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A Novice’s Guide To Budgeting

15 February, 2008

Step One: Find out how much you earn.
Gather up all the bank statements, for all your accounts, for the last twelve months. Make a note, on a piece of paper or in a spreadsheet document on your computer, of the deposits that went in. Write down your regular pay amount and how often that goes in. Write down any pensions or government allowances that you get and how often they come in. Then write down any “one off” sort of payments you got in the past twelve months (annual bonuses, tax returns, gifts etc) and work out how much money you have earned in the past year.

Step Two: Find out how much your assets are worth
While this is not an absolutely essential part of a budget, it can be helpful for you to gain perspective during the process.

Write down a list of all the assets you have, and write down their approximate value. The more accurate you can be, the better. Include your home, any investments (shares, properties etc), vehicles, land, farming equipment, livestock, an approximate value for your household goods, jewellery etc. If you can get professional valuations, find out the replacement value as well as the “resale” value. Search online for vehicles similar to your that are being sold, look for properties in the area that are being sold or get a market appraisal from a real estate agent (and take off 10-20% ;)).

Now add them up and see how much you own.

Step Three: Find out how much you owe

Now, write a list of all your liabilities and loans. Include home loans, investment loans, car loans, personal loans, people you owe money to, rent-to-buy agreements (not rental house expenses though) and “no interest until 2011”-type agreements. If you can, get a “pay out” figure for all of those loans, if you were to pay them out today, as well as their current balance.

Add them all up, but try not to fret too much!

Step Four: Find out what you’ve promised

Now write a list of any contractual obligations you’ve entered. This includes a Foxtel two year contract, any mobile phone contract, a loyalty contract (for example, we are in a contract with our electricity supplier that we will stay with them for two years and they will give us cheaper electricity), gym memberships and any other sort of money you are bound to pay over a period of time. Also include in here the payments you make on each of the loans and borrowings you collected in step three. Don’t include loans you are not making payments on. Write down the date (as best you can) of when this contract expires and how much you have owing. If you can, find out if there is a “pay out figure” on these also – either a payment for breaking the contract, or a discount for paying the contract off early.

Write down the cost and how often you have to pay it. It can also be very useful to find out when payments are due. Are they due every August, or March, June, Sept, and Dec, or are they due the 15th of the month, or every second Tuesday? The longer this list is, the less you will be able to change when you try to adjust your budget.

Step Five: Find out what other expenses you have to pay

At this step, write down any other expenses that you cannot get out of, that are a fixed expense. They include land rates, sewerage costs, garbage disposal, strata levies, pay-by-the-month insurance policies, home rental, mortgage, child care, landline line rental, car registration, prepaid mobile phones and anything else you can think of. Write down the cost and how often you have to pay it. Find out when the next payment is due.

Step Six: Find out what else you need to buy regularly, that is not a fixed expense

Write a list of things that you feel you need, that are not a fixed expense. This may include groceries, medical expenses, travel expenses for work, study costs, telephone calls, petrol, electricity, water, gas – the list is going to depend on your circumstances. Now estimate how much you pay and how often. Also write down when this is next due.

Step Seven: Find out what else you spend your money on

Have a good look at any bank statements, credit card statements, receipts and bills you can find from the last year. Write down all the things you spent money on that didn’t fit into above categories, and how much they cost. This would include gifts, meals, haircuts, books, holidays, cds, entertainment, magazines and a whole pile of other things based on what your life is like. Add up what you have spent in the last year on these items. Don’t forget to include things you paid cash for – have a good guess at how much those things cost, if you don’t have receipts and can’t remember.

If you haven’t got very good records of this, track your expenses (every cent) for the next week to see where all your money goes. Every coffee you buy, toll you pay; write it down. Every time you pay a bill, buy a loaf of bread or fill the car with petrol; write it down. The longer you do this for, the better idea you will get of where your money goes.

Step Eight: Set up a good spreadsheet

You don’t need a computer for this step, although it makes it an awful lot easier. You will eventually find your own way with the budget, but to start I suggest you use this method of calculating expenses.

