When creating a budget, so many people will end up with a final product that, despite their good intentions, fails to work for them. Whether this is because the budget is too lenient and doesn’t result in savings, or because it is unrealistic and cuts down more than circumstances would permit, an unsuitable budget ultimately has a negative impact on how people approach and manage their personal finances.
With this being said, there are a number of steps you can take to create a budget that is realistic and effective in managing how you spend your money.
1. Create an Initial Outline of Your Current Spending
The first step in creating any effective budget is to create an initial outline of where your money is currently going – this is a list that will be refined throughout the budgeting process.
Rather than beginning to list off random expenses and categorizing them as you go, consider categorizing them in regard to your regular daily expenses, in chronological order. Once these smaller regular expenses have been thoroughly considered and categorized, you can move on to ongoing expenses that are more significant and occur on a monthly, or yearly basis, with examples including bills and rent. Finally, consider any one-off expenses that you may occasionally make, averaging where necessary.
2. Consider Your Needs and Wants, and Adjust Spending as Necessary
With this comprehensive list of how you spend your money, you can now consider your needs and wants. Whilst unrealistic budgets will often eliminate regular expenses in their entirety (morning coffees, for example), initially identifying them as wants will then allow you to look at them as a whole, identify the percentage of your spending that they comprise, and then cut down where necessary.
Therefore, identify your needs and wants within your current spending, whilst being strict yet realistic. Then, put the needs to one side, and focus on the more unnecessary expenditures. Rather than taking the often unrealistic action of cutting out entire costs (although this can often be effective), a more effective approach might be to reduce these costs, just not entirely.
For example – whilst some people will begin the budgeting process and realize the amount they are spending on takeaway food, they often make the decision to completely stop spending in this area. This can often reduce motivation and is a restriction that ultimately may not be adhered to. Instead, reduce spending on takeaway by a percentage, and look to other areas for further savings.
3. Consider Cheaper Alternatives
Now, to further improve upon your in-progress budget, consider where spending can be reduced by moving to an alternative, rather than eliminating the cost altogether.
While eliminating entire areas of spending can be difficult depending on factors such as lifestyle and what you are used to, switching to a more affordable alternative will require significantly less change and will allow you to save in the process. An example here is in regard to spending at bars – making the lifestyle decision to instead host more events at your home will allow you to buy drinks from bottle shops and encourage guests to BYO.
Another effective tip in regard to cheaper alternatives is to make improvements to expenses that are regularly incurred. Even switching something like insurance providers from a service that is likely bloated and inefficient, to something more cost effective (NRMA car insurance is an example) will mean that small regular expenses add up to much lower sum.
Other effective changes that can be made are switching from using rideshare services to public transport, and considering different brands and supermarkets.
4. Consider a Focus on Savings, Rather Than Reductions in Spending
If you are struggling to reduce spending with what feels like a lack of a solid goal, consider shifting your focus to achieving savings goals. This may seem like an obvious approach, however it is one that will often go overlooked as ‘budgeting’ is associated with limiting where you spend.
Coming up with a solid monthly savings figure, based on your regular income or an end savings goal, is a great way to do this. Not only will this figure become a source of motivation, but it will also give you a more clear range of spending to stick to.
5. Remain Diligent and Keep Adjusting Where Necessary
Finally, one of the most important aspects of successful budgeting is to strike a balance between persistence and being realistic. This is one that many people in the pursuit of financial responsibility will fail to achieve, either creating a budget that is impossible to stick to, or creating one that results in little savings at all.
Whilst this balance might be difficult to achieve initially, a good way to start is to create a budget that is leaning towards the strict side, whilst having a predetermined, slightly higher and more realistic (yet still beneficial) savings goal that you would still be very happy in achieving. In attempting to stick to your budget on a regular basis, you will also have the opportunity to make slight deviations from it in the areas that might be necessary at any given time.
However, if you do find that you are consistently going over budget, it might be important to reconsider either the budget itself, or how committed you are to your goal of savings. Ultimately, any budgeting process will require sacrifice and change – keeping your end goal in mind will help you to successfully get there.