How to maintain a budget

Setting up a budget is great progress in your efforts to improve your relationship with money and, ultimately, your financial position.

That’s because it is the foundation of managing your cash flow and spending habits.

But setting up that budget is not where most people come unstuck.

Most people who try to budget fail to get the benefits of a budget because they cannot maintain the practice.

Let’s look at the steps to how you can maintain your budget.

Step 1: Schedule your budgeting practice

Budgeting is a practice that requires commitment, willpower, attention, and consistency. It’s not a set-and-forget exercise.

To budget well means paying close attention to your spending within each of your categories to ensure you stay within your identified limits and, therefore, within budget.

It is far easier to stick to a budget when you pay close attention.

This means you will need to set a regular weekly time to review your spending, check you are within your budget, and adjust for changes.

The longer you maintain budgeting the better you will become at forecasting.

You might like to review your spending weekly or daily to see how you are tracking. It doesn’t have to be a manual process; you can use apps to help you track and monitor your spending.

A budget must be realistic and reasonable if you are going to be able to stick to it. Many people set themselves up for failure by underestimating their actual spending or making the budget too restrictive and unmanageable over the long term.

If you want to succeed, you have to push yourself, but you also have to be realistic.

It’s like setting a goal to attend the gym every day when you have not been going. The same is true with your budget. Push yourself to spend better and save more, but be realistic when setting a limit for each spending category.

Don’t cut back too much if you know it’s not going to be something you cannot sustain.

Step 2: Make budgeting a game that you win at

Budgeting doesn’t have to be restrictive or boring. It may seem unlikely for people who have had a problematic relationship with money, but you can make budgeting fun.

It’s worth considering are you more likely to stick with a habit that you enjoy? Of course, you are.

One way to do this is to ‘gamify’ the process and reward yourself when you stick to your budget and reach milestones or savings goals.

This is much more than a game, of course. What you are doing is building milestones and rewards into your budget to celebrate your progress and achievements.

It will change how you think about budgeting, from a chore to an activity you feel satisfied with.

Step 3: Review the value of your money and simplify your budgeting

It might seem obvious, but you may not understand the value of the money you earn if you spend too much.

You work hard for your money, but rarely when spending money do people connect it to the effort, time, and energy that went into generating it.

Thinking about your entire budget in this context can be a simple way to reframe the way you view money psychologically.

Let’s assume you spend $500. If you think about the time and energy it costs to earn this $500; you might see its value in a new light.

Next time you are spending, work out how many hours of labour it would take to earn. Use this idea to weigh up the actual value of any purchase.

Give every dollar you earn a purpose, even if that job is saving or an extra loan payment. It doesn’t mean you spend every dollar you make, but instead, you are intentional and mindful about every dollar you spend.

You may want to break some of your budget categories and expenses into weekly amounts to help you spread out your spending and make it easier to manage.

For example: If you give yourself $200 a month for personal spending, think of it as $50 a week. Suppose you put $900 in your grocery budget; that’s $225 a week.

Thinking in these smaller amounts may make it easier to stick to your budget.

You can do this too with significant living expenses such as car costs, insurances, and medical.

Review them and break them down into smaller amounts to make it easier to consider your budget costs.

Step 4: Get smarter about your use of credit

It’s essential to keep track of your spending in cash and credit.

Studies show that we spend more with credit cards than we do with cash. This is because spending on a credit card takes away the immediate awareness of how much something costs. You are more susceptible to impulse spending as you tap and go.

One often-cited study was conducted by Dun & Bradstreet, in which the company found that people spend 12%-18% more when using credit cards instead of cash.

The buy now and pay later concept means you spend now and don’t get the bill until next month. This way, you don’t have to think about whether you can afford the purchase unless you have planned for it in your budget.

Buy now pay later products allow you to buy something now and pay for it later.

A minimum payment is paid when you shop online or at a store, then you pay the rest of the purchase off over future instalments. Typically, these products require you to pay off your purchase over three or four instalments.

Do people also overspend if they use, buy now pay later products? Two in three shoppers who have used buy now, pay later financing said it’s caused them to spend more than they would have otherwise, a new LendingTree survey of 1,040 Americans found.

With both credit cards and buy now pay later providers, you can pay extra for your product as the company providing the service charges interest if you miss a payment.

Try using a debit card instead. This means you have the money first, before the purchase.

If you continue to use your credit card, track every purchase, this can be time-consuming. However, it’s a way to spend on your cards and keep your heightened awareness.

