The number one rule when building your wealth is to never lose money. That is why it is so important that you create and follow a plan. In this case your plan is a budget. You use a budget to control income and expenses in your life. It enables you to be in control of your finances so you can get on with your life with less financial stress.
In this insight, I will be covering how to budget the right way and show how easy it can be for you to get started budgeting.
Personal financial budgets are very often overlooked or used improperly. Other times they are too complicated and time consuming to use. This leads to incorrectly understanding your finances. Which gets forgotten and discarded within weeks.
When you have a budget you will begin to feel in control of your money and the stress gets lifted.
Use a budget to tell your money where to go instead of wondering where it went.
You can budget in many ways. What will work best for one person in one way may not work for someone else. Whichever way works for you, these core principles of budgeting remain the same.
Set Your Goal
The first step is to know why you need a budget. By setting a goal you will be able to decide where your money goes. Having a goal drives you to success with focus and direction.
You could be saving for something large like a car or a house. Or perhaps you're working to pay off a loan or build up a cash buffer for an emergency. Whatever the reason, a goal is your first step.
How to Set a Goal
Work out what you want. Focus on what you want to do rather than what you think you should do. Write down 3 things that you enjoy doing. Do these things help you achieve your goals?
Make your goals S.M.A.R.T.
- Specific - The more defined your goal is, the easier it is to achieve and measure. Rather than saying 'I want to save some money'. You should say 'I will save $10,000'.
- Measurable - Can you tell when you have achieved the goal? How will you be able to measure whether you have achieved it or not? You will be able to see $10,000 in your bank account.
- Achievable - Yes, it is important to stretch yourself. But start with an achievable goal to get the ball rolling. When you achieve your first goal, you will feel good about yourself. It will encourage you to move the goal posts further to build up to bigger and more audacious goals. If $10,000 seems like a lot, break it down. Start with $100, then $500 then $1000 and build up to the $10,000.
- Relevant - The goals you set should allow you to progress towards your bigger goal. Make sure this goal does not deviate from your greater ambitions in life.
- Timely - Goals need to have an end date otherwise they are simply a wish or idea that you may one day achieve. E.g. 'I will save $10,000 before the end of the year'.
Once you have set your goal, you need dig into your current income and spending habits.
Track Where Your Money is Going
The second principle of budgeting is to know where your money is going. By knowing when regular bills or spending habits occur you can begin to allocate for it.
You should understand this before you work on creating your budget. The only way to know is to track your spending over a period of time.
The most basic way of knowing where your money is going is by logging into your bank account. Scroll through and see all the transactions you have made on your account.
You could do this each time but there is a better, more exciting way.
Fichest's money page allows you to import your transactions. It categorises and provides insights that you may not be able to see by looking at your bank account.
Fichest only allows you to manually upload your transactions for two reasons:
- There is currently no safe way to automatically pull your transactions without giving your bank account logins to a third party (Extremely not recommended!). The "Open banking API" allows you to safely authorise read-only access to your transactions. But its not widely available yet. Fichest will integrate open banking when your bank enables this functionality.
- Having your transactions automatically processed means you're less inclined to look at it. Review your transactions to gain the best control and insights over your budget.
With Fichest, each transaction is anonymously analysed by our custom-built machine learning algorithm. It recognises transactions and categorises them for you. Its ability gets smarter every day as more and more transactions get processed.
Next time you import your transactions, you will only need to review the categories. Seeing if there are any anomalies rather than scrutinize over every single transaction. You can still also review every single transaction and re-categorise them too.
The transactions get categorised to help you see what areas you are spending in your life. If, for example, you find that you have too many subscriptions then Fichest will be able to show you this.
The aim is to analyse your spending over days, weeks or months to get a good idea. The longer period you can see your transactions for, the better idea you will have of where your money is going.
3 Popular Styles of Budget
Money is often a taboo topic that is hardly discussed. Your relationship with money will reflect in how you budget. If you struggle with budgeting or not sure where to start then one of these styles may suit your needs.
Here are the most popular ways to budget:
Zero-sum budgeting aims to give a purpose to every dollar coming in. The goal is for your everyday transaction account to be at zero by the end of the period. This doesn't mean you are spending all your money. It means you are making use of every dollar by allocating it to where it should be. That is, you are paying expenses, saving or investing it.
The aim of zero-sum budgeting is to prevent any unnecessary spending. By doing so, it allows you to maximise your income. If you do not allocate your income then 9 times out of 10 you will use it on wasteful things.
By matching the budget timeframe with your pay cycle, you can use your income to pay your expenses. Then you can utilise any remaining amount towards your goal. That is, you could use it to save for something big or invest etc.
This style of budgeting aims to break your income into 3 segments.
- 50% to needs/expenses - A good chunk of your money will likely go towards expenses. Rent/mortgage, food, utilities and debt are among the largest ongoing expenses. These are things that you can not avoid. That is why straight up you allocate half of your income towards expenses.
- 30% to wants/fun - Life is about living and having fun. If your expenses are too high or saving to much, you can often overlook this segment. Use this money to enjoy yourself.
