Budgeting – An introduction to the basics

22 Dec 09 / Posted by: Jessica

Budgeting is a bit like dieting – you get the best results when you set realistic goals, commit to making it a permanent part of your lifestyle, and allow yourself the occasional treat along the way. Go too hardcore and you’re more likely to fall off the bandwagon.

Start small

The first step is to take a good hard look at your spending habits. Start by keeping a daily diary of where the money really goes. If you’re not disciplined enough to keep a written record, let your bank do it for you and read through your credit card or EFT-POS statement when it arrives at the end of the month. Chances are you’ll start to see some patterns emerging – it can be surprising how small things like that daily chocolate bar or takeaway coffee add up.

Compare what’s coming in versus what’s going out

Next make a list of your income and the expenditures you’re committed to on a weekly, monthly or annual basis so you can compare the money coming in, with what’s going out. Some of the standard categories you’ll need to include are food, power, mortgage/rent, KiwiSaver contribution, any loan repayments and transport costs. Make sure you also take into account those large one-off payments that you’ll need to cover at some stage – like annual insurance premiums, school fees or car registration costs – and keep aside some extra for unexpected emergencies (a useful rule is to aim for three – six months’ salary in the bank).

Some people also like to include a regular set amount for donations to charities or buying presents. Of course if you’re spending more than you’re earning you’re going to have to make some adjustments – can you increase your income? Or are you going to have to find a way to save costs?

Remember to pay yourself

Make sure you include a fixed payment to yourself in your budget – decide on a weekly amount you can afford and direct credit it into a savings account. Even $10 a week will start to grow into a decent nest egg, once compound interest takes effect. If you’ve got specific goals like putting yourself through university, upgrading your car or buying your house, make sure you’re saving towards them in your budget. If it’s an automatic payment it’s completely painless – you’ll find you won’t even miss it.

Reward your success

Finally, try to include a regular amount for the fun stuff – after all, that’s what life is all about. If you include a fixed figure in your budget for things like entertainment, takeaway coffees or just random acts of kindness, you’ll find you’re more likely to stick to it. If it helps, draw the amount out in cash each week so you’re not tempted to throw larger luxuries on the credit card and undo all the rest of your great budgeting work.

For great practical advice on creating a budget check out the Retirement Commission’s free website www.sorted.co.nz – it’s full of calculators and useful information to set you off on the right track.

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