Either way, once that money gets low at the end of the month, you will become aware of how much you have left to spend, and that might be stressful if your spending is not within your budget

Be mindful about what you spend each day to keep within your limits and continually adjust your budget as you go.

Step 5: Get real about planning

Emergencies and surprises do occur and impact your budget. In the US, the Federal Reserve found 61 percent of adults say they would cover it, using cash, savings, or a credit card paid off at the next statement.

For the remaining 40 percent of adults, they would have more difficulty covering such an expense, the most common approaches include carrying a balance on credit cards and borrowing from friends or family.

We often think of these as ‘unexpected expenses’. But how unexpected are most of these?

A lot of what we call “surprises” is just poor planning.

When developing your monthly budget, check your social calendar, plan for each month’s events and needs ahead of time.

Birthdays are regular events; ensure they are included. Holidays, weddings, family visits, and time off work can all be planned. So can the annual payment or renewal of something substantial.

So much of improving your finances is becoming and remaining mindful with your money.

Step 6: Experiment with ‘not spending’

Challenge your spending habits with a spending freeze, a spending diet, or a zero spend challenge.

Again, this is an important exercise that you can have some fun with. You can do it by setting up a ‘no-spend week’ challenge with your friends.

Whatever you call it, the idea is the same: a commitment to not spend money on anything that is not a necessity.

You can do a no-spend challenge for a week or a month. It might seem intense, but it’s a remarkable way to change your mindset and spending habits.

Get started with your no spend challenge by identifying in writing what qualifies as a necessity or what area you are challenging yourself not to spend in (i.e., takeaways, clothing, coffees) and how long you’re going to challenge yourself not to spend.

Make it more fun by challenging your friends or family members and see who can save the most.

You can also slow down emotional spending impulses by not rushing big purchase decisions.

When you are in the store or online, find the item you wish to purchase at the cheapest cost and wait one day before buying.

It takes the impulse out of the decision. Your head has a chance to make the decision, not your emotions.

Step 7: Nominate a budget buddy and become accountable

If we were good with our finances on our own, we might have learned to manage our money.

The reality is our habits and attempts at improving our finances have often failed.

Find someone in your life to help: a budget buddy or someone with who you can be accountable regularly.

Someone who would encourage you and be bold enough to call you out. A spouse, partner, family member, or friend make good accountability partners.

So, who isn’t afraid to give you some ‘tough love’?

There is incredible strength in seeking accountability to help you stay on track.

Step 8: Become proactive – and stay positive

Be practical and intentional in your spending decisions.

Ask yourself, does this purchase come with a payment plan. Will this eat into your savings? How will this benefit your day-to-day life? Is the benefit worth the cost?

Weigh the pros and cons to make sure it’s adding value to your life and not creating stress.

If you have a terrible month, have blown your budget, or forgot to track your spending, don’t get discouraged and give up.

Use this to create awareness of where you need to adjust your spending, try new habits and alter your budget. Ask the why do I budget question, and remember those benefits.

Budgeting is learning a new life skill; it takes practice.

You may have to experiment all year before you find a system that works. Having a list of things that work well can help remind you of how far you’ve come and the positive changes it has made in your life.

Budget, learn, adjust, live well.

How to budget

Last week we established that budgeting isn’t easy, so you need to understand why it’s a behaviour that must be followed up with regular – even daily – actions.

We covered in detail why budgeting is essential to improving your finances, using several examples and looking at many reasons why budgeting has to become part of your life for you to behave more mindfully with your money.

Remember, the ultimate goal is to improve your relationship with your finances to move out and avoid financial stress so you can get ahead and live a financially stress-free life.

Let’s take these steps and learn how to budget.

Step 1: Properly determine your household income

Determining the regular amounts of money received for you and your household is the first step.

Many people do not receive the same amount each pay period. There could be different rosters each week, different pay amounts due to overtime, penalty rates, or shifts worked.

The goal here is to review your payslips and last year’s payment summary to understand your income clearly.

Review the last three months of pay and calculate the average.

Review for any pay amounts that are unusually high or low and think about whether these fluctuations should affect your calculation of what you earn. Consider how things like unpaid leave or unusually long hours (that you cannot sustain) impacted your income.

Try to budget on what income is certain and regular from your employment, other sources and use the after-tax amounts.

It is important to consider all income sources. You may have a second job, receive Government benefits, support payments from a previous spouse and investment income.

Include all income sources to calculate your total income.

Record all this in a spreadsheet. There are good online templates available for free. Money Smart has a great budget planner. You can access a number of budgeting apps or ask a trusted friend who has been successfully budgeting to run you through how they keep their records.

