Help & support
As you progress on your journey towards financial fitness, it helps to have an idea of where your money is going. While the sound of a ‘budget’ can be off-putting for some, a budget is just about making a plan for your money – because we know having no plan is often a plan to fail.
A recent survey conducted by CommBank found more than half of Aussies currently have a budget. But a third believe that their current method is ineffective.
The good news is you get to budget however works best for you: there is no one size fits all! Some people like spreadsheets, some people like good old-fashioned paper and pen. There are, however, a range of digital tools that can help.
Whether you want to have visibility of your personal funds, your small business’s capacity to pay bills and expand, or both, creating a system to manage your cash flow is not something to be afraid of.
Budgeting is a tool to help you feel more in control of your money. It can, however, take some time to find a system that works for you. Here are some steps to help you get started.
How to budget in a way that works for you
Many people assume ‘being on a budget’ is going to be restrictive, as though you’re going to eat baked beans every day.
But that’s not what budgeting is about.
A budget is an attempt to create a picture of your overall finances over time: your income, expenses and the resulting surplus or shortfall of funds.
Budgeting can be done in advance by setting limits for how much you will spend over a given period. But it can also simply be done in retrospect, by looking back on how much you earnt and spent during a timeframe.
You get to choose how frequently you want to budget — annually, monthly, fortnightly or weekly. The important thing is that you attempt to capture all your living expenses, income and resulting surplus or shortfall.
Short-term and long-term goals: How budgeting can help
Having a budget can help you to borrow, save and invest with confidence. It’s about building a picture of what surplus funds you may have at the end of the day to put towards your longer-term financial goals. These might include saving for your retirement or for a short-term goal like taking a holiday.
Knowing your living expenses will also help you apply for loans, like a home loan, with confidence, because you’ll have a better idea of what level of repayments you can comfortably service. It can also help you to plan for a career break or save up an emergency fund of easily accessible savings to cover between 3 and 6 months of living expenses.
Finally, when you’re looking to build your wealth over the long term via investing, a budget can help you invest with assurance that you’re not going to need that money back in the short term.
Popular budgeting methods
Budgeting is all about finding a system that works for you to help you be more mindful with your money. Below is a breakdown of three popular budgeting methods.
Take what you like, leave what you don’t and consciously create a system for managing your cash flow that works for you.
1. Budget by ‘buckets’
The buckets method is about setting money away in advance for your needs, wants and savings.
There’s also a rule known as the ‘50:30:20 rule’, which says that those buckets should be about 50% of your income for your needs, 30% for your wants and 20% for savings.
But those percentage splits might not work for everyone, and you have to tinker and find out what percentages work for you.
2. The cash envelopes method
Another method which has become popular in recent times is called the ‘cash envelope’ method. This involves getting cash out from an ATM, grabbing some envelopes, labelling them with certain budget categories, like 'shopping' or 'food', and putting in each the amount of money you wish to spend on that particular budget category for the month.
The aim is to only spend from the cash you have, and if you spend it all, you have to stop spending.
Using cash envelopes can be a helpful strategy for those who regularly overspend, but it doesn’t work for all budget categories, particularly ones with direct debits, and some people don’t feel safe keeping too much cash on hand.
3. The 'Track, Reflect, Project’ method
The final method is called the tracking or conscious spending method of budgeting.
It’s not about setting hard limits, but simply checking to see that you are spending in a mindful way and one that aligns with your life values and goals.
In a nutshell, the steps are to: track, reflect and project.
TRACK your money for a period of time, as you learnt in Lesson 3.1. The point is just to observe, in a nonjudgmental way, where your money is going.
REFLECT As you track your spending, it’s a good idea to reflect on which of your expenses are a ‘need’ versus a ‘want’. Take the time to slow down and consider the real value you're getting out of each purchase.
PROJECT Budgets often end up going off-track because we failed to anticipate some of our bigger, lumpier expenses, such as car maintenance or quarterly council fees. Think forward to some of these larger expenses which might not be captured in your short-term tracking.
Ultimately, there is no one ‘right’ way to budget.
It’s about developing a system that works for you and helps you feel more in control of your money.
Remember, budgeting is simply a tool you can use to start building the life that you want and making your money decisions with confidence and what not to love about that?
Budgeting tools
There are many great tools out there to help you get started on your budgeting journey.
For CommBank customers, the Money Plan section of the CommBank app can help you get visibility on where your money is going. You can set budget categories and track spending. You can also see a snapshot of your income and expenses over your chosen budget horizon.
The CommBank website has a ‘Budget Planner’ tool or you can explore the governments’ MoneySmart website, which also has a planner.
In summary, budgeting is not something that you should be afraid of. It’s a tool you can use to build the life you want and make your money decisions with confidence.
Congratulations, you’ve completed this lesson!
Next lesson: 3.3 - How to know your (net) worth and why it matters