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How to budget

Budgeting can help you save more and prepare for the future.

A budget is a smart way of managing your money. There is no one set way of doing a budget, but all budgets let you manage and allocate your money in a way that lets you save for today and the future.

When you create a budget for yourself you can see how much money is coming in (your income) versus money going out (expenses and spending).

This gives you more control over your finances and your money goals.

How to budget money (6 steps)

1. Set a budgeting goal

Are you trying to save a specific amount each month? Do you want to pay off debt? Or do you want to just have visibility into your finances?

Having a clear goal will help define your budget.

2. Calculate your total income

If you work full-time, just check your pay slip to determine your after-tax income. If you work casually or across multiple jobs this may be harder to calculate, but you can just use an average of the last 3 months of your income to get a good estimate.

Remember to include all sources of income:

  • Your salary (remember to record whether this is weekly, fortnightly or monthly)
  • Passive income from side hustles
  • Pension or government support
  • Investments
  • Child support payments

3. Calculate your total expenses

This step will take the longest because it's the hardest. Start by looking at your bank statements for the past month (or the past 3 months if you want a more accurate picture) and list out everything you spent money on. Then, begin to categorise.

Essential (fixed) expenses

The first category will be your fixed expenses. This is for things that you will always need to pay for such as your rent, bills, groceries, petrol and repayments for debt like your credit card.

Other important and necessary expenses such as transport and medical costs can go into this category.

Non-essential expenses

All other expenses can be put into the non-essential expenses category. It's tricky because some expenses in this category are essential (like clothing) but they just aren't essential every month.

Expenses that belong in this category are things like streaming service payments, takeaway, trips away, beauty, movie tickets and other entertainment.

4. Do you need to cut any expenses?

At this point, you might realise you need to cut out some expenses. The budgeting process is a great time to reevaluate some costs such as streaming services or other subscriptions, or even how much you're spending on takeaway.

5. Set your goals: Spending, saving and debt

Now that you know how much money is coming in (income) and how much is going out (expenses) you can set goals.

Spending goal

Your expenses are all listed out, so now you can set a goal for how much you want to spend in each category. Remember to allow yourself a buffer because not all expenses have set amounts each month.

Debt goal

If you have debts (credit cards, personal loans or similar debts) you need to create a goal in your budget to pay them off. Home loan debt isn't included in this section because it is considered a fixed expense.

Your debt goal might be making the minimum required payment each month or it may be making extra repayments to get your debt repaid faster.

You can use a debt repayment calculator to help you here.

Saving goal

You know how much you can spend and how much you have to pay off your debt, so how much can you save? Set a realistic but ambitious savings goal that aligns with a tangible goal such as saving for a house deposit, a piece of furniture, a car or a holiday.

6. Track, track, track

You can't budget without tracking. But don't worry – there are a lot of options for budget tracking. You can use a budget tracking app, a spreadsheet or even pen and paper if that's your preference.

Your banking app might have an in-built budgeting function, too.

Budgets work best when you work at them. Make sure to track how you're going each pay cycle and revise your budget as your expenses, income or finances change.

You don't have to start from scratch with your budget, here are some budgeting strategies to consider:

Simple Extraction

The 50/30/20 budget

The 50/30/20 strategy divides your money into 3 different buckets: needs, wants and savings. From here, 50% of your income is allocated towards needs (housing, bills, groceries, etc), 30% is allocated towards wants (eating out, streaming, weekends away, shopping) and 20% is put towards your savings.

If you're struggling to save 20% of your income, you should take a look at how much you're spending on things you "want" but don't "need" and make some cuts in order to hit the 20% savings goal each month.

Surgical Extraction

The zero-based budget

Using this strategy, there is zero money left unaccounted for each month. This goes quite a few steps further than the 50/30/20 strategy and assigns each dollar you earn to a particular expense or item each month.

So instead of looking at a general category for bills, you'd break down each bill you expect to pay that month and the exact cost of each. Similarly, you'd track every coffee or meal out down to the last cent. This strategy relies on you being very organised and committed. It would likely require the use of a budget planner, spreadsheet or other tracking tool.

Wisdom Teeth

The pay-yourself-first budget

This strategy is simple yet very effective. Basically, you set yourself a savings goal each month and ensure you meet this before you pay for anything else.