Step 2: Begin tracking your living expenses

This is about fully understanding what your living expenses have been over the past three months. Select a long enough period to reflect what expenses typically occur. This may be a period longer than three months, select the period that works for you. Three months should be the minimum.

To calculate the total, you should examine all the sources of spending, including:

    • Credit card statements;
    • Store cards;
    • Buy now, pay later accounts (i.e. Afterpay, ZipMoney); and
    • Bank statements also account for cash payments.

Review direct debits for all your accounts to make sure they are included.

Look for amounts that you have transferred between accounts you own.

These should be excluded from your calculation; otherwise, you will double-count some of your expenses.

Lastly, look for any one-off amounts and do not occur more frequently than yearly (not a bill like annual insurances or car maintenance). Remove these from your calculations.

As you are doing this, you are bound to notice spending patterns. You’ll see how much, for example, you spend on those morning coffees or evening takeaway dinners.

It could be the cost of various streaming services that stand out.

Pause on these discoveries as you go through and ask yourself honestly: do you use and need all these things? Can I alter my behaviour, for example, make coffee at home. What difference would it make to your life if you didn’t have these types of products and services and their associated costs?

This is an excellent time to review your subscriptions that you may not use regularly.

Question yourself here: ask whether you are receiving value from these subscriptions and discontinue if you are not. Remember, even small amounts can add up and make a difference over time.

In Australia, unused subscriptions are very significant. Research conducted by Finder.com.au found Australians are wasting nearly $4 billion a year on unused subscription services. Collectively Australians have 56.7 million subscriptions – about three each per person – costing about $40 per month. The most popular subscription services include Netflix, Spotify, Foxtel and Stan.

Now add up the amount spent from each account for three months.

Allocate these expenses into three categories:

    • Fixed;
    • Variable; and
    • Irregular.

Factor in any major annual or bi-annual expenses you know are coming if you have household items that will need replacing, for example, microwave, hot water system, washing machine or dryer.

Make sure you factor in the replacement costs of those appliances that are nearing the end of their useful life. These are often overlooked.

Step 3: Balancing the budget

Take your income and expenses for the same three months.

Subtract the expenses from the income and see if you have earned more than you have spent.

If you have a surplus – congratulations!

You might like to consider whether this is sufficient to ensure you can cope with any unexpected expense like those replacement costs.

What happens if your expenses exceed your income?

First, don’t panic.

If you do not have a surplus (i.e., more expenses than income), the first step is to review your expenses a second time to determine any expenses you can change or cut completely.

Step 4: Go back and review your expenses

No, really, do this part again – this may be annoying, but it is crucial. Cut and change those non- essentials.

Some suggestions to modify your expenses are:

    • Changing the frequency of the expense. An example could be eating out less often;
    • Renegotiate with your service providers. An example could be changing the mobile phone plan and electricity provider;
    • Review personal, general and car insurance to ensure you are getting the best deal and make sure you are not over-insured;
    • Consolidate debts to reduce interest charges;
    • Refinance your home loan and select the most suitable product;
    • Select one TV streaming service, not three; and
    • Avoid impulse spending on lifestyle items.

Often in reducing expenses, you don’t need to stop spending in a particular area altogether.

If you reduce the frequency of a few of these items, then you may be able to save enough to ensure your expenses are lower than your income.

If you still cannot balance your budget after reviewing all your expenses, you can look at your income.

Step 5: Review your income potential

It’s time to take an honest look at what you earn. This involves reviewing your capacity to earn extra income, including your potential for a second job or even the sale of unused or under-used possessions.

Some suggestions to modify your income are:

    • A second job, such as an Uber driver on the weekends;
    • Ask your employer if there is an opportunity for overtime; and
    • Do you have unused possessions or items in the home that you could sell to free up space and boost your cash flow?

Selling unused and unwanted household items can be significant.

Online marketplace Gumtree estimates Australians could make an average of $5800 per household by selling about 19 unwanted or unused items lying around the home.

Gumtree’s 10th Second Hand Economy Report found 62% of Australians have pre-loved or unused home and garden items they would sell.

Step 6: Balancing the budget

After making those changes, hopefully, you have determined you can cover your cost of living, and that balancing your budget is very satisfying.

If you are in surplus, that will put a big smile on your face.  Having surplus money gives you choices, and that is empowering; you can make decisions around investments, lifestyle and your ability to support others.

If you are still struggling with balancing your budget, you can seek support. You could consider contacting a financial counsellor or a budgeting coach for help.

Next week we look at how to maintain a budget.

Why do a personal budget

We have started a new financial year. Like previous financial years, new rules come into effect.

