How to Budget your Way to Financial Freedom
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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.
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 free 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.
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!
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.
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.