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step by step guide to budgeting

step by step guide to budgeting

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02/01/2013

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Step by step guide to budgeting
Step 1: Why a budget?
What you'll learn in this step: Calculating your budget can help you work
out whether you need to increase your income or reduce your spending.
What are budgets?

Budgets are like your own personal small business statements. They are the sum of your incomes (wages, salary, dividends, interest, rentals, pensions and so on) minus the sum of your expenses. What you are left with is your disposable income. If when you work out your budget, you discover your outgoings are greater than your incomings, you need to increase your income or reduce your spending.

Why budget?

A budget lets you know if you are living within your means. If you're spending more than you're earning,
you'll be going backwards and have little to show from the average $4 million you can be expected to
earn during your working lifetime. But a budget also can set you on the road to saving for something
special like a holiday or a car \u2013 or building an investment portfolio.

A budget is not a millstone; it's a tool to help you manage your finances.
Go to Moneymanager's savings guide to fine-tune your savings strategy and find the best rates to make
your nest egg grow.
Learn more: Saving private revenue, The Sydney Morning Herald, 09 Jan 2002
How to win the budgeting war.
Learn more: Best intentions, The Age, 24 Feb 2003
The best way to save money is to start with a plan, writes Peter Weekes.
When to start
There's no time like the present to start a budget, but there are a number of key events in your life that can
trigger the need for a budget. These include:
\u2022
Getting married ...or divorced
\u2022
The birth of a child
\u2022
A new job
\u2022
The start of the year
\u2022
The start of the financial year
\u2022
A new job
\u2022
Saving for a key purchase
\u2022
Retirement

Learn more: Time to action a budget plan, Personal Investor, March 2002
Disciplined investing begins with disciplined saving. And the bedrock of saving is creating and sticking to a
sensible budget.

Case study
Janet and Bob have been married for six years and hope to set up their own business. They
describe their financial habits as "sporadic".
Step
1:
Why a budget?
Step
2:
Gathering
information
Step
3:
Making it work
Step
4:
How budgets fail
Read the full case study
How do you start?

First you need to list all your income sources and all your expenses. The income part is probably the easiest
and the one that gives you that warm inner glow. The expenses part is a little harder \u2013 some months you
have electricity bills, other months your car insurance is due. The beginning of summer might see you buy a
couple of outfits, or your children might have just had a growth spurt and need new clothes. It can be easy to
overlook and underestimate your spending. What you need to do is identify your total expenses,
remembering the incidentals and the bills that are annual, half-yearly or quarterly.

Learn more: Don't get sucked in, Sydney Morning Herald, 24 Jan 2001
There are many ways to unwittingly squander your precious dollars. Find out the key dos and don'ts.
top

Step 2:
Gathering
information

What you'll learn in this
step: Daily tracking of your
expenses will give a good
indication of where your
money goes. A budget
planner is a handy tool.

There are many ways to work
out your budget, but it comes
down to gathering information
on your spending and your
income. It can be difficult to
track all your spending, but
there are a number of reliable
methods. One is the "daily
track method", and the other
the "deal your cards" method.
But you could just as easily
sit down at the table with all
your receipts for the last year
and work it out.

Case study
Jillian, 28, is a scientist, and Oliver, 33, is an engineer. They have a five-month-old baby and want to
Step
1:
Why a budget?
Step
2:
Gathering
information
Step
3:
Making it work
Step
4:
How budgets fail

know how to manage their finances while Jillian studies medicine and Oliver stays at home with their
children.
Read the full case study

The daily track
method

One way to work out your
expenses accurately is to
track them on a day-to-day
basis for up to two months.
This is probably the most
accurate method, but it can
be tedious. Every cent you
spend \u2013 whether it's buying a
cup of coffee or a bus ticket \u2013
needs to be recorded. It's
advisable to create one sheet
of paper for each of the eight
weeks, and then divide each
sheet into eight columns, one
for every day of the week and
one for the total. This should
start to paint a picture of your
spending habits, and if you
need to cut corners, you'll be
able to see where savings
can be made on little luxuries.

Add the eight weekly totals
together, divide by two and
then multiply by 13 to give
you a figure for 52 weeks.
Then add in the other costs
that come outside that two-

month period like your
home and contents

insurance and, say, your
annual club subscriptions.
That will give your total
annual expenditure. You can
then divide that by 12 for an
estimate of your monthly
commitments. Of course, not
all your expenses are spread
out evenly month-by-month,
and there will be some
months when you will spend
more than others.

Consider paying your
insurance in monthly
instalments to spread
the load.

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