I have four main columns in my budget spreadsheet. I have a text column that s the label of the expense, some examples: Groceries, Petrol, Health Insurance. The second column is the amount you actually pay. The third column I call frequency. This is where I write how often I pay the expense in question, ie the frequency of a weekly expense would be 52 (or 53 if that day of the week is the first of the year), a monthly expense would have a frequency of 12 etc. The fourth column I multiply the frequency and amount together to get a yearly value. You might be quite surprised how much that latte or pack of cigarettes a day is actually costing you over the year!

You can program spreadsheets to do this calculation for you. There are two ways to do this. The first is to simply enter the numbers into the equation yourself. You would type =sum(12.50*52) for a weekly bus fare that cost $12.50. Once you hit enter, the cell will now display the yearly amount for that expense.

The other way is more efficient but more complicated to explain and set up. Each cell in the spreadsheet has a “name”. The columns across usually have a letter designation (a, b, c and so on) and the rows down usually have a numerical designation (1,2,3 and so on). If your label is in column A, your amount in column B and your frequency in column C, the equation would look something like this: =sum(B3*C3). You can then “copy” this cell (highlight and then right click) and then paste it down the column (click on the letter label at the top of the column so it is highlighted and then right click and select paste) and then from now on your columns should display the yearly total once you input figures into the cells for other expenses.

If all this is too complicated, use the previous method or just punch the figures into a calculator. The benefit of programming the spreadsheet to do it for you is you only need to change one figure (say, how much you spend on groceries each week) and all your figures (yearly expenditure, total expenses etc) will automatically update for you, to reflect this change.

Step Nine: Punch in the numbers

Now is the easy, but scary part, putting in the expenses, and figures in your spreadsheet. This is a time consuming but easy step in the process. As you go, you may want to organise your income and expenses into categories. You could organise them according to how flexible the figure is (from inflexible to items you could easily eliminate if necessary) or according to area, such as car, home, food, medical or whatever suits your situation and preference.

Step Ten: Get a view

Now, you need to add up your total earnings and your total expenditure. You can put the numbers into a calculator or you could program the spreadsheet to do it automatically. To program the spreadsheet to add the totals, type =sum into the cell and then either highlight the cells which contain the figures to be added or you can type the range manually. If your figures start at C3 and go until C42 then you would type =sum(C3:C42) and that would automatically calculate the amount, and update each time you change a figure. Make sure you add you income and expenditure separately.

Now, subtract your expenditure from your income. This will let you know if you are overspending your income. If the figure is unusually large (say you have, in theory, $10,000 a year unaccounted for) you have probably forgotten entire categories or underestimated a lot of your expenses.

Step Eleven: Set a goal

Now you have a good picture of your finances, you need to set a goal. It could be getting back into the “black” if your expenses are greater than your income. It may be saving for a holiday or paying more off your mortgage. Whatever your goal, it is entirely up to you. It is a good idea to set a timeframe to achieve the goal in, and make it realistic! You are not going to change from overspending your income to the tune of $5000 a year to saving $20,000 in a year for a grand overseas holiday (Unless you earn a six figure salary and gamble your money away!).

Step Twelve: Review and make changes

Now, starting with the most flexible categories (magazine subscriptions, entertainment, dining out and take away food etc) try to make a reduction in as many areas as possible, or cutting out entire categories – are there magazines you don’t read that you should cancel your subscription for or simply stop buying? Work your way up the list until you get to commitments and bills that you can’t eliminate (rates, electricity etc). Hopefully with a bit of effort, you can set a realistic budget and achieve your goals.

There are plenty of websites, including Aussies Living Simply, that have plenty of budgeting hints and ideas on ways to cut back. They should help you with some ideas of where you can cut back.

Step Thirteen: Sit back and relax

Sit back and relax, knowing that you now have knowledge about where your money is going and how to stop it slipping through your fingers. Knowledge is power. You are now empowered to make changes in your finances!

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