Budgeting 102: Sticking to your budget

Even the best budget can unravel if the right tools are not in place. Here we talk about how to stick to your budget.

Give me the main points

  • Keeping to a budget means keeping a tight rein on expenditure.
  • Budgets that work are usually ‘balanced’ budgets (not ‘baked beans’ austerity budgets).
  • Consider setting up separate accounts – and direct debits – to make saving automatic.
  • Regularly review your progress. Work out a Statement of Financial Position.
  • Save a buffer. Have at least three months of cash in reserve in case things go wrong.

It’s easy to underestimate what we spend – by day, by week, by month.

It’s also common to put off budgeting until you have some money. And how easy it is to let things slide?

But when we finally get around to working out a decent, detailed budget the job’s not done. Now the hard work begins. Here are five tips to help you stick to your budget.

Stocktake – Spending more than you earn?

Subtract your total weekly expenses from your total weekly income. How’s it looking? Hopefully—ideally—you’ll have more coming in than going out. Over time you’ll be able to save—and build up your reserves.

First, you want a buffer in case things go wrong. Financial advisers used to talk of having six month’s spare cash in the bank. When this seemed out of reach for most, they talked instead of having three months in reserve—but many people struggle to even have one.

Living month to month is stressful enough; living week to week even more so. Getting your finances into a stable and sustainable place is the goal. Properly accounting for income and outgoings is the first step.

Cut costs

You may be able to increase your income, either through taking on a second job or cranking out a genius invention. More realistically, the quickest way to improve your personal bottom line is to cut costs. Curb unnecessary spending.

Go through your expenditure. You’ll find there are fixed costs (e.g. rent or mortgage payments) you can do little about, and other areas where you could cut but it may be unwise to do so (e.g. insurance). Unfortunately, the areas where you can make greatest savings—your discretionary spending—are often the things that are most fun. Going to the movies, big Friday nights out… that annual Bali break with the girls.

Once more, the crucial consideration is ‘balance’. You can draft an extreme austerity plan, but you’d be unlikely to stick to it. Be realistic. Don’t introduce cuts across the board or take $20 off food without knowing what you can (and will) give up or change.

Have a plan

It’s easier to keep to a budget if you have a goal you’re working towards. It might be something humble like a pair of shoes, a cast-iron wok, or a new cricket bat. Or it could be bigger ticket items like a car, an overseas trip or your first home deposit. Or perhaps you’ve got debts you want to pay off.

Having a plan keeps you focused and makes spend-ups and blow-outs less likely.

Sort your day-to-day money management

Set up a system that makes saving automatic—and limits your ability to spend more than you’ve budgeted. It’s a good idea to consider setting up several bank accounts, with direct debits into (or out) of each.

For instance, you might have a general account where your wages are paid into. Each week, money is diverted from here into a designated ‘House’ account (for your home deposit). Don’t touch this. You might have another couple of accounts—a smaller one where you trickle money in for that trip-of-a-lifetime to New Zealand, another for a fund for big, occasional bills (vehicle maintenance etc.).

Your goal? Each month your overall financial position should be stronger than the month before.

Track your progress

Check your finances each month to see if your savings and spending plans are on track. If you’re extra organised—you may want to fill out your own Statement of Financial Position in Excel.

Don’t just look at the bottom line. Where are you over? Where are you under? What little fixes could bring things back into line?

Are your targets realistic? Remember the best budgets are regularly reviewed and refined. They evolve over time.

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