Budgeting 101

What is a budget and why is it important?

A budget is a well thought out plan for your money. If you don’t have plans for your money, you might spend more than you need to, spend more than you have or not reach the goals you set out for yourself. 

Making a budget and sticking to a budget are two different things. 

Think about why budgeting is important and if you stick to it – what benefits this can have on your life: 

• Reduces stress and anxiety 
• Achieve bigger goals faster – buying a house, going on that holiday, retiring early 
• Having money for when you need it 
  • Car broke down and need a new one for work

Step #1: Fact-Finding – Income and Expenses 

There are some cold hard facts you need to find before you start drawing up your budget. We need to first understand what money is available to spend and what we are spending our money on. Essentially our income and expenses.

Income:  to find out what money is available to spend: note down your total monthly income after tax.

Expenses: to find out what we are spending our money on: look at bank statements, card transactions accounts and note these down on a guide. I would recommend using this excel resource to start.

Step #2: Pick your Budgeting Method 

Low effort (easy): Save First, Spend later

Find out what % of income you want to save – every time you get paid – transfer this money into a separate account (eg a High Interest Savings Account, investing account, emergency fund etc) 

By portioning away money that you aim to save straight away – you learn to live on what’s left and hit your savings goal IF you don’t dip into the funds that have been moved away. 

Medium Effort (kind of easy): Divide and Conquer 

Divide your expenses up into needs, wants and savings. 

Needs are essential expenses that you cannot live without. Some examples of this are: transportation, car expenses, bills, mortgage/rent, groceries. 

Wants are lifestyle expenses that you can live without however have a positive impact on your physical or mental health. These include dining, hobbies, shopping, travel etc 

Savings can be a high Interest Savings account, investing account, emergency fund etc 

A good place to start is the 50/30/20 Rule. 50% Needs, 30% Wants and 20% Savings. 

More Effort: No Stone Unturned More effort 

Once you have seen which expenses you typically encounter during step 1 – write out a budget for each category which you think you can adhere to 

This strategy involves listing every single transaction that you have made that month, categorising into their category and seeing in which areas you have overspent (or underspent) and see what can be improved from month to month 

Most transactions happen via card nowadays so this can be done once a week or once a month.

At the end of each month – give yourself feedback on areas where you can improve and see how that goes for future months 

Step #3: Execute, evolve, excel 

Do what you plan 

Change what you need to 

Celebrate your wins

Common Budgeting Traps 

• Being too tight and restrictive: a budget is there to guide you towards a savings goal however it is important to live life at the means available to you. Don’t live below your means if it starts to affect other aspects of your life – see page on What Is More Important than Personal finance. We don’t want a budget to affect your physical and mental health because long term this can lead to burnout and lead to reverse budgeting (spending without thought) to cope. 
• Leaving out once in a while incidental expenses: these can quickly add up and throw out your budget altogether – these might be car servicing costs, medicine costs, new electronics- phone/laptop, new shoes etc. If they don’t fit somewhere in your budget, class them into the other category. 
• Doing it all by yourself: if you have a partner – do it together. Having someone do it with you keeps you accountable but also increases transparency in relationships. Being on the same page financially with your significant other can lead to to happier and healthier relationships 
• Getting demotivated after a bad month: shoot you spent an extra $250 on dining out last month. “Oh no! Screw this! I’ll never recover”. Spending more than your budget and recognising that is almost more important than spending less than your budget. You start to recognise patterns on where you can improve, where you can reallocate funds or if you cant save as much to change your expectations. In step 3: Execute, evolve and excel. I’d say the most important part is evolving. Things always change, we get a new car, we get a new job, we get a new partner, we get a new hobby. Changing your expenses to suit your everchanging lifestyle is important as expectations on expenses change with it. 

The Bottom Line/Summary

Who said budgeting was easy and straightforward? It can be as easy and relaxed as you make it or as time consuming and strict as you like. It’s important to strike a balance that works for you that you’ll actually stick to. 

If you can get a system going which you’ll stick to: you’re already doing better than 90% of others who don’t understand where their money is going. By understanding where your money is going, can unlock flexibility to save more for the things you want or set your future up for success.