Budgeting for the first time?
20 Mar, 2022
Budgeting for the first time? Then, please let me make it as painless as possible!
Take a good hard look.
I regularly speak with people who are, for the first time, looking at their money correctly. Like, I mean, actually looking hard at each transaction, which is what you need to do to understand where your money is coming from and going to. For many, we get by; earning, spending, and not taking too much notice. But this “head in the sand” attitude to money will only get you so far and will keep you living week to week or month to month.
There often comes a tipping point where you know that wafting through life and not taking much notice of your finances means you never seem to get ahead. Or, without knowing it, you are going backwards. It takes a jolt, something like a massive jump in petrol prices and a hike in grocery prices like we are experiencing in the first quarter of 2022, to make you act.
Even if you don’t track your money, it’s likely that you have noticed more leaving your wallet for these basic household necessities. And it hurts!
We drive a car, which has a 50-litre fuel tank. Filling it up now costs $150+, and I’m noticing this in our budget. But because I budget, I can easily adjust for this increase without a sense of panic. I want you to have the same sense of calm that I do.
What do you “think” you earn and spend?
If someone fresh to personal finance comes to me, the very first thing I’ll chat about is budgeting, encouraging them to start tracking what they earn and spend.
Which often incites a groan. But more commonly, I hear, “I know, I know, I’ve always meant to do it”. Now is a great time to do it, instead of just making up numbers!
Take it from me, working to a budget - either with military precision or a casual attitude - really does give your money some direction. When you have a plan for your earning and spending, and you know with a degree of certainty what you spend on XYZ, it just takes away one of life’s main stressors.
Today, I thought I would make it super easy for first-time budgeters.
Sorted.org.nz is the government-run financial literacy website created by Te Ara Ahunga Ora Retirement Commission. Amongst many useful resources, it has an excellent and simple to use, free, Budgeting Tool.
If you had not budgeted before, never made a plan for your money, or have fallen off the budgeting wagon, you can sign up to Sorted (they don’t collect or share any of your data) and create a personalised spending plan.
Look behind you!
It’s a straightforward process.
Initially, you will be looking backwards at what you have spent over the previous months. You tally up exactly how much money you earned for an entire calendar month using your bank statements and enter that amount.
In my case, our combined January 2022 income was $6,000.
When you answer their simple questions about your living arrangements, debt and saving goals it will create tailored budget categories for you. The next step is to look at each expense/transaction on your bank statement in January and enter them in all of the budgeting categories Sorted has given you. Each category heading has many subcategories. If there is a category that you spend money on and it’s missing, you can add your own.
I have called my budget “January 2022”. In my case, we spent $4,250, leaving a surplus of $1,750.
This shows the subcategories under “Everyday Expenses” in January 2022.
January was a good month for Jonny and I. We ended up with a surplus of $1,750. We then get to decide what to do with that money. In our case, we topped up a few sinking funds we have underway and sent the rest to our investments.
3 budgets for 3 months
I recommend that you complete three different budgets for three consecutive months to build up a view of your spending and earnings. You will start to see patterns.
This process gives us a retrospective view of spending and earning and is a good indicator of what you are likely to spend going forward. It removes the guesswork.
Now that you have some accurate figures, you can start to create budgets that plan AHEAD.
Using my example above, we consistently spend $1,200 a month (about $250 a week) on groceries, so I will set that as my budget for next month, adjusting my budget to suit how many weeks are in the new month.
And that is basically it:
a) Create three budgets for each of the last three months. Print them out, and then go over them. What stands out to you? Spending too much dining out? Are your grocery costs combined with your dining out costs a bit out of control? Are your petrol costs lower or higher than you thought? How much are you sending to your KiwiSaver each month? Seeing your own figures can be both confronting and useful.
b) Use the information you have gathered to set a new budget for the coming month. Then from the 1st of the new month, try to stick to it. At the end of the month, review your progress. How did you go? What do you need to alter?
c) Each month, forgive yourself the slip-ups from the month prior, create a new budget and do your best to stick with it. As you see progress you will feel more confident in the process.
Budgeting tips:
Include every expense - even if it is a ‘one off’ expense. Why? Because you have these expenses ALL THE TIME, even though they might be different every month.
Keep your categories broad. i.e “Dining out” as opposed to “MacDonalds, Japanese, Vietnamese, Fish and Chips”.
Budgeting is easier for those on fixed incomes, but what if you are like Jonny and I, and each month’s income is different? Ours could be anywhere from $3,500 - $8,000. Put simply; we budget to live on our lowest monthly income of $3,500, allowing money to be allocated first to the essentials: food, housing, electricity, cars etc. From there, dependent on our income, we budget in other expenses in order of priority, from most to least important.
The podcast “The Ramsey Show” gives excellent budgeting advice.
Include your whānau when creating your budget. They will be more likely to follow it if they are part of it.
Set a budget period that feels natural to you, whether that be weekly or monthly.
A budget is a lesson in observation, not judgement. What you choose to spend your money on may differ from your spouse. You need to accommodate each of your wants and needs.
The first couple of months is ‘no judgement’ months. You are simply getting an understanding of where you earn and spend. Once you have gathered some data, you can start making changes.
Your budget is not just the dollars and cents; it flows through into the lifestyle decisions you will make. So, don’t underestimate the power of a good budget to help you live the life you want!
The Sorted Budgeting Tool is an excellent starting point, and it’s quick and easy to use, but it is very manual, requiring you to enter each expense physically. I think this is an essential thing for new budgeters because now that we rarely handle physical money, observing each digital transaction makes you sit up and take notice of each cost. Then you get to decide whether that seems high, low, necessary or unnecessary. You can adjust to suit.
This free Sorted Budgeting Tool didn’t exist when I began to budget over ten years ago. I used a spreadsheet I made on my computer. But this free tool is so much better and faster for those just starting. It’s basic to use, therefore it’s very usable.
The logical next step.
Once we had our spending and earning under control and had settled into some good habits, I got sick of manually updating and calculating, and it was at that point that I moved to use New Zealand made online budgeting app PocketSmith which I pay an annual fee for (less than $8 a month). I’ve blogged about them many times because they are awesome.
This is next level budgeting for those who want to dig deeper and really want to stick with the habit of budgeting. It automatically pulls in the balances of my bank accounts, every transaction I’ve made, it categorises all my expenses for me. Because I now know my spending habits, I can set budgets for each category and forecast forward. It tells me my savings percentage and updates my net worth. And many other things besides! Cue the sounds of Angels singing!!!
“Budget” is not a rude word.
Quite a few years ago I asked my Mum how she used to budget when she was managing a household of seven. She had a visceral reaction to the very word ‘budget’. To her it meant deprivation, not having enough money and uncertainty. To me a budget means exactly the opposite because it lets me have anything I want, because I’ve planned for it, and I’ve got the money to buy it. Budgeting, which now takes me no more than 5 minutes a week gives me a great deal of certainty, which I find is particularly useful in these uncertain times.
