send them $60 a fortnight. It goes against your account, and there are no bill shocks once a quarter saying you owe them hundreds of dollars. Many of my accounts are in credit, meaning I can stop paying them for periods while the bill catches up and I re-start payments. This is because I slightly overestimate what I owe them.

Where possible, add up the ‘extras’ in your life and break them down the same way, by pay period. Then remove that money from your spending account into a separate account. This will at least give you a fighting chance to make your bills each month.

Create your budget. Be realistic. Allow yourself some small treats if it will help keep you on the path to savings, but don’t let yourself off the hook too quickly. We’re talking about YOUR future financial health here.

Find a reasonable level of savings. At least 10% of your income is a good starting point. If you make 100 dollars, save $10; if you make 1000 dollars, save $100 – at LEAST. If you can’t find this, review your spending budget and find someplace to make savings regularly.

Once you have identified your weekly saving, put them into a different account automatically. This is the key that so many people miss. In the bestseller “The Richest Man in Babylon” and numerous books since (Like “Profit First”), you pay yourself first. This isn’t always possible, especially when you are clearing debt. Clear the debt first, then look for savings in your budget.

Your life and goals are why you work. Your family and friends are what bring you joy.

Your financial independence is the most important goal.

List all your debts from the largest to the smallest. Minimise your payments as much as possible to all obligations except the smallest debt and knock it off. Then do the next debt. Commit as many resources as possible to your eliminating this commitment and knock it off. This includes the money you are saving. It will knock off the debt quicker and will free up more money to save down the track.

This process gains its own momentum, but it’s vitally important that you are not building new debt while you do this. If you have credit cards, put them in a small water container in the freezer. This means they are available if you have a genuine emergency but are not available or carried with you for impulse purchases.

If you have very high credit card debt or more than one high credit card debt, contact a financial counsellor urgently. Credit cards have very high-interest rates on debt, and you can be buried financially by them. Do NOT ignore high credit card debt. Get help. A financial counsellor can help you with a payment plan, assist in consolidating the debt and sometimes negotiate to put the interest on hold.

If credit collectors are already chasing you, loan companies and Sherriff departments, see a financial counsellor URGENTLY. Being under this level of financial stress will damage your health, sometimes permanently. Take care of the issue and find your way back to normal.

Continue to eliminate your debts, one by one, from the smallest to the largest.

Once these debts are cleared, whether that takes a month or several years, you are set up for a better financial future.