From 1 July 2021, there are significant changes to superannuationtaxation, social security, Medicare and many other systems.

These changes impact how we are taxed personally, our superannuation, indexation of social security, different medical benefits, etc.

All of these changes hit our bottom line.

Do we receive more income or less? Will we be paying more expenses?

Understanding these changes is essential to managing your money.

The practical, ongoing action you can take to make use of this knowledge is budgeting. It’s an indispensable component for managing your money.

So why budget?

Instinctively, we know that budgeting allows us to manage money wisely, avoid financial stress, and be in control.

The simple answer is that it’s a habit that is always helpful to our financial situation.

Here are some first-person perspectives on what budgeting did for people:

“I had never known what my spending was really doing. I started seeing just how much I was really spending on my lifestyle, and it was a sobering experience.  I also wanted to save for an overseas holiday but couldn’t make it happen as I didn’t have enough money.”  –  Andre, 28, Bunbury.

“I now have made changes on how much I spend on eating out and catching Ubers.  I have started to SAVE!!”  –  Melissa, 29, Brisbane.

“It was great to feel in control of where I spend my money now and how much I will have left.”  –  Phil, 46, Sydney.

“I didn’t realise how much credit card interest I was paying.  I now manage my spending to avoid paying credit card interest, and this has saved me a lot of money.”  –   Lisbet, 40, Adelaide.

“Even though budgeting was daunting at first, I actually started to be wiser around what I spend.”  –  Bakthi, 38, Melbourne.

“The first time I took a good look at my payslip and realised how much money was going into superannuation, I could see where my money was going. It felt empowering.”  –  Sunil, 41, Kingaroy.

But there’s a hitch.

Many of us still have trouble following through and sticking to budgets, which means something is getting in the way of committing to the budgeting process.

It’s important to note that budgeting is not easy. It is a commitment to a new way of thinking about money, and it adds a whole new layer to how we interact with money.

Budgeting is a high-level mindful money practice – it’s paying attention to what we earn, what we spend, what we need and our attempts to change for the better.

Succeeding means not giving up in the pursuit of this new life skill.

The proper motivation is needed to undertake this skill of being constantly curious about your money.

Desperation can provide that motivation, but you might not want to reach some kind of financial disaster to start budgeting.

It’s worth having a deeper look at the question of ‘why budget’? To help increase our level of motivation and commitment to building budgeting skills.

We’ve broken down the main reasons to help you understand.

Hopefully, this will help you feel more engaged and better able to commit to building this new life skill.

1. Do you want better control of your spending

Let’s be honest, without a budget; you are more likely to over/impulse spend. You’re trying your best to make good choices, with a rough idea of how much you can spend. But without actual financial boundaries, it’s easy – and extremely common – to spend more than we meant to.

It feels like a kind of freedom to splurge, spend without worrying – buying a shiny new pair of shoes, that next level smartphone, taking a cab over a bus, even just getting an extra dish when ordering takeaways.

We don’t want to see these choices as actually creating our financial reality. But when you sit down and discover you have taken 19 cab trips in a month or bought takeaway dinners 17 times, the cost adds up, and the areas you can cut costs become apparent.

In other words, budgeting makes us aware of unconscious and unhelpful choices with money. It gives us control over these self-defeating behaviours.

2. Do you want financial goals

It seems easy to set goals; it’s a creative exercise that seems responsible and feels good too. You settle on a goal and work out a timeline.

But achieving a goal is difficult – or everyone would be kicking financial goals all the time. And we are not doing that.

Budgeting is an essential part of achieving any personal financial goal. You’ll find it challenging to commit to any financial goals without budgeting.

A budget allows you to reverse engineer your goals via a clearly defined process. It keeps you on track, day in, day out, week in, week out, month by month. Each budgeting action is a recommitment to your goals.

Over time the benefits of budgeting help you achieve financial goals.

3. Do you want financial habits that help your relationship

Without question, whether you are married or de-facto, budgeting helps long-term relationships.

Money is so essential that relationships grow with shared financial goals achieved together or fall apart where people in a relationship feel financially unsafe.

Relationships flourish where people feel safe on many levels, especially when they can see a reasonably good future. Budgeting helps people see what the future might look like, and crucially, it helps the relationship when completed together – giving that rewarding sense of teamwork.

Budgeting is also a tremendous boundary-setting exercise and practice for couples.

It is also well known that money problems are a significant source of fighting, arguing and even relationship breakdown.

If you want to end the conflict in a relationship, you could do worse than having shared financial goals – and as we’ve shown, budgeting is a crucial part of that.

