Budgeting often feels like something that’s difficult to get into. I’m not an accountant, so how should I know how to budget? How should I know how much I should be saving?
Fortunately, with technology there are more ways to budget than ever and it’s easy to get started. If you’re looking for ways to get your budget started, here’s a guide on the steps you can do to help.
1. Figure out your financial goals
Most people’s motivation to start budgeting starts with a goal. Maybe you need a new car. Maybe you want to take that holiday to Fiji, or maybe you want to save some money for the kids for Christmas. Whatever it is, it’s important to outline what your financial goals are from the beginning so you can keep sight of what you’re saving for.
It’s also important to note the distinction between short-term goals and long-term goals. You might want to have a few short-term goals by the end of the month, whilst working towards a longer goal by the end of the year. Having short-term and long-term goals will help keep you on track and celebrate the small financial wins you get each month.
2. Choose a budgeting plan that matches your priorities
There’s no one-size-fits-all approach to budgeting. Depending on what your financial goals and priorities are, different budgets will work for different individuals. The important thing is to figure out how much you can realistically save without compromising on your quality of life. For example, if going to the movies with your friends is something important to you, it’s more realistic to set some money aside for it. Just remember to keep this prioritisation within reason – you still have fixed expenses and savings goals.
These priorities can help to provide a framework for your budget. They’ll also help you determine how much you want to be saving. A popular budget plan for this is the 50/30/20 rule – 50% to your needs, 30% to your wants and 20% to your savings. This budget plan acknowledges the importance of putting money towards the things that improves the quality of your life. If this sounds like you, we found a useful resource for the 50/30/20 rule here.
3. Determine your actual income
In order to figure out how much you’ll be able to save each month, you’ll need to start by determining what your actual income is. Once you factor in things like tax and KiwiSaver payments, you’ll be left with the real value you have to work with in your budget.
If you’re a contractor or your work yields irregular income depending on the season, an [irregular income budget](https://www.youtube.com/watch?v=apVsEz7U4iw&ab_channel=KellyAnneSmith) may be a better fit for you. Alternatively, calculating your monthly income on average can be a useful way to determine how much income you can work with.
4. Determine your expenses
Just like we did with your income, we’ll also need to determine the values of your expenses. The more accurate your numbers are, the easier it is to control your spending habits. Generally, you’ll have three types of expenses when budgeting:
Your “needs” are the expenses that are necessary for you to live. Rent, utilities and groceries are all examples of such expenses. Another term for these expenses you might recognise is cost of living. If you’re looking for ways to reduce these, check out our article on cost of living. Most of these expenses are fixed and are easy to calculate.
Your “wants” are the expenses you don’t necessarily need to survive but improve your enjoyment of life. For example, restaurants, leisure or entertainment subscriptions. If some of these costs are uncertain and fluctuate from month to month, averaging is your friend. Remember to give yourself breathing room based on your priorities.
Finally, “savings” are where you’ll be putting the money that goes towards your financial goals. Another thing you may find useful is a separate “emergency fund”. It’s a reality of life that emergencies like hospital bills or car repairs happen. By having an emergency fund, you can continue to work towards your goals without making too big of a dent to your habits.
5. Writing the budget
Now that you have your actual income and expenses figured out and your goals in place, you’re ready to start writing your budget. This stage can be a step that scares off a lot of people. Luckily, there are a range of apps and services available to help make budgeting as smooth as possible.
As recommended by Stuff, we agree that Mybudgetpal is one of the best budgeting tools currently available. Mybudgetpal is “budgeting made easy” and automatically categorises your expenses. It also allows you to set spending limits to reflect those priorities you worked out before. As a bonus, it’s also free and just requires you to set up an account. You can do that here.
Using services like Mybudgetpal and automating payments is a great way to keep yourself accountable. Saving money and budgeting can be hard, so why make it harder than it needs to be?
6. Keep on track
Budgeting is something that can be easy to forget about. Remember that effective budgeting requires a few check-ins to make sure you’re on track with your saving! At the very least, you should be checking your accounts and budgeting tools once a week. Mybudgetpal allows you to compare spending across different periods and highlights spending habits that need attention. Make use of the tools you have to ensure your financial goals aren’t getting too far away.
Remember to keep your expenses accurate as well. It can be easy to forget who in your friend groups owes what for dinner. Splitwise is a great app for remedying this. It allows you to track shared expenses with friends so that everyone gets paid back. If you want to learn more about Splitwise, check out their website.
Budgeting is nothing to shy away from if you’re looking to make the most out of your income. An effective modern budget will include:
- Clearly outlined goals and priorities
- A budget plan that fits those goals and priorities
- Accurate income and expense values
- Use of apps and automation to make the job easier
- Regular check-ins to keep track of progress
If you need some help raising finance for your next big spend, a personal loan from Pioneer Finance can help. Get in touch with the team and we’d love to discuss what finance options are right for you.