A budget shows exactly where your money goes so you can redirect it to a deposit or extra loan repayments. The simplest approach has four steps: list your income and spending, cut what doesn’t matter, give every dollar a job and review it monthly. Lenders also check your living expenses, so a tidy budget helps your application.
Talk to wealthy people and you will find most have one thing in common – they know how to manage their money. And that means having a budget. Boring, right? It might sound tedious, but the reality is you won’t get ahead without spending less than you earn.
Here’s our guide to budgeting so you can take charge and change your financial future.
Step 1: How do I work out where my money goes?
You won’t know where you can save if you don’t know what you’re spending. While it can be confronting, the first step to better budgeting is to find out where all your money goes.
Start by reviewing your past three months’ income and expenses. Categorise your costs into fixed essentials (mortgage, rent, insurances, phone), variable essentials (groceries, petrol, haircuts), unplanned essentials (new brakes, dental surgery) and nice-to-haves (Netflix, fashion, holidays).
You can use a traditional spreadsheet or a budgeting app, such as Track My Spend, designed by ASIC.
Don’t fret if you find you don’t have enough income to cover your expenses. Better to discover this now than to keep heading in the wrong direction. If you’re spending more than you earn, or not saving enough, it’s time to make some changes.
Step 2: Which expenses should I cut first?
Time to decide where to cut back, keeping in mind even small changes can make a big difference. That take-away coffee before work tallies to about $850 a year. Starting with the nice-to-haves, decide what you can go without. Whether it’s eating out less, shying away from shoe sales or cancelling your wine subscription, sacrifices must be made! Your essentials also offer big saving opportunities. Budget less for groceries, shop around for a cheaper phone plan and talk to me about a mortgage review. There are plenty of costs you can adjust so don’t put it off and don’t make excuses!
Step 3: How much should I put towards savings?
Once you know your essential costs, budget for those first. There’s no point splurging on a night out if you don’t have enough money to pay your electricity bill. If tempted to spend before you save, open separate savings accounts where you can allocate funds for bills and savings.
Add up the annual cost of your bills, such as insurances, electricity and rates, and divide the total by 12. Set up a monthly funds transfer for that amount so when bills are due, you have money on hand to pay them. You can then work out how much you need for weekly expenses, such as petrol and groceries, and even that daily coffee.
Now you know your essentials budget, set aside some savings. If you’re not sure how much to put away, start small and build to bigger amounts as you learn to live within your budget. A good savings goal is 20 per cent of your take-home pay. Once you’ve allocated funds for bills, weekly living and savings, the rest is yours to spend as you please. Just remember there’s a difference between desire and need, so try and save as much as you can. Remember, this is the bucket that rewards you down the track.
Step 4: How do I stay on track?
Everyone thinks about and manages money differently, so it’s important to find what works for you. The main thing is that you stay on track. It might take several months to notice a difference, but if you’re spending less than you earn, you’re heading in the right direction. Remember, budgeting needs to be part of your lifestyle not instead of it, so find ways to treat yourself from time to time without undoing your hard work.
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.
Frequently asked questions
There is no fixed rule, but many people aim for 20% or more of their take-home pay. The right amount is whatever you can sustain every month. A consistent savings history also shows lenders you can manage repayments.
Yes. Lenders review your bank statements, usually the last three months, to check your living expenses and spending patterns. Large discretionary spending or buy now pay later debts can reduce how much you can borrow.
Download three months of bank statements, group spending into categories and total each one. Our budget planner calculator does the maths for you and shows what is left each month for savings.
