What is a budget and why is it so important?

For some reason the term “budget” instantly shoots fear into our hearts. When you look at the definition of a budget it simply is adding up what money you have coming in, then take away the money you expect to come out, usually over a month. It really doesn’t sound that scary compared to things like cancer, death or war, so why is it that we all run for cover?

 Well, there are a number of popular theories. Do any of these ring true for you?

  1. It’s too hard and time consuming to do
  2. It’s too scary to see where all your money goes
  3. I have tried it and it doesn’t work as unexpected events always happen

 So based on just these three points, why should we bother doing a budget?  Ponder these:

  1. It alerts you to overspending and so you become more accountable
  2. It allows you to set goals for achieving personal wants/desires
  3. It gives you a sense of being in control rather than wondering where your money goes
  4. It helps you to continuously compare suppliers and providers
  5. Budgets are everywhere from businesses to Government and so are clearly essential

OK, so it’s time we all agreed that budgets are important. We may not like them, but ultimately we need them to keep our finances in order. Once you have accepted that you must do one, the next step is to get it started. There are a number of free budgets you can download from the Internet, or if you are not computer savvy, then you can easily buy a paper version from most newsagents.

Step by step process to make a budget

1. Add up all of your income.

For most of us that just means pulling out a pay slip but for those of you that may have investments like term deposits, dividends from shares, receive child support etc. you need to add up all the money you receive. We suggest doing a 12 monthly budget, so for each month understand what money comes in.

2. Get together all of your bank statements and bills.

Now you are going to go through these and record all of your monthly expenses like mortgage/rent, loan repayments, insurances, food, petrol, entertainment, school fees etc.

3. For each month, add up all your expenses and take them away from your income and hopefully you should still have some money left over.

Some expenses are fixed and stay the same all year, for example your land rates, while other expenses such as food, can change from week to week and are called variable.

4. If your budget is very tight and you have very little left over each month, then you should start firstly looking at cutting down your variable expenses.

After this, you can then look at your fixed costs and see if you can perhaps research a cheaper option. For example if your car insurance is costing $60 a month, look around to see if you can swap to a cheaper insurance company.

5. Look at your budget every month to make sure you are on track and update it with any forgotten items.

The key of any budget is to understand that it will constantly change and to not lose hope. As long as you are now in a position of understanding where your money is going, you are far more capable of having a successful savings plan.

So don’t let the concept of a budget frighten you. Think of it as a green vegie, as much as you may not really feel like having one, you know it’s definitely good for you!

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