More than just a financial tool, a budget is a plan for how you will spend your money. It helps you track your income and expenses which will help you build a financial plan in the future.

Managing your cashflow with a budget is based on one simple principle – it’s essential to have more money coming in than going out. For most people who are wanting to take control of their money and plan for the future, budgeting is your not-so-secret weapon.

The right budget will switch your focus from paying bills pay check to pay check, to taking power in the direction of your financial goals.

Why Is Budgeting So Difficult?

The truth about your money is not always something you want to face head-on, even if you’re doing everything right. And if things aren’t going well, budgeting can feel like an unpleasant face-off with reality. Budgeting skills take practice – it won’t feel comfortable to start with.

If you’re ok with the psychological challenge of budgeting, the next hurdle is even knowing how to do it correctly. Where do you even start?

There are many budgeting methods out there, but the tried and true one is a budgeting spreadsheet. A simple money manager like our downloadable budget template can really help you understand your money. This also functions as a budget calculator to let you know if you are in the red or the black!

Step 1 – Calculate Your Net Income

The first simple step to building your budget is knowing your actual income. Net income is the amount you take home after taxes and superannuation. The easiest way to find this is by checking your bank statement or using a pay calculator. If your earnings are inconsistent or comes from a variety of income sources, review review your income over the last months and choose a baseline to calculate from (make sure it’s an amount you usually achieve each week).

Let’s use the following example of Dylan with $100,000 including superannuation. Running his income through the pay calculator, we see that Dylan’s net income would be a total of $1,349.97 weekly (a total take-home pay of around $70,000).

Step 2 – Understand Your Spending

Fixed vs. Variable Expenses

Using bank statements, credit card statements and other records, it’s time to figure out what you’re buying!  You want to get the exact amounts, especially on your fixed expenses. Then categorise your expenses into Fixed and Variable Expenses.

Fixed Expenses are the same from month to month. These essential, regular payments create a foundation for understanding your cost of living and often will be a big chunk of your income.

• Housing costs: rent or mortgage payments,
• car loan payments,
• car registration,
• mobile phone or internet,
• insurances,
• utilities,
• school fees.

Variable Expenses change over time, so calculate a baseline or average for each cost. Reviewing this will also help to identify where you might need to look for cheaper alternatives to your usual choices.

• fuelling up (or charging) your cars
• public transportation
• groceries
• entertainment
• eating at restaurants
• subscriptions

Some other variable expenses include unexpected expenses such as car repairs and services, medical bills and your kids’ extra school costs. And be sure to list every streaming service or membership you pay for — you might be surprised how much those add up!

For those seeking a savvy tool to manage subscriptions, budgeting apps or digital tools like Upbank have budget trackers for different types of expenses and help you monitor actual spending and maintain payment schedules across categories.

Our top tip for calculating weekly expenses:

To convert monthly amounts into weekly spending amounts, multiply the monthly figure by 12 and then divide the result by 52. Don’t fall into the trap of simply dividing your monthly income by 4 — that won’t give you an accurate picture of your weekly spending.

Now Categorise Your Expenses

Next categorise your Fixed and Variable expenses into two different piles: a non-negotiable pile we’ll call Needs, and a nonessential spending or ‘Wants’ pile. A budgeting app can help with this, but it’s better to do it manually the first time.

It’s helpful to think of your Wants list as discretionary expenses that you could do without if you absolutely had to. Like an expensive gym membership or pilates class, the meditation app, or your golf course membership.  The reason for this is not to scrap that list of items, but be able to be flexible with those items based on what your future goals are.

Step 3: Add in your goals

Now that you’ve got all the details of your cash-in and cash-out, it’s time to overlay your goals and priorities. Let’s say you want to save up for a house, pay off your debt, get a personal trainer, or get your backyard landscaped. This is your time to make sure these get some attention in your budget.

You might have a budget surplus or extra money that you can immediately put towards your goals. If this is the case, it’s also a good idea to think about the timeline of your goals. If it’s a more urgent goal, you might have to allocate more money to that goal when you get to Step 4.

Step 4: Create Your Budget Plan

Take a step back and look at what you have so far.

• You’ve been able to put together a comprehensive list of your monthly expenses
• You’ve defined which expenses have some flexibility to them, and
• You’ve defined what matters most to you financially.

Plan your spending by adjusting it to align with your goals. It may mean increasing some areas or cutting back on others.

