Budgeting Made Simple
Wednesday, April 20th, 2016
At this time of year, it is important to think about budgeting and your plan for the financial year. Although making a budget can be daunting, it is one of the best things you can do if you want to keep your spending in check.
One of the best places to do this, is Sorted which features an online budgeting tool which provides an easy way to assess your spending habits.
Step 1: Set clear goals
Before you begin to draw up a budget, you need to identify what your main financial goals are. These can be either short, medium or long term and could involve everything from paying off the credit card/mortgage to saving for retirement.
Step 2: Calculate income and expenses
Once you have established some goals for your money, take a look at where it comes from and where it goes. Make a list of all your household income sources. Include everything from wages (after tax), commissions, self–employment income, pensions and other regular income.
Next calculate your spending. This can be difficult because, for most people, they are clear about where their money comes from, but not as certain about where it goes. Spending includes everything you spend your money on. For example, power, rent, groceries, credit card, mortgage etc. Make sure that you record the whole family's spending for at least three months. This can be achieved using a note book if you don't wish to use a computer. The purpose of tracking everyone’s spending is to find out where all the money is going.
Step 3: Design your budget
Many people are averse to the word “budget” because it implies deprivation and going without. If you look on your budget as a spending plan, it will allow you to avoid money issues as well as reaching your goals. Your first priority is to ensure that your expenses do not exceed your income. Expenses include everything you spend your money on, not just the bills.
The Federal Trade Commission have a detailed worksheet which can be downloaded for you to follow. The worksheet is designed to help you track your monthly income and expenditure. Once you have downloaded the form, write your total monthly income in the box provided. The expenses listed cover all areas of your life from housing, food, entertainment and health. If you have been diligent in recording your spending, you will have a detailed record of where your money is going. At the end of the form calculate your total monthly income minus your total monthly expenses. If the total is positive, you are on the right track. If it is negative, you will need to either cut back on your spending, or find ways to increase your income. For help and advice in this area, the following organisations can assist: The NZ Federation of Family Budgeting, the Salvation Army or the Citizens Advice Bureau.
If you're a person that does not have a steady job- for example you have seasonal work or are on commission- then things can be more complicated. To deal with this, you should calculate the average net income you've had per year for about 3 years. This number can be divided by 12, to get an idea of your monthly income. Another tip, is to set up a holding account. This involves having all of your income deposited into one account and paying yourself a monthly amount based on your calculations.
The holding account method also works well for students. If you have a sum of money saved from employment, or if you receive a lump sum of student loan funding, set it all aside in a separate account so that you don’t spend it all at once. Pay yourself a monthly or weekly amount to meet your obligations.