Budgeting 101: A Beginner Guide
Itching to tighten up your finances? Whether you want to save for something special or just want to do better with your moolah, budgeting is the key! We'll demystify budgets, explain the importance of budgeting, and provide tips to create and stick to one - without the grey hairs. Let's begin!
What will I learn?
Understand what a budget is and how it’s important.
Know the benefits of budgeting.
Learn how to budget.
Gain tips for sticking to your budget plan.
Quiz yourself and lock it all in!
Frequently asked questions (FAQ) about budgeting
What is a budget?
Budgeting is planning how to spend your money wisely.
It’s like driving with limited fuel. The money you earn is a tank of fuel and your expenses are the stops you make. Budgeting means mapping out your journey so you use your fuel wisely, ensuring you reach all your important stops like 'Expensville', 'Treat Street', and ‘Savers Summit’, without getting stranded. If you plan well, you might even have enough gas left for a fun detour to ‘Fun Junction’.
Just like in a journey, good budgeting ensures you efficiently use your fuel to reach your money goals.
Why is budgeting important?
Life in New Zealand is expensive, especially for young people just starting out. It costs a lot to live a normal life. Plus, 7 out of 10 people find it hard to manage their money. That's why learning how to budget is as important as ever!
It's not just about being careful with money; it's about making the smartest choices for you, dealing with student loans wisely, and not falling into credit card traps. Good budgeting helps you become independent with money and sets you up for a more secure and better financial future.
Benefits of Budgeting
1. Control over your money.
With a budget, you're the boss of your bucks. It allows you to decide where and how to spend your money. When you budget, each dollar serves a purpose aligned with your priorities.
2. Reach financial goals.
Budgets act as a financial GPS. They not only keep you on track to cover your needs but also steer you towards achieving bigger dreams, like buying your first car, taking that dream holiday, or eventually, buying a house.
3. Less debt (that’s a good thing!).
Sticking to a budget reduces the risk of overspending and borrowing money. When you have control over your money and work towards financial goals, you’re less likely to run into sticky situations. Budgeting also helps you to tackle any existing debt (knowing what you need to pay and when), ensuring you don't get trapped in the cycle of borrowing.
How to Create a Budget
1. Track the money you earn (income) and money you spend (expenses)
This process sounds scary, but trust us - it’s not! This is the best first step you can take. We’ve split this section into three steps so that it’s super easy.
Gather your ingredients together (income)
Just as a chef gathers all ingredients before cooking, start your budget by listing every fortnightly income source, like your salary, allowances, or any side hustles as well as the amount you earn from each. If you work casually and earn a different amount each week, write down an amount on the lower end.
Let’s turn to Maria, a student. She earns $500 from her part-time job each fortnight after tax, plus $20 allowance from her parents. She has noted this down 👇
All of Maria’s income that she receives each fortnight (every two weeks).
Critique what you’ve been making (expenses)
Go through your bank account for the last two weeks and everything you’ve paid for and their amount. For example, rent/board, utilities, entertainment, eating out, hobbies, car costs. You can do this in an Excel or Google Sheet, notepad, or handy budget app.
Don’t worry, you only have to do this once! This is like seeing what meals you’ve made in the past so you can whip up better food going forward.
Maria has noted down how much she spends each fortnight in the categories below. A total spend of $450.
See what leftovers you have (disposable income)
Now that you know how much you’re earning and spending, you can see how much money you have left over after you’ve paid for all your expenses.
Maria’s disposable income in this example is $50. It’s a great start, but she wants to save more. So she’s going to set some realistic goals to push her savings higher!
2. Set Realistic Goals
Deciding on financial goals is like setting a destination on a map. Ask yourself, what are you budgeting for? It could be saving for uni, a new gaming console, a new car, or becoming debt-free. It can be anything you want.
You can have one or multiple goals at the same time, but don’t stretch yourself too thin! It’s better to start with one goal and achieve that than to have three but fall short. These goals are your financial destinations, guiding your budgeting journey.
Maria has some pretty big (but good) savings goals! But with $50 a fortnight, it’ll take her just over 2.5 years to save. By allocating money and reducing her spending, she can save faster and hit her goals!
3. Allocate Money
Think of your income like a balanced diet, where you need a mix of different food groups. Just like a healthy diet sometimes requires cutting out some fat, you do the same with your budget.
Maria went back to her expenses and is cutting some fat. Trimming expenses she thinks she can live without while still enjoying her studies. She didn’t want to spend less on entertainment, but maybe she’ll do things like drive less to save money on fuel, cancel a streaming subscription, and opt for home-brand grocery items.
