The best way to take control of your household finances is to do a Budget. A Budget is a simple tool that will help you to understand the money coming in and going out of your household. It will show you if you are spending more, or less than you can afford, and this will then enable you to act to find the right balance between spending and saving.
You may think that spending up on big things is what gets most people into trouble with money, but often it is the everyday little things that end up costing more over time. It is so easy to lose track of the $5 spent every day on coffee or the regular visit to the supermarket on the way home from work to purchase those few items for dinner. But amazingly that $5 for coffee each day can total to $1,300 for the year, or that $20 spent at the supermarket 3 times a week can equate to over $3,000.
The most effective way to find out where your money is going is to do a spending diary. To do this you will need to make a note of everything you spend for one month. You can do a shorter period, however one month will normally capture most of your regular expenses. Don’t try to alter your spending habits, just notice where your money goes.
Remember, completing a spending diary is not about judging yourself it is purely about tracking your spending habits. So, don’t be too harsh!
By looking closely at your daily money habits, you will be able to make realistic choices about where you want your money to go.
At the end of your tracking period, add up everything you have spent. Now you have a good snapshot of your current day-to-day spending.
The next step is to work out how much money is coming in and how much money is going out? Hopefully there is more coming in than going out! If not, then this is not the end of the world, but you do need to take action to fix this. Keep spending more than you can afford each month and you risk sliding into debt – easy to get into, much harder to get out of.
The next step is to refine your budget and direct your money to where it matters most. The best way to do this is separate your Expenses into two areas:
- Fixed Expenses – these should be all your basic necessities that you need to live on, i.e. food, rent, utilities.
- Discretionary Expenses – these are your lifestyle choices – things that you want but could live without.
It is important to understand the difference between the two because if you need to reduce your expenses then your focus should be on reducing your discretionary spend.
Make a note of all the items you could cut out or cut back on. Then check – is this realistic? Do you need to cut back on all of these items, or just some? Even if you need to reduce your expenses a lot, try not to cut out everything in your ‘wants’ bucket. By allowing yourself a treat now and then, you will find it much easier to stick to your budget.
Having worked out ways to reduce your expenses and save money, you are ready to start planning. So, set some goals for the future and make a plan to achieve them! Setting goals, whether large or small, short or long-term is exciting and can be very motivating.
Now that you have your budget working, it is time to take the final step and put it into action. The trick is to make this as easy as possible. By making things happen automatically you won’t have to work at your budget.
- Start now!
- Pay rent, loan repayments or credit card debt by automatic direct debit where possible.
- Smooth out your big bills – work out how much you require each year and then if you are paid fortnightly break it down to a fortnightly amount and put that aside in a separate savings account. (That way when the bills arrive you will have the funds to pay them).
- Contact your utilities providers (gas, electricity, water) and ask about bill smoothing. Or see if you can make a fortnightly or monthly payment instead of the whole bill in one go.
- Keep your savings separate – particularly if you are saving for a future goal.
- Add in your windfalls – try to save any pay rises, bonuses or tax refunds.
- Always pay yourself first!
After all your good work putting your budget in place, make sure you stay on track. The best way to do this is to check your budget at least annually, adjust your budget if your circumstances change, enthuse yourself by putting a picture or chart of your goals on the fridge and reward yourself with regular treats, so that living with a budget does not feel like a chore.
If you keep your budget going, you can progressively achieve bigger goals like going on holiday, buying a car, putting your kids through school or saving for retirement.
Taking charge of your money means less stress and more control. Now you know the secret to being good with your money. A few simple steps will make a difference!