By Warren Shute
Whether you’re just starting out, or you’re a seasoned budgeter looking to take things to the next level, these tips and our budget planner will help you become a money managing maven.
Organisation is key to budgeting. Not a naturally organised person? That’s no problem. Simply download our free template below, which makes budgeting simple, intuitive and highly effective. So now you’ve got no excuse.
Fill in the details about your incomings and outgoings and calculations will be made automatically.
It will help you realise what’s really coming in and going out each month… you may be surprised, before you’ve even begun to budget.
Be realistic, not joyless
Two related things to keep in perspective:
1. I find people tend to overestimate what they can do in a year, and underestimate what they can do in a decade.
If you set yourself goals and targets that are unrealistic, it will discourage you and you’ll quickly stop trying to improve your finances. Try to change your approach so that your vision is more long-term, letting you enjoy the process rather than trying to cram everything into a few months, which won’t work.
If you’re budgeting with your partner or other people in your household, even better. You’ll motivate each other and feel collectively empowered to take control of your money.
2. If you try to sacrifice too much at once, you’ll give up. The worst thing you can do is cut out everything you enjoy.
Yes, financial planners will advise you to reduce your spending, if your circumstances require it. But if you remove all your indulgences, you’ll lose passion and momentum for why you started to budget in the first place.
Life is for living: don’t deprive yourself of all pleasures.
Take emotions out of the equation
We’re emotional beings, and that impacts our financial decisions. Our actions are often determined by how we feel. Had an argument with your partner, or a bad day at work? You’re likely to make different choices than when everything is going your way.
It can make a huge difference if you try and automate as much of your money management as possible, while retaining the ability to have spontaneous fun. How? By using this bank account system:
- Set up two accounts, one for bills and another for personal spending. You can take a look at our selection of carefully chosen savings accounts with Aviva Save.
- Arrange all your regular payments to come out of your bills account. Be honest with yourself and ask three questions of each: do I need this, do I want this, can I get it cheaper?
- Put some WAM (that’s ‘walk about money’) into your life. That means using the money in your personal spending account to pay for all your weekly variable spending like groceries, drinks, haircuts etc. Work out how much you need (or have left) to spend in a month after your bills, divide it by four, that’s your weekly WAM.
- Set up a payment once a week for this amount from your bills account to your spending account.
- Your WAM is your allowance – it’s finite. Don’t dip into your bills account for more. It’s not too long to wait for next Wednesday.
This takes some of your budgeting off the spreadsheet, but in an easily managed way.
Three questions that will transform your finances
On the budgeting template you’ll be asked to itemise all your regular expenditure from mortgage payments to mobile phones, TV package to transport costs. And for each one, ask yourself three small questions that add up to a HUGE impact:
- Do I need this?
- Do I want this?
- Can I get the same for less elsewhere?
If it sounds simple, it is – but you’ll be amazed by the power those three queries hold. Most people don’t think about how much they’re paying for the gym, their cable or their electricity. Those payments simply happen.
So, don’t be like most people: when you sit down and you’re honest about the answers for each expense, you’ll be surprised at what you can save.
How to split your budget
Once you’ve got your figures down, it’s interesting to see where your money actually goes. And while there are no hard and fast rules, a typical split might look like:
- 50% of net income for running the house, i.e. your Bills Account
- 30% of net income for WAM, i.e. your variable spending
- 20% of net income for your future self. First use the 20% to accelerate the overpayment of your unsecured debt, but when this is repaid, use the 40/40/20 principle
The 40/40/20 principle
If you’re in the enviable position of having paid off all your unsecured debts, there’s another split to consider, and that’s taking your 20% and allocating it 40/40/20:
- 40% goes to overpaying your mortgage
- 40% goes into your retirement plan
- 20% goes back to you to enjoy today, or into savings
Think of the last 20% as investing in yourself. You could learn new skills or train to earn more money in the future, or you could take a fantastic holiday. As long as you don’t take out debt to cover any extra costs, it’s important to enjoy the here and now as well as plan ahead.
That’s how you’ll stay on top of your budgeting, now and in the future.