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With the new year fast approaching, now is the ideal time to establish a budget that sets you up for a strong financial year ahead.
A thoughtful and realistic budget not only keeps you in control of your finances but also helps you navigate unexpected costs and achieve your financial goals.
Here’s a comprehensive guide to building a realistic budget to start your year on the right track.
1. Take stock of last year’s spending
The first step in creating a budget is to review your spending from the past year. Check your bank statements, credit card bills, and any other records to see where your money went. Categorise your spending into essentials, such as housing, groceries, transport, and utilities, as well as discretionary spending like dining out, hobbies, and entertainment.
Reflect on areas where you consistently overspent, expenses that could be reduced, and any unexpected costs that disrupted your finances. Understanding your past spending habits can reveal opportunities for improvement and give you a clearer picture of your financial tendencies.
2. Set clear and specific financial goals
Creating a budget without clear goals can make it harder to stick to. Identify what you’d like to achieve financially this year. Your goals might include building an emergency fund, reducing debt, saving for a home deposit, or planning a family holiday. Setting specific, measurable goals helps you create a budget with purpose.
Breaking your goals into short-term, medium-term, and long-term categories also makes them more achievable and easier to track. For example, you might save a specific amount for emergencies within three months, pay off a particular debt by year’s end, or start building up a deposit over a few years.
3. Categorise and estimate your expenses
Organising your expenses into main categories can provide a clear structure. Common categories include housing, utilities, transport, groceries, insurance, debt repayments, lifestyle costs, and savings or investments. Estimate how much you’ll need in each area, drawing on your previous year’s spending while adjusting to better suit your goals. This structure provides a clear overview of how much you’re committing to each area and highlights categories where you might make reductions to free up funds for other priorities.
4. Try the ‘three-bucket’ approach
Instead of a fixed percentage rule, consider using the Three-Bucket Approach:
Essentials bucket: This covers your day-to-day living expenses—things you can’t go without, like rent, utilities, groceries, and transport.
Savings and debt reduction bucket: This is where you set aside money for both saving and paying down debt. If you have high-interest debt, like credit cards or personal loans, consider allocating more funds here to reduce interest costs over time. Once high-interest debts are reduced, you can focus more on savings goals such as an emergency fund, home deposit, or long-term investments.
Lifestyle bucket: This includes the ‘nice-to-haves’ like dining out, entertainment, and hobbies.
Using these three broad categories helps you be flexible with your spending while covering the essentials and making sure you’re progressing towards your financial goals.
5. Explore budgeting tools and apps
Using tools specifically designed for Australians can make budgeting easier and more effective. Many apps link with Australian banks, simplifying tracking expenses, setting budgets, and categorising spending. Options like Pocketbook and Frollo allow for tracking and goal-setting that’s tailored to your financial situation, giving you a clearer view of cash flow and helping you keep tabs on your progress toward goals.
6. Review and adjust regularly
A budget should evolve with your life circumstances and checking in monthly or quarterly can help you stay on track and make any necessary adjustments. Life changes like a new job, an unexpected expense, or even a reduction in certain bills can affect your budget. Regular reviews also allow you to see if your spending aligns with your goals and make tweaks as needed, so you’re more likely to achieve your financial targets and stay motivated along the way.
7. Automate payments and savings
Automating payments and savings can be one of the simplest yet most effective budgeting strategies. By setting up automatic transfers for bills, savings, and debt repayments, you ensure that obligations are met without needing to manually move funds. Schedule a portion of your income to go directly into savings each payday, set up monthly payments for loans to avoid late fees, and use direct debits for recurring bills like rent, utilities, and insurance. This approach minimises the temptation to spend money earmarked for other purposes and makes it easier to stick to your budget.
8. Keep it realistic and celebrate wins
Budgeting is a long-term commitment, and it’s important to keep things realistic. Setting achievable goals and celebrating small wins along the way, like paying off a debt or saving for a family holiday, can keep you motivated. Recognising even modest achievements can help you stay engaged and reinforce the habits that support your long-term financial well-being.
And when you slip and overspend or forget to save don’t beat yourself up. No-one is perfect. The important thing is don’t give up just get back on track as soon as you can.
Starting the new year with a practical budget is a powerful way to set yourself up for financial success. Keep it flexible, review it regularly, and remember that small steps can lead to big gains over time. Here’s to a financially fit and prosperous new year!
The Money & Life website is operated by the Financial Advice Association (FAAA). The views expressed in this article are those of the author and not those of the FAAA. The FAAA does not endorse or otherwise assume responsibility for any financial product advice which may be contained in the article. Nor does it endorse or assume responsibility for the information.
