How to create a budget that works for you

So, you’ve gotten to the end of another financial year, you’ve seen your after-tax income on your tax return, and you’re absolutely convinced there’s no way you really earned that much. Where did it all go?!

One of the first steps we ask clients to take in the financial planning process (if they aren’t already) is to complete a spending plan. Having a handle on what’s coming into your household, what is going out and what kind of surplus (or deficit) you might have is the foundation of every financial plan. We have to start by knowing what we have to work with.

Your income is your greatest tool for building wealth, it’s important to make the most of it! So where do you begin?

Be realistic

There are a million budget templates online, we often encourage clients to use a version of the MoneySmart spreadsheet (MoneySmart, 2024). Begin by adding up what you currently actually spend. It’s always tempting to fill in a budget with what you think you spend or what you’d like to spend, but that doesn’t help you get a very good grasp of your current situation. It’s hard at first, and it might feel like a punch in the gut, but being honest with yourself is the first step to getting ahead. Use actual bills, receipts and bank statements so you’re getting the most accurate figures possible.

Why am I encouraging you to be honest to start with? So that you don’t set savings goals that are way out of your depth and get disappointed when your “budget in theory” doesn’t work and you don’t reach the goal you’ve set for yourself. You can adjust how much you allocate to certain variable items later (we’ll talk about that next). A good way to temperature check your budget once it’s established is to track what you’re actually spending for a few months, and adjust as necessary.

Once you know what your annual surplus is expected to be, you can figure out how much of that surplus is going toward each of your goals (holidays, new car, investment) and how long it will take you to achieve that goal. If you’re in a deficit, it might be time to look at which of your variable expenses you do and don’t value to determine what’s going to give.

Sacrifice what you don’t value. Spend guilt free on what you value.

As a millennial I’ve been told so many times that my annual coffee and smashed avo spend is going to mean I never have a house deposit *rolls eyes*. But in reality, I could buy a $6 coffee every day of the year and it would only give me $2,190 extra in savings (not accounting for interest). With a median house price of $1.08 million in Lake Macquarie (Core Logic, Property Value, June 2024), that’s not putting much of a dent in my house deposit.

While I don’t buy coffee out every day, the one time a week I do buy it brings me genuine joy. It’s often done with a really good friend having a great catch-up. It’s okay to enjoy your life while working toward your goals. It’s important to allocate space in your budget for enjoyment along the way! On the flip side, if I was spending heaps of money on subscriptions I wasn’t actually using (once I paid for Kindle Unlimited without using it for almost a year before realising, eek!) then it is a complete waste of money and probably not worth sacrificing achievement of my goals.

When you temperature check your budget, ask yourself “is this something I really value?” and if the answer is “yes!” then leave it in there. You might be able to make a slight adjustment (barista coffee once a week instead of every day). You can also ask yourself “is this something that is worth sacrificing my goals for?” and if the answer is no, then cut-it-out.

Have a money management system

It’s all well and good to have a budget on paper, but where the rubber hits the road is your money management system. If you’ve ever tried to make a budget work with one bank account and done it successfully, you are a superhero. For us mere mortals it’s usually better to have separate accounts for different types of expenses. I use one account as a funnel for the other accounts, this is where my pay comes in. I also have a long-term savings account (goal-based savings like holidays or house deposits), short term savings account (short term bills like rent, insurance, car servicing, utilities), and a spending account (groceries, petrol, my weekly coffee).

You can find a system that works for you, again there is plenty of advice on the world-wide-web about what the best way to do that is. But I can tell you now, it’s the most rewarding feeling when your annual car insurance renewal comes around and instead of having a really poor fortnight and eating two-minute noodles, you’re able to transfer out of your short term savings and pay the whole bill in one go.

So, to finish up…

If you’ve gotten this far and you’re really thinking about how to implement these principles, you’re already winning. Budgets don’t have to be a shackle around your ankles, they can be an effective way to gain a healthy sense of control over your finances. If you’re already doing all or some of these things and you’re ready to take the next step with your surplus, whether that’s investing for the first time, talking to someone about your first home mortgage or making sure you’re set up with the right insurances for you – give me a call! I’d love to help you on the next steps to living your ideal life.

Written by Georgia Alexander, Provisional Financial Adviser at Progressive Financial Planners

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