If you are living pay day to pay day, spending money but having no real idea of where the money is going, then it may be worth considering making up a budget. Creating a budget is a great way to gain better control over your finances by having a clear idea of what your money is being spent on. A budget is great means for learning about personal finances and can enable you to put money aside for when bills come in or for savings. It is also a good practice for living within one's means, rather than spending money unnecessarily.
Budgeting can be tricky, but with practice it becomes second nature
Photo: Stuart Miles- freedigitalphotos.net
On a personal level, by creating and sticking to a budget and only buying what is actually essential, I have managed to save thousands of dollars. I now have a savings fund which is a great peace of mind, especially in the case of an emergency.
Write down your income and expenses
Start with writing down your income and any bills. Include the mortgage or rent as this will account for a large portion of expenses. If you have any previous or recent household bills then have them handy as well. It's best to have at least a couple for each utility, as bills like power can fluctuate during the seasons. My gas bill always goes up during winter as we tend to have longer showers when the weather is cold.
Remember to include land rates, house insurance, water, gas, electricity, phone, car payments, registration or insurance, medical fees, credit cards, internet connection or any other expenses you might have.
Write down all your expenses
How much are your bills costing you?
Next to the name of each bill, work out how much each one is costing you per year. To do this, use the last couple of bills from each utility to gain an average. If your last gas bill was $170 and the current one is say $220, you might write down the average amount as around $200. It is better to over estimate than under. If you get the bill every 3 months, then times that amount by 4 so the total for the gas bill would be around $800 per year. Some bills like car registration are paid every 6 months. The goal here is to find out how much you are paying for each bill per year.
Once you have a list of all the bill amounts, you can work out how much you need to put aside for the bills each payday. If you get paid weekly, divide each total amount by 52, or if it's fortnightly divide it by 26. So if my gas bill was $800 per year and I know the bill comes 3 monthly, then I would divide the total by 4 which gives me a monthly amount of $200. I get paid fortnightly so I then half that amount giving me a total of $100. Now I know I should be putting aside $100 per fortnight for the gas bill.
Do this for each of your bills and mortgage or rent and then add each of the totals together.
This task can seem quite overwhelming and the total amount will be a lot of your income. But remember these are all bills that needed to be paid anyway. It's just now you have a clearer idea of how much you need to set aside and it can actually be a cathartic exercise.
Open a separate bank account for bills
Personally, I find it easier to have a separate bank account for my mortgage and bills. Each pay day I automatically transfer the fixed amount over so it is there ready for when the bills arrive. I find it easier for me to pay the bills directly from that account. This also eliminates a lot of stress as I know there is always enough money to pay for the bills.
When you are first starting a budget you may have lots of bills and the for the total you worked out you might not have enough pay coming in initially to cover it. In this case just pay as much as you can on each bill up to the fixed amount. Just keep steadily putting the same amount away for the bills each payday and by doing this system eventually there will be an excess there available for the next big bill.
By keeping a budget you can save thousands per year
Photo: Martin Kingsley-Wikimedia Commons
What comes next?
Once you know how much is being spent on your total bills, you can work out how much money you need for the other essentials. Groceries and petrol are 2 of the main ones. These are variable according to how many members are in your family and how often you use the car. Consider what you regularly also need money for and budget for this.
When I wrote up my first budget, I honestly had no idea how much I was spending on food or petrol so I started to keep track. I kept a little notebook and every time I put petrol in the car or stopped in at the shops for some groceries, I wrote down the amount that was spent. At the end of the fortnight this gave me a fair idea of how much money I would need to set aside for each of these things. It also brought to my attention the items I was buying and whether they were absolutely necessary. This was when I came to the realization that I was spending far too much.
Often when you create a budget, you underestimate your outgoings, so a budget will often need to be revisited until it fits you and your families needs.
Once the money for the main expenses is put aside, you can then see how much is available to put towards savings, a holiday or that big household item you want.
With some hard work and persistence, sticking to a budget does pay off. What works in your household?