If you can’t afford to put away regular savings, it might be time to create spending limits. This also applies if debt payments have gotten difficult to keep up with. It’s always a good idea to free up as much cashflow as you can, as this opens up possibilities for your financial future.

Don’t eliminate every unnecessary expense and live a spartan, joyless life. Rather, turn your money towards what is most important to you, including a budget for fun.

An effective budget will help you to keep a long-term view of your money goals. Even short-term goals can help support your steps towards financial freedom.

Top tip: Add in an additional category for unexpected costs or emergency funds and make regular contributions to that account.

Using a budgeting strategy

Budgeting strategies can provide a helpful framework as you allocate your funds. Here are two popular approaches:

The 50/30/20 rule?

The 50-30-20 budget allocates:

• 50% to Needs (essential expenses)
• 30% to Wants (discretionary spending)
• 20% to Savings or debt repayment

This simple method balances enjoying life now with planning for the future.

Another option is the 30/30/20/20 budget, which splits your income as:

• 30% for housing
• 30% for bills, utilities, debt, or groceries
• 20% for discretionary spending
• 20% for savings

These strategies aren’t fixed rules but guidelines to see if your spending is on track.

There are other strategies, such as the ‘zero-based budget’, the ‘pay-yourself-first’ method or the ‘envelope budget’. I don’t actually recommend any of these methods, as they all have significant shortcomings. I’ve shared more on my opinions of these budgeting techniques in our Budgeting e-book.

A good budget doesn’t need a complex strategy – ideally you shouldn’t have to be making daily or even weekly calculations. It’s important that your budget planner is easy for you, simplifies your life and goals, and makes money better – not worse.

Step 5 – The Right Way to Put Goals First

Goals come in between Needs and Wants. After you’ve budgeted for your Needs (non-negotiable bills like your mortgage or rent) then Goals come before any discretionary spending.

Putting goals first often looks like using a regular transfer to send that money into a separate account (with a good interest rate) or perhaps an offset account where it can grow undisturbed. If your goal is paying down credit card debt for example, think about using any surplus to create a debt avalanche. More about this in Step 7!

Step 6 – Include Things You Love

I don’t recommend being so obsessive about your budget that you give up everything you enjoy. Remember, it’s important to make your budget work for you, and that includes building in what brings you joy. Why? Because you and your budget should be good mates. Don’t make it into something that treats you like an afterthought – you’re worth more than that!

Step 7 – Automating Your Budget

Automating your cash flow is crucial for a successful budget.

Some people create bank accounts for each category, while others lump things together. Though, one of the most useful tips I can give you on this is to:

The account you get paid into should be different from the account you spend from (and not even have a card attached, if possible).

You should have at least one separate account for your ongoing fixed bills and expenses. You should then move all the funds required for your fixed expenses into this billing account, where these living expenses will be distributed automatically to each item via direct debit or BPay.

Why should you automate your finances?

Automating your budget not only saves time and effort but will help you stay on track with your financial goals. It’s easier to stay on track and reduces the temptation for impulse purchases especially if you are trying to pay off your debt.

FAQ: What can I set and forget, and what needs regular attention?

Once your budget is in place, automate your periodic payments right away. However, review variable expenses quarterly, track debt repayment, and plan for recurring costs like health insurance. Regularly adjust your investments to align with short-term and long-term goals, and update your savings goals as needed.

Step 8 – Review your Budget regularly

Your income, expenses and priorities will change over time, so actively manage your money by reviewing your budget regularly (perhaps once a quarter) and updating it.

As you manage your budget, try to identify room for change by asking yourself:

• Are your goals the same or have they changed? Are your meeting them or are they not realistic?
• Where are you spending too much money? Can you explore cheaper alternatives for the things you pay for now?
• Are you going too hard, and feeling like it’s a lot of work for no enjoyment?  What are some things you could add to your budget just because you like them?

You might find that you’ve drifted on your current money goals or you haven’t kept spending in check. This is a good opportunity to reset while staying flexible.

Conclusion

Whether you’re setting up your first budget or wanting to revise your existing one, a good budgeting tool is a vital step towards mastering your money. Crafting a personal budget that works is not just about numbers but about understanding your financial situation, setting realistic goals, examining your spending habits, and making tough but fair decisions.

Managing your money requires commitment and patience so don’t be discouraged if you slip up from time to time!  If you are looking for additional help, try seeking financial advice or speaking to a financial counsellor about building your budgeting skills.