This Is How You Budget: What It Is, Why You Need One And How To Do It Right
The Cusp finance expert Canna Campbell takes us through the basics of setting up a budget and why this is a non-negotiable if you want to sort out your money and start saving for your future (even if you’re only thinking as far ahead as Christmas).
All of us underestimate how much we really spend. We subconsciously (and sometimes consciously), play down what our real cost of living is or even simply forget all those little things that really add up.
When I ask clients to do a budget, they normally return back to my office with a rather pale face. Which is why I now suggest that they do it over a glass of wine – the shock of the real cost of life is normally much higher than we like to admit.
The big question dancing on your mind is probably how do I actually do a budget? Or maybe even, what really is a budget?
What a budget is and why you need one
A budget is a truthful list of the cost of all the things you need that you pay for to keep yourself alive and happy. And you need to know, realistically, what your living expenses are – especially if you have specific financial goals such as saving for a deposit or planning for your retirement.
How can you work out how much you can afford to put into savings if you don’t know how much money you need to live off? And planning your retirement will definitely be awkward if you aren’t certain of how much money you need to not only survive, but enjoy a comfortable life.
The truth is, it doesn’t matter how you budget just as long you have one – and if you do, regularly check and update it and make sure that it works for you and your cash flow habits and challenges.
Methods of budgeting
Excel spreadsheets of weekly or monthly expenses are probably the most popular method of budgeting (you can actually get a complimentary preloaded budget template by subscribing to the SugarMamma website).
There are also a range of apps that are equally handy and more visual. However, spending diaries (where you write down what you paid for or purchased each day) can also assist in budgeting your money more effectively (although they can also be disturbingly confronting).
How to do this budget thing
Group your expenses
To start your own personal budget, I recommend grouping your expenses together by theme. For example, you could have car expenses, which would include petrol, rego, CTP, comprehensive insurance, tolls, maintenance etc. Organising expenses into groups will help give you a more informed and clear picture of each area of your life. Make sure that you understand the frequency of each expense and then tally everything up together to get your bottom line figure.
Use your actual bank and credit card statements, not your memory
It can be handy to print off some recent bank and credit card statements, to refer to while plugging in all your expenses. This prevents you from fooling yourself as to the reality of your spending habits.
Round them up
Round up all your expenses to the nearest round dollar (for example, if your gym membership is $90 per month, enter it as $100 per month). This is a wise idea as it creates a buffer and reduces the impact of any expenses that were innocently forgotten about.
Match them against your calendar to get a feel for highs and lows throughout the year
The next step is to match these expenses against your calendar. No two months are the same when it comes to living expenses; there will be periods where you are hit with a barrage of expensive annual bills and expenses that clear you out (like Christmas time or when all our car insurances arrive in the mail together), and there are quiet months where we’re flush with cash. The latter months can actually give us a false sense of security as that excess cash should be redirected somewhere safe in preparation of those expensive months, as a form of damage control. I like to call this ‘stock piling’, just like squirrels do with nuts for their winter hibernation.
Set up a separate bank account to take from the highs and prep for the lows
This is where I recommend having a ‘Life Account’ – separate but linked to your everyday account. Here you can park that excess cash flow during those cheaper and quieter months so that you don’t get tempted to spend it. And when those bills arrive, you have a feeling of control and reassurance knowing that your bills can be paid in full and on time.
Expenses evolve because life does
The more honest and open you are with doing your budget, the more useful it will be, and the more likely you are to not only stick to it, but most importantly, regularly review it and update it, as our expenses evolve all the time.
Budgeting isn’t boring, it’s smart
Budgeting is not a boring, depressing task, but an informative, important and at times enlightening one. It helps you gain a deeper understanding and awareness of your relationship with money. With this extra understanding, you then have the ability to continue on making better and more conscious decisions in the way that you chose to use money to bring you the things that make you feel fulfilled and alive.
Lead image: Pinterest.
Canna Campbell is a certified financial advisor running her own company, SASS Financial, established in 2007. Her blog and YouTube channel, SugarMamma.TV teaches people the power of financial freedom; covering everything from managing budgets and investing in stock and shares, to saving strategies for your ultimate designer handbag. Canna regularly appears on TV as a personal finance expert, and has written for many publications.