Nurse your finances back to good health

Creating a budget is the first step toward securing a healthy financial future. Having a budget helps you to feel in control of your money. With a solid budget, you’ll see exactly where your money is going, as well as planning how much you can save toward your goals.

Disclaimer: The information contained in this article is of a general nature only and should not be taken as financial or legal advice on any of the topics discussed. Always consult a financial adviser before making any investment decisions.

You don’t need an accountant or special software to set up your own budget. Start by looking at where you are right now and where you want to be.

First, work out why you want to do a budget. This can help you to decide where you want your money to go. Ask yourself: what is my goal? It could be to stay on top of bills, save for emergencies, pay for your children's education, save for a holiday or a house deposit or secure an early retirement.

In simple terms, 5 steps to creating a budget are:

1. Calculate total income – your budget should be based on your take-home pay, which is what’s left after taxes and other expenses have been taken out of your gross income.
2. Calculate necessary expenses – these are the bills you pay each month, such as your rent or mortgage, petrol, insurances, electricity and other utilities, groceries, car repayments, healthcare, phone and other essential costs.
3. Estimate discretionary spending – these are all the things that you don’t necessarily need but make life fun, like buying the latest fashion, eating out, going to the movies or a concert, your Netflix subscription, your morning coffee or a nice of bottle of wine with dinner.
4. Savings – it’s important to have a safety net, not only to cover the unexpected costs that life throws at us from time-to-time, but also to have something to look forward to, such as an overseas holiday or new car.
5. Review – even the best plans don’t always work out, so it’s good practice to regularly compare your budgeted spending with actual outgoings to make sure you stay on track; you might need to adjust your budget as the circumstances of your life change.

The 50/30/20 budget

One of the most popular systems around the world is the 50/30/20 budget.

In simple terms, when following the 50/30/20 budget:

• Half of your take-home income should go toward necessary expenses.
• Thirty percent of your take-home income should go to discretionary expenses.
• Twenty percent of your take-home income should go towards savings or debt repayment.

Divide your savings into the following three categories:

• Short-term (e.g. holiday)
• Mid-term (e.g. deposit for a home)
• Long-term (e.g. retirement)

If you want to keep these funds separate, set up different accounts to the one you use every day so that your savings aren’t in front of you.

Now that you have a budget - stick with it

Having a financial plan is one thing, sticking to it is another entirely. Here are some helpful hints and tips to help you stick to your budget:

• Find an app or software that’s easy to access and straightforward to use to help you stay on top of your spending
• Automate your payments so essential bills are taken care of as soon as your pay hits your account
• Set specific financial goals such as paying off a credit card, or saving up for a holiday or home deposit so you have something to work towards
• Plan your weekly meals and use a shopping list to cut down on food wastage and impulse buying
• Give yourself a buffer each month so you don’t get caught out by extra expenses 

What if nothing goes to plan?

Despite your best efforts, sometimes even the simplest budget doesn’t work. Rather than give up, answer the following questions honestly:

• Is your budget realistic?
• Do you find budgeting is too much work?
• Is anything missing from your budget?
• Have you taken all the fun out of your budget?
• Do your financial goals seem unattainable?

A health financial future

When things get tough, it can be difficult to remember why you started your budget. At times like this, it’s important to remember your financial goals.

While it might be unpleasant having to forego the latest iPhone, cut back how many nights you eat out or hang on to your car for an extra 12 months before replacing it with a newer model, the sacrifice will be worth it in the future.

With money in the bank and control over your spending, you can relax knowing you have cash on hand for emergencies, money for your next holiday, spare funds when you come across a great sale, and a great chance of enjoying a well-funded retirement.