Co-author: Michelle Norton
Seeing all your expenses written down, is a great reality check on where your money is actually going. Think of it as similar to using a food diary to track yout eating habits; in the same way a food diary can make you aware of where you are overindulging, a money diary (aka a budget) can help you work out what areas of spending you might be able to cut back on.
How to write a budget
It stands to reason that the more detail you have in your budget, the more accurate it will be. So, print out approximately three months’ worth of bank statements, or download three months’ worth of statements, electronically. Assemble all these statements, firstly in account order (to make sure you are not missing any), and then into date order.
Next you need a budget spreadsheet. There are some terrific online budget calculators available, including on the Canstar website. Check out our budget planning calculator, to get a blueprint for your yearly cash flow. Whichever budget tool you end up using, there are likely to the following common spending categories:
Income is everything that you earn over the course of a year. Your wages/salary, commissions, bonuses, share dividends, interest on savings, regular overtime, government benefits and tax refunds.
Fixed expenses/Regular expenses
Fixed expenses are things that are, funnily enough, fixed. Expenses like mortgage repayments, rent, rates, utilities (gas, electricity etc), insurance premiums, petrol, car costs, groceries, subscriptions and gym memberships — you get the point, these are the expenses that don’t change much. Even if the monthly amount varies, the yearly amount is pretty much predictable. These are expenses that are by and large necessary — like Christmas, tax and relatives that are hard to avoid.
Discretionary expenses/other expenses
As the name suggests, discretionary expenses are something that you incur by choice. To a large extent, the amount that you spend on these items is entirely up to you. Examples are gifts, entertainment and hobbies. By saying that it is your choice to incur these expenses, this doesn’t mean that you shouldn’t be spending money on them. There will be many occassions where you are expected to buy a gift, such as weddings and baby showers. But whether you spend $20 or $200 is up to you (and what you can afford according to your newly made budget).
Do you have any regular savings plans? Are you, for example, putting extra money into your Kiwisaver, or perhaps putting a bit extra away into a cash account or term deposit. Research your options to find out how best to make your money work harder for you.
How to put budgeting theory into practice
We have gone through the theory; now let’s put it into practice. Get your bank statements and your budget template and we’ll start applying one to the other.
The way to do this is to go through each bank statement, line by line. Every single transaction on every statement — both credits and debits — should be able to go somewhere in your budget. It is up to you to remember what each transaction was for. Credit card and EFTPOS are generally easy, because the payee is listed beside the transaction. Cash withdrawals can be harder but three months should, hopefully, not be too long a timeframe to stretch your memory over.
Add in annual/six monthly costs
Once you have been through each bank statement line by line, and have put all the information somewhere in the budget, have a quick look through it to see if there are any annual expenses that you have paid over the relevant three-month period. If so, divide the amount paid by four (there are four quarters to each year) and change the figure in your budget to that amount. So, for example, if you have paid your annual car registration, divide this by four and put the figure into your budget.
Next, multiply your budget totals by four.
Then have a think about any possible income that isn’t listed on your budget yet. It may be something like a tax refund, commission, bonus and so forth. If there is anything you can think of, add it into your annual figures.
If there are any annual expenses that you haven’t paid during the three-month period, work out what they are and put them into your budget.
Congratulations! You now have a pretty accurate picture of how much you earn and spend each year. Compare the “how much you earn” figure with the “how much you spend” figure. How does it look? Is it a negative figure or a positive one?
Either way, knowing where your money is going will help you to identify ways to save. Here are 30 ways to save, to get you started.
While we know the savings environment is pretty tough at the moment, there is no sense in going with the first savings account or savings account provider that you see advertised. A budget is crucial to making your money work for you. So too is choosing financial products that suit your financial needs and lifestyle. To help you narrow down your options, Canstar compares savings providers and accounts. To have a look at what is currently on offer, just hit the button below.