For example, if I wanted to save $1,000 a month, I'd transfer $1,000 to my savings the minute I get paid and treat this like it's a non-negotiable bill or monthly payment. Once I've done this, I'm free to spend my money however I choose for the rest of the month because I know I've already made sure my savings goal is met.

Wisdom Teeth

The envelope or bucket budget

This option can be used with one of the other strategies. After determining how much you can spend each month on "wants", you then break this down further into specific categories such as eating out, entertainment, personal care and retail shopping which are each assigned a monthly limit.

You then withdraw enough cash for each individual category and keep it in an envelope. Once the envelope is empty, that's all you can spend on that category until next month when you top it up again. If you like this strategy but don't want to use physical cash, you can use different bank accounts as digital buckets instead.

You could also opt for none of these strategies and create your own system or take a hybrid approach and use bits and pieces from each. There are also plenty of budgeting apps you can download. It's not important which budget strategy you use, it's only important that you use a budget and use it consistently.

What is loud budgeting?

If you've been on social media at any point this year, you might have heard of the 'loud budgeting' trend. If the words 'social media' immediately made you switch off, I understand but don't be too quick to judge.

Loud budgeting is where people (you guessed it) budget loudly. And this means you're being open and upfront about your budget and your savings. So when a friend asks if you want to go for dinner, you don't just say no, you say something like 'Nah, I've already spent my allocated $200 on eating out this month and I'm trying to save for my new jet ski.'

For some people, money is a taboo subject – especially when it comes to talking about specific numbers. But this can really help towards your savings goals.

  • Your budget stays front of mind. Silent budgeting is forgotten budgeting, if you ask me.
  • You stay accountable. Once you've made it clear to the people around you that you're saving, you can't fail now.
  • You get your friends thinking about saving too! The more budgeting and saving becomes a part of everyday conversation, the more other people start to think about saving - and that can only help you if all your friends are opting for cheap dinners now.

Budgeting tips

  • Switch to a high interest savings account. If you're going to be saving, make sure your money is working for you with a high interest savings account. This will ensure any money held in the account will earn more interest and you could be hundreds of dollars better off by the end of the year.
  • Get a budgeting buddy. Just like going to the gym with someone else keeps you accountable, budgeting is easier with a support system. A friend or partner can keep you on track and you can both learn from each other.
  • Use cash. If you tend to tap your money away, try withdrawing your spending limit for the week in cash. Having the physical amount makes it harder to overspend and you will end up saving on card fees, too.
  • Leverage micro-investments. Micro-investing apps can simultaneously let you make investments and more easily balance the budget. The premise is simple: whenever you buy something, round it up to the nearest dollar and invest the excess in the share market or in a high interest savings account.
  • Consider multiple accounts. This is the digital version of envelope budgeting: create multiple bank accounts or sub-accounts, each with its own purpose. You can have one account for fixed expenses, one for discretionary spending, one for saving, etc.

How a budget can help you save money

1. Tracks your spending
Rather than "spend and forget", a budget encourages you to track your spending. By doing this, you'll keep your impulse spending low and ensure you don't overspend on certain things without realising it, like eating out (or ordering in!). Tracking your spending also helps you spot areas where you can easily cut back and save.

2. Identifies new ways to save

When you've got a budget and you're working towards a personal savings goal, you're going to be more motivated to find new and creative ways to save. From doing your grocery shopping at night and going meat-free a few nights a week to selling things online and starting a side hustle, there are plenty of ways to save money to help meet your savings goals.

3. Allows you to get more out of your savings

Once your budget is ticking along nicely and your savings stash is starting to grow, you can use this money to generate even more savings. Instead of leaving the money sitting in your regular bank account, consider putting it somewhere where it generates a return, such as a high interest savings account or an ETF.

John is the co-host of the this is money and this is property podcasts (formerly my millennial money and my millennial property). He is Director at SOLVERE Wealth, Director/Buyers Agent at Envisage Property, and is property coach of over 25 years.

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To make sure you get accurate and helpful information, this guide has been edited by Jason Loewenthal and reviewed by John Pidgeon, a member of Finder's Editorial Review Board.
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Lead Editor

Elizabeth Barry was the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review. See full bio

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Elizabeth has written 248 Finder guides across topics including:
  • Banking
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