Now that you have put together a budget and survived, you should be ready to put it to work. If you haven’t made a budget yet, then go and read Budgeting Sucks, use the spreadsheet in the link, the tools at the end of the post or just google away for “free budget planners” online and find something that you feel comfortable with. I’m not re-inventing anything new here, there are a lot of these available and for a very good reason! Do you still need convincing? Ok, How many successful business do you know that don’t create a yearly, quarterly or even monthly budget? They do this for one very simple reason, to stay viable and (hopefully) make money. Without a budget you have no idea where your money is going, so how can you possibly try to keep more?
Right, back to making the budget work… Your list of expenses is in front of you in your budget, you can clearly see what you are up against and have hopefully identified some obvious areas where you can trim some fat. Was there anything left over? If so, it is up to you to decide whether you want to keep more, or use it for your own enjoyment. Perhaps you could compromise and do both? I’m not here to tell you to keep it all, you need to factor in fun, but make sure you pay yourself first!
Paying Yourself First
This is an important rule wealth creation, the amount should be as much as you like, but if you are keeping less than 10% of everything you earn it is going to be slow going! I know it may seem difficult now to save this much money, but if you start now, it will get easier and pretty soon you won’t even miss it. No matter how much you have, ALWAYS pay yourself first! Treat your long term savings as a bill, it cannot be ignored and must be attended to first and foremost. I find the best way to do this is to set up a savings account with a decent rate and arrange a direct debit (based on my pay frequency) from the account my pay goes into. I can highly recommend a savings maximiser account with ING Direct. They have a great rate, no fees and best of all no debit card! You have to transfer the money back out and wait a day before you can get to it, which means you will be less likely to spend it.
Now that you have taken care of the most important bill, you need to portion out appropriate amounts to cover your other big bills (mortgage/rent, utilities, insurance, car servicing etc.). Add these up for a quarter or year and divide by your pay period. Use another savings account – either ING Direct or you normal banking institution (if they don’t charge fees) – and call it the Bills Account, original eh?
Set up another direct debit from your everyday account and have it go out as soon as you are paid. This account may fluctuate a little over time as your bills roll in, but you should be able to cover them all from here. It’s very easy to stay on budget too as you should now know how much you are putting away for a particular bill. So when it comes time to pay it, do a quick double check to see that it isn’t more than what you have allocated.
This is not the money you keep, it is the money you spend on stuff you want and things you want to do – cool right? It might also include a christmas savings plan and should definitely include an emergency fund in case you need it, this should ideally be at least 4 weeks pay, but you can work up to that. Try and get to at least $500 as quickly as you can so you have a buffer for emergencies.
Budgeting in fun is important, without fun your budget will not work! People need to socialise, buy new sh#t they don’t need, but want anyway and just generally feel like they have some money. The secret to making the most of your savings is to resist buying the sh#t you don’t need and setting your sights a little higher. Take it to the next level by setting some goals to help you on your way – think trips overseas, other life experiences or bigger ticket items that are worth saving for. If you are just really crap with money, then you might like to split out the emergency fund and christmas savings into another account to keep it safe. Do what works for you.
Food and Pocket Money
If you are smart with your bills and aren’t overextending yourself, there is a good chance you will have enough money to eat more than just 2 minute noodles and still have some pocket money to throw around. These are regular expenses and should come from your everyday account. Use your credit card to buy food and get rewards if you are strict and if you pay it off in full before the end of the month. If not use a debit card or take the money out of the bank, when you have nothing left it means there is nothing left!
I suppose in a way I am into frugality, but i’m not a tight ar$e. I hate waiting in lines for cheap petrol, I’m shit at shopping for specials and sometimes I just like to buy my lunch. Most of all, I’m lazy and want to spend the least amount of time possible dealing with the necessary, but completely boring stuff. Saying all of that, there are some good resources that can make life a little easier and you might like to check them out. Try lasoo for online catalogues, get an everyday rewards card for petrol discounts if you buy your groceries from Woolworths ior similar, or try servosavers for businesses close to you that offer fuel discount schemes. My personal favourite is Boozle… what can I say, I like a beer! If you have others, please feel free to share them here in the comments.
Reviewing Your Budget
I don’t have any hard and fast rules about how your budget should look, it’s yours so make it look the way you want, but here are a few theories worth considering:
The budget frameworks below have been outlined in a great post over at Get Rich Slowly, I suggest you go take a look.
1. The only budget you’ll ever need – from the book The Only Investment Guide You’ll Ever Need
- Destroy all your credit cards.
- Invest 20% of all that you earn, never touch it.
- Live on the remaining 80%, no matter what.
2. The ultimate lifetime budget – from the book All your Worth
- Allocate 50% to Needs (housing, transportation, groceries, insurance, and clothes you really need).
- Spend 30% on Wants (wants include subscription services, clothing beyond the basics, restaurant meals, concert tickets, comic books and other stuff you can live without, but might not want to)
- Set aside 20% for Savings (including debt repayment)
3. The 60% solution – my preferred option, as outlined by Richard Jenkins at MSN Money (I have altered it a little here)
- 60% to Committed Expenses (clothing, basic living expenses, insurance, and regular bills (including subscription services)
- 15% to Money you keep
- 15% to Irregular Expenses (debt reduction, holidays, major repair bills, new appliances, rennovations etc.)
- 10% for Fun Money (dining out, hobbies, indulgences, etc.)
So How do you Stack Up?
All of the above frameworks are really simple and easy to apply. If you are having trouble, it is very likely that you need to reduce your Committed Expenses. I’m not perfect myself and am still strying to tweak my budget to look the way I want it to, but it will happen if you work on it.