4. Do you want to feel more peace and contentment about money

It’s an odd thing but true. Feeling financially secure and content reduces the desire to spend.

Reducing unnecessary spending then helps you to start enjoying your money.

One of the key elements to finding financial contentment is to stop comparing to others. Stop the practice of wanting things that you see others with, whether they are showing off a gadget or a new car on Facebook or at work.

Don’t compare yourself to anyone but yourself. Keep your focus on how you are doing, not how are they doing. No budget doesn’t have a column for ‘keeping up with the Joneses’.

Going back to your budget, checking, re-checking, confirming, adjusting keeps you focused on your goals, your life. It is excellent financial but also an emotional and mental self-care practice.

Ironically, people who focus on improving themselves and not bettering others end up being admired by others.

5. Do you want to end the feeling of being overwhelmed by money

Nobody enjoys feeling overwhelmed. We all know our decision-making can suffer when there is too much going on all at once.

Being overwhelmed leads to bad decisions with money, impulse buying, bad investments or shopping to escape reality and somehow find comfort. As a short-term measure, it can appear to work, but it’s disastrous for your finances as a habit.

Routines are good for preventing overwhelming feelings, and the best financial practice of all is budgeting. Being diligent daily with money means you won’t overspend as a habit and will be less likely to experience shock and become overwhelmed when unexpected expenses occur.

6. Do you want to avoid debt

Being stuck in debt feels depressing, like working to repay others which can build a negative belief that you’ll never get ahead.

Budgeting will stop you from living beyond your means, so options like quick credit to buy must-haves disappear. In this way, budgeting will prevent you from getting into crippling debt.

But because budgeting is a life skill about carefully planning your finances, it is also absolutely vital to help you get out of debt.

Sometimes a budget will show that you need extra help, or even extra income, to service your spending and repayments. That can be an unpleasant truth, but being in reality with money is essential and the first step to improving your finances.

7. Do you want to be better organised

Being disorganised with money is stressful.

Trying to run your finances on the run, without a budget, without a plan is flying by the seat of your pants. If money is tight, it’s hazardous to be disorganised.

It’s not just repayments, reminders and other bills that can slip through the cracks; you may miss out on cost-savings and good deals because you are not paying attention to your finances or worse incur late fees and interest.

Getting organised is a bigger job than staying organised.

8. Do you want to be ready for unexpected expenses and emergencies

Unexpected costs are unpleasant facts of life; hopefully, they don’t come along too often.

The best way to prepare for unwanted financial nasties is to have a buffer.

Many sources recommend building up and maintaining three to six months of ordinary living expenses in case of unexpected expenses – which is more than many people have.

Using gambling and lotteries as a way of building a buffer is a big no-no. People who gamble and win tend to spend what they fluke: easy come, easy go.

But equally, hard-won savings tend to be something we fight to keep; we are proud of them, so we protect them and nurse their growth.

Effective, committed budgeting will lead to savings that are likely to be better than you have ever maintained – and good savings are the best buffer against emergency costs and unexpected expenses.

To start a budget, live on a budget, keep living on a budget – and that buffer will grow. As it grows, so will your peace of mind. 

9. Do you want to save some money

We touched on this point about emergencies, but it’s worth asking the question again: do you want savings?

We are not talking about the kind of savings where you get together enough money for a holiday, or a motorbike, or even a wedding. That is just delayed spending – and there’s nothing wrong with that.

If those things improve your life, then do it, and enjoy the fruits.

But it’s not the kind of saving that builds and grows and increases steadily over time – and keeps rising.

Who doesn’t want those kinds of savings? Yes, that can seem impossible. But it’s not impossible, though it does take discipline and a plan. That plan is a budget, and that discipline is sticking to your budget.

Budgeting allows us to save for the things we want and to grow a separate amount that will enable us to reach long-term life goals.

10. Do you want to get ahead

Think about the question regarding a choice: what would you prefer, getting ahead or lagging?

It seems obvious, but disorganisation, impulsive and out-of-control money habits that weaken your relationship and make you feel overwhelmed will lead to you falling behind in so many areas of life.

Living week-to-week is stressful, and it doesn’t help you plan for the future.

Budgeting is a consistent answer to ending that feeling of falling behind in life, and it is the action that allows you to ‘get ahead’. Commencing a budget and building the skill of budgeting with consistent attention and action will change everything.

Budgeting is one of the most apparent, empowering and impactful ways to live mindfully that we can think of – and everyone can do it.

Next week we provide a practical guide to learn how to budget.