Saving Money & Wasting Less

Lesson 6: Budgeting

Working out a budget

There are probably as many ways to work out a budget as there are people working them out! There are websites such as Planabudget, Financial Plan, and Better Budgeting) that can take you through the process of planning a budget step-by-step, and there is bound to be software you can buy to ease the process. However, you don't need special software. All you need is a piece of paper and a pen (and maybe a calculator), or preferably a basic computer spreadsheet program. (You can download one free at Open Office, which offers a complete office package, including a spreadsheet, word processor, presentation and drawing software.)

Listing the budget items
On your paper or spreadsheet, start to list all the things you currently spend money on, including everything you can think of. These might include the following list, but there may be extra items in your case and some may not apply. You may want to group some items together, or split others that are grouped in the lists below. Make a separate list of expenses that regularly come out of your account automatically, as in the example below. (If you're part of a dual-income family, you also need to decide if you will have two budgets or a combined budget.)

Automatic deductions

• Automobile association
• Car loan payment
• Car insurance
• Health insurance
• Other insurances - life, income protection, house and contents
• Internet access
• Regular donation to charity

General expenses

• Accountant fees (for annual tax return)
• Ambulance insurance
• Bank fees and charges
• Books/magazines
• Car maintenance
• Car registration
• Chemist/medicines/pharmacy/makeup
• Christmas club account (if you have one, and if you haven't, it's a good idea!)
• Clothing/sewing needs
• Computer and printer supplies
• Dentist/Doctor/Optician
• Dining out
• Donations to charities (in addition to regular donations)
• Driver's licence renewal
• Education/workshops/courses
• Electricity
• Emergency fund
• Entertainment/hobbies/fun
• Gas
• Gifts
• Groceries
• House/garden maintenance
• Luxuries
• Mortgage or rental
• Parking costs
• Rates and/or land taxes
• Saving for holidays
• Saving for big items
• School expenses
• Stationery and postage
• Subscriptions/union fees
• Telephones
• Transport costs - gasoline/petrol/oil/gas, public transport
• Veterinary costs/animal needs
• Water rates/costs of water

You will now have two lists: those items that are automatically deducted from your account, and those you have to pay yourself.

Deciding on the budget frequency
Next, decide whether you want your budget to be weekly, fortnightly, or monthly (or even annually) irrespective of the frequency at which you're actually paid. If you want to be paid weekly, then make your budget a weekly one. It's your budget, and you're the one paying yourself, so you decide what you want.

If you're like me, you may find it easier to budget weekly, because if you can't afford something this week, it's easier to wait until next week to buy it, rather than waiting a whole month, and so you're less inclined to make impulse buys or 'blow the budget'. But if you think it's easier to have a monthly budget because you get paid monthly, then do that. If you want to pay yourself every 17 days, then go ahead and do that! (And good luck with your calculations.) You're in charge.

Calculating the amounts
Check your bank statements to make sure you know what bills are automatically paid, what date, and the amount. If the bill is paid monthly and you want your budget to be weekly, multiply the bill by 12 and then divide by 52 to get the weekly amount. If your budget is to be fortnightly, multiply by 12 and divide by 26. If you're not sure of the amounts yet, just write in an estimate at this point, as you will refine your budget later. Add these amounts to give you your automatic deductions total.

Next, estimate or calculate the other items on your list. For irregular bills such as car maintenance, dentists and so on, or for variable bills like electricity, you may be able to go through your records for last year and work out how much you spent last year, and then calculate a weekly, fortnightly or monthly estimate (as applicable) from that. Don't worry about getting exact figures at this point, as you will refine your budget as you go on. If you have no idea how much you've been paying for some of the items, just write amounts that you think might be about right. In discretionary items such as savings, emergency fund, luxuries, and so on, write in the amount that you think you would like to save each period.

Don't forget to include saving for big items, because part of being financially secure, and in saving money, is to get out of the habit of automatically buying what you want and then worrying about paying for it later. If you are constantly buying on credit, or relying on loans, you'll pay a fortune in interest. The idea of saving up for things may seem old fashioned, but it still makes a lot of sense.

Now add up all the amounts to give you your general expenses total.

Calculating the difference
Add the automatic and general expenses together to give you your total expenses for the budget period.

Now work out your income for the budget period. So, if you're paid monthly, for example and you have decided on a weekly budget, divide your net annual salary by 52, or multiply your monthly salary by 12 and then divide by 52. This gives you your budget period income. Don't forget to include all your income, from all sources, including interest, child support payments, or irregular payments.

(If, like Maude in the example in Paying Yourself, you have an erratic or irregular income, try to estimate as best you can from averaging previous years' income, or estimating what you think you will earn. For safety, deduct at least 10% from what you think you will earn. If you earn more, your holding fund will grow to give you a buffer for the lean times when you have little or no income.)

Crunch time
Now calculate the difference between your income and expenses for the budget period. This is where you find out how well, or badly, you're doing.

If your income for the period is greater than all your expenses put together, then you're doing well and you are already living below your means. You might want to look again at your figures and make sure they're correct, or perhaps you can find ways of saving even more money.

For most of us though, when we do these calculations, we find that our expenses add up to more (possibly far more) than our income. This is why so many of us get into financial trouble or end up in debt, with personal loans, or with credit cards constantly at their maximum, or living from one pay packet to the next. We are simply spending all we earn or more than we earn. Often, we think we're doing fine, but then an irregular or unexpected bill comes in (like car maintenance or vet bills), and we're in the red. This is why budgeting is so important - budget for the unexpected before the unexpected happens.

If you've added it up and your expenses are greater than your income, you have two choices: decrease your expenses, or increase your income. Since we're about saving money and the Earth in this course, decreasing the expenses is the best option.

Review each item in turn, work out where you can make reductions, and revise the figures. But remember, the very fact that you now know you're in trouble puts you ahead of most people who are just drifting along like people on a raft heading for a waterfall.

Perhaps you need to revise down some of your estimates. Look especially at reducing your discretionary spending on items such as dining out and books/magazines, and try to save money following the suggestions of earlier lessons and those to come. Look at each item and decide if you really need it, especially if you cannot afford it. If the difference between your expenses and income is too great you may need to do something drastic like consolidating loans, or selling your car and buying a smaller, cheaper one.

Note though, that it is usually false economy to save money by cancelling insurance. Review your insurance needs, but don't rush into cancelling policies to save money, as it could cost you far more than keeping it on. Make sure your income is insured in case of accident or long illness, and if you have dependents you need life insurance too.

You may need to seek financial advice if you cannot get your expenses lower than your income, especially if you already have debts. It is much better to seek help now than waiting until an unexpected bill or tragedy tips you over the brink and you realise too late how bad your situation really is.

However you manage to do it, you need to end up with your total expenses adding up to less than your income. Even if it's only $1 a month less than your income. You need to find ways of saving and cutting expenses until you can get to this situation. Make sure you include something as savings, regardless of how small the amount, and include an amount for luxuries, so you can treat yourself. Print this page

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