- 20% to savings/growth - These are usually investments. Anything that will return more money to you - as safely as possible. Things like higher education, shares or property may be growth investments for you.
Tip: Use our percentage calculator to help you work out the correct breakdown of your pay for your budget.
If the median Australian salary is roughly $70,000, then the breakdown (ignoring taxes) would be:
- $35,000 (50%) towards expenses.
- $21,000 (30%) towards fun.
- $14,000 (20%) towards growth.
If you divide that by 52 weeks of the year, your budget each week becomes:
- $673 expenses.
- $403 fun.
- $269 growth.
Those numbers will look quite accurate for many but may not fit your exact needs. This will change based on dozens of factors. These factors may include: your scale of income, if you live in a high cost of living area or how frugal you are. You may need to adjust the percentages or choose a different budgeting style instead.
This style of budget is a little more loose than the other two and aims to set rules around what you value the most.
The aim of this budget isn't to focus on what to cut out but rather what to leave in. For example if you love to have breakfast out then you may add more budget towards eating at local cafes.
This type of budgeting lets you focus on your best life and built for you.
Don't forget to still make room for things in your life that you cant cut out like food and utility bills.
How to Set up a Budget
A good idea is to set your budget timeframe to match with your pay cycle. For example, if you get paid weekly, you should create a weekly budget. If you get paid monthly then you should have a monthly budget.
You can make a weekly budget in Fichest. It can automatically scale to a different period if you change the duration view.
Record your Income
Make a list of all your regular income (wage, pension, government payments or investments etc). If you do not have a consistent regular income, work out an average.
How regular do you get paid and how much? Dont forget to add any other regular streams of income like dividends or rental income.
Record your Expenses
Make a list of all your regular expenses. You will be able to see your expenses from your transactions. See Track Where Your Money is Going step above. Track what they are for, how much they cost and how often they occur during the budget period.
You will have a mix of essential expenses, fixed expenses and debt expenses.
- Essential expenses - expenses that you need to live. You cant avoid these. This includes things like food and housing.
- Fixed expenses - expenses that reoccur and are predictable. This includes things like rent/mortgage and phone bill.
- Debt expenses - expenses that occur because of debt. This includes things like personal loans and credit cards.
Don't forget to factor in any unexpected expenses too. Things such as: repairs, medical bills, extra-curricular activities and pet fees.
If you looked at your transactions over a long enough period of time, you can begin to see patterns. If you average out, you can get an accurate figure for expenses that vary.
Allocate the rest
It's not how much money you make but how much you keep.
Hopefully when you have paid all your expenses from your income there will be money left over. This money is the most important part of your whole budget because it is what you will use to fund your growth. You can not work forever so you need to ensure that you have money coming in when you cant make it come in yourself. To do that, the money that you have left over needs to be put to work.
You should first build yourself an emergency stockpile of cash. A good amount is to have 3+ months worth of expenses. The more months available the merrier you will be if an emergency does come up.
Your emergency fund should be separated from your day to day money where it is out of sight and out of mind. This prevents you from touching it when you want to buy a guilty pleasure.
Once you have your emergency fund saved for an emergency, next step is to put your money to work. However you do this is up to you. The aim is to send your money out and when it comes back it brings its friends back with it. i.e. you invest the money and it pays you money back as a return.
Don't forget to live your life. You shouldn't feel guilty using that money. It is for things that you want like material possessions and life experiences. The whole point of making a budget is so you can rule your best life.
Track, Adjust and Automate
Budgeting requires discipline. When you are disciplined, it helps your money go further. Life is ever changing and that's why your budget requires regular attention to adapt with you.
Now that you have set up your budget, you need to review it on an ongoing basis.
When you find your budget does not match the reality of your living, you will need to look over it to realign it again.
Budgeting also requires a time commitment. Your time is valuable so make use of technology to do the heavy lifting for you.
Some things you can do to help automate your budget:
- Use financial software. Fichest makes creating your budget as easy as it can be. It automates the tracking insights that you may not have been able to see just by looking at your bank transactions. Review the period comparisons to see how you are tracking and if you have blown out any areas of your budget.
- Create multiple bank accounts. Use the best high interest savings account that you can get your hands on for your emergency savings. Create another transaction account for your regular bills. As money comes into your account, setup automatic transfer schedules that cover the required amounts into your bills and emergency accounts. Move your debt and investing payments too. This ensures you are sticking to your budget and they are not recklessly spent.
Start Budgeting Now
The way you budget comes down to what resonates with you the most. What will work for one person may not be the best way for another. Whichever option you choose, stick with it. Budgeting requires discipline and an ongoing commitment. But it doesn't have to be hard.
The aim is to get familiar and on top of your spending so that it becomes part of your muscle memory. That is, it is so easy that you don't even have to think about it because you have a plan and are sticking to it.
Don't forget to keep reviewing your budget on a regular basis. Your life changes and so does your spending so remain flexible and you should have no problems.
If you haven't yet created your budget, try Fichest and see how easy budgeting is today.