Now Maria can save $95 each fortnight (she’s even thinking about getting more work hours so she can save even more!). At this rate, she’ll save $500 for emergencies in just under 2.5 months, and be able to take her trip overseas in only a year and a half from now - just after she finishes uni!
4. Adjust as Needed
Just as a sailor adjusts their sails to accommodate changing winds and currents, your budget too should be flexible. Life can be unpredictable – a sudden job change, an unexpected expense.
Regularly review and adjust your budget to align with these life changes, ensuring you stay on course towards your financial goals.
How to stick to your budget
Consistent Check-ins: Your Weekly Budget Review
Make a date with your budget every week. This regular check-up is key to ensuring you're following your financial roadmap. It's like having a quick weekly meeting with your money to make sure you're both on the same page.
Trimming the Fat: Slash Those Non-Essentials
Get your detective hat on and scrutinise your spending. Find those sneaky, non-essential expenses that creep in and cut them back. It’s like pruning a tree - necessary to keep it healthy and growing in the right direction.
Tech to the Rescue: Budgeting Tools for the Win
Embrace technology! Use budgeting apps or spreadsheets to make the process smoother and more efficient. Think of them as your personal finance assistants, always ready to lend a hand. Budgeting apps don’t work for everyone, Tyren at Moolah Matters likes to use Google Sheets.
Celebrate Small Victories: Rewarding Yourself
Don't forget to pat yourself on the back. Staying within your budget deserves a reward. Allow yourself small treats as a motivation booster. It’s like giving yourself a high-five for being such a smart budgeter!
Learn to budget from others
Not everyone approaches budgeting the same way so here are some more examples showing how others budget.
Alex's Save First Approach
Alex, a graphic designer, makes $1,500 each fornight. He uses a zero-based budget, where he gives every dollar a specific job. First, he sets aside $750 for things like rent, bills, and groceries. Then, he puts $300 into savings for emergencies and retirement. He allocates $225 to pay off his car loan, and the remaining $225 goes toward fun stuff like going to the gym and eating out.
Alex's goal is to make sure he settles his necessities, loan repayments and savings first. At the end, Alex only spends what remains on fun stuff.
John's 50/30/20 Budgeting Strategy
John is a freelance photographer with an average monthly income of about $2,500. He follows the 50% / 30% / 20% rule. Half of his money ($1,250) goes to necessities like rent and food, 30% ($750) to wants like entertainment and fun, and the remaining 20% ($500) to savings and emergencies.
This simple approach lets John handle his irregular income while staying financially balanced.
Sarah's App-based Budgeting
Meet Sarah, an aspiring entrepreneur earning around $4,000 per month. She uses a budgeting app to manage her finances. She designates 45% ($1,800) for essentials, 25% ($1,000) for her business and investments, 15% ($600) for personal enjoyment, and 15% ($600) for savings and retirement.
The app helps Sarah track her spending and sends her alerts if she's getting close to her limits in any category.
Frequently Asked Questions (FAQs)
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Sometimes, things come up that you didn't plan for, like needing to fix your car or replace something you’ve lost. It's smart to have a little extra money set aside in your budget for these surprises, so you're not stressed about where to find the money when you need it.
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There are lots of apps and tools out there that can help you keep track of your money, how much you're spending, and how much you're saving. You can use simple apps on your phone or even a spreadsheet. The important thing is to pick something that you find easy and helpful to use. If you find it hard to use, then you’ll like stop using it altogether!
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It happens! The important thing is to look at why it happened and try to fix it for next time. Maybe you need to set aside a little extra for unexpected things or cut back on some expenses. Remember, budgeting is about learning and adjusting as you go. It’s a GPS to your financial goals.
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Absolutely! It's important to include some money for fun in your budget. If you like going out to eat or have hobbies, make sure you set aside a little money for these things. This makes it easier to stick to your budget because you won't feel like you're missing out on the things you enjoy.
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Yes, saving money is important! Read our Saving 101 Guide to learn more.
Conclusion
Budgeting is not just a task, but a lifestyle choice that leads to financial freedom and security. By understanding what a budget is, appreciating its benefits, and following these tips, you're on your way to becoming a savvy money manager. Remember, every dollar you save and spend wisely is a step towards your financial goals and dreams.
Feedback
We'd love to hear from you! How has this guide helped in your budgeting journey? Share your stories and tips in the comments below.
