Budgeting

This chapter will bring together what you already know about income, expenditure and savings and explain the basics of financial management.

What is a budget?

A budget is a financial plan that takes into account your expected income and expenditure in order to project how you should manage your money in the future. Your current financial position will serve as a guide as to how you should organise your money.

Your financial position

The amount of money (negative or positive) remaining after you subtract your expenses from your income will give you your current financial position. To find a pattern of income and expenditure, look at your past earning and spending behaviour.

You already know that your income is any money that you acquire through work or via an allowance. If you have a regular income, then it is easy to predict how much you will earn in any given period; if you have a variable income, it may be better to try and view your finances over a longer period, like a month rather than a week, to minimise the effect of the irregularities. In a casual job, you may receive between $100 to $200 a week depending on the shifts you work, so it may help if you average out your income over a month to get an approximation of what you can expect in that period.

Define your expenditure, classifying expenses as voluntary or involuntary, and then separate them into fixed and variable expenses.

Fixed expenses are those that you must pay on a regular basis, such as rent every week or the water bill every quarter. These are usually involuntary and of the same amount or a predictable amount every time.

Variable expenses are those that arise from circumstance, such as if you need new furniture or personal purchases. This will give you a good idea of where your money goes and whether you are spending beyond your means on a regular basis, or if you are prone to impulsive spending, purchasing goods without adequate decision-making.

Elements of a budget

After you have developed an idea of your spending and saving habits, you'll have an idea of what you want to do with your money, an objective. You might want to get out of debt, start saving money or start organising your finances in a more efficient manner. By drawing up a budget you can track your income, which you can then alter to suit your objective.

Budgeting is about balancing your income with your expenditure. Many people budget to avoid debt or start saving, so it is important that your plan follows your objective. If you find that you spend more than you earn, for example, then you will need to look at the expenses that you can cut or minimise to balance your finances.

When you've completed this process, you can then decide what to do with your dispensable income. This is the remaining amount of money after you meet all necessary expenditure. Where you spend your dispensable income will depend on personal lifestyle choices.

Following your budget

While your budget may seem plausible in theory, you may also need an element of flexibility to allow for variations, for example, if you allocate $40 a week for petrol but the price of petrol goes up, you may need to extend your budget to cover the rise.

After implementing your budget, follow it for a few weeks to gauge how it works in practice. You will probably find areas that need adjustment if you have over- or underestimated your requirements. The complexity of your budget will greatly affect what you need to adjust, for instance, if you have a lot of variable expenses it would be hard to set aside an amount to accommodate them. In the early stages of implementing your budget, write down the amount you allocated for an expense and compare it to how much you actually spent. Eventually you will have a record of expenditure in relation to your budget, which you can then adjust accordingly.

Operating under a budget will show you whether you have the discipline to follow your plan. You can also learn to anticipate and accommodate variations through experience. Strict budgets are necessary if you have a small income and a number of expenses, but by learning to use your financial resources effectively, you acquire valuable financial management skills that you can apply beyond a personal level.