Alison is a member of the Chartered Accountants Australia and New Zealand, and currently works in Public Practice Accounting.
The Basics of Budgeting
Most families know the importance of a budget. If you have one in place, you can use it to ensure your rent or mortgage and other essential bills are paid on time. Many budgets fail because they are not stuck to; others because they were created incorrectly in the first place.
This article aims to guide you to the Ultimate Budget: an all-inclusive budget, which will highlight discretionary spending in addition to the essentials. Many people simply do not realize how discretionary spending can add up over the months and years. The cost of a Flat White may not seem to be much at $3.50, but if you buy a muffin too, and have this habit five days a week, you'll soon see the cost multiplying.
The aim of the budget is to ensure you are fully aware where your dollars are going. You may be surprised with the results!
Starting Your "Ultimate Budget"
The Ultimate Budget is based on your last three months' spending. This is to ensure a fairer budget is achieved, essential to work out an 'average' month for your family. If one of the months has unusually high one-off expenses (e.g medical costs, Christmas, vacation), you can deduct these amounts or choose a three month period you feel is representative or your normal spending patterns.
Most online banks have the ability to download your statements and transactions. If possible, export your three months transactions directly into Excel (this will save you some time), or if you are unable to do this please manually enter the expenses into Excel. To manually enter your bank data to Excel, you only need three columns, and not all the column names you receive from a bank data download (as in the example below). Only Narrative, Debit Amount and Credit amount are needed. There is no need to enter the dates, just ensure you only enter data for a three month period.
Next, add a line to the end of the Excel data to total the two columns debit and credit. Add another line for net difference. The net difference is calculated as total credits minus total debits. A positive amount (as in the example below) indicates your incoming money is higher than your spending. If your net difference is a negative number, this means you are spending more than you are earning.
Bank Data Exported to Excel
Breaking It Down
You now have three months of bank data in Excel. If you have more than one bank account, please repeat for each account. Now we are going to add a new column in Excel, to follow the Credit Amount, and call it 'category'. I recommend sorting your data into A-Z by narrative to make the next step quicker.
Data Categories for Your Budget
- Incoming Wages & Benefits
- Other Income
- Education/School (costs and savings)
- Loan/Credit Card Repayments
- Motor Vehicle
- Discretionary Spending
As an example, if you have sorted the narrative by A-Z, you can add 'Groceries' in the category column for the first Walmart expense; then copy this down for each with the same narrative (i.e. to add 'Groceries' for all Walmart expenses).
What to Include in Your Budget
- Other Income—Include any income that isn't wages or government benefit payments, e.g. bank interest, dividends etc.
- Utilities—Include electricity, gas/heating, water, telephones (inc. cell phone)
- Motor Vehicles—Include gas/fuel, insurance, registration etc.
- Insurance—Include all non-motor vehicle insurance, e.g. home & contents, medical
- Discretionary Spending—This should be for everything not listed in one of the six other expense categories (Rent/Mortgage, Utilities, Loan/Credit Card Repayments, Motor Vehicle, Insurance, Groceries). In essence it's all personal spending other than groceries. This will include non-essential goods like clothes, luxury items, take out coffees and snacks, downloads (movies, music) and games.
Sort by Narrative to Save Time
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The Next Step
Once you have added categories to each line item, re-sort your data in Excel; this time by category name. We now need to add up the total for each category. Add a new column title 'totals' and use the sum function in Excel. Ensure your sum includes every expense in that category for the last three months. See the example below:
Making Your Data More Manageable
Now you have the total for each category; summarize this in Excel. Please see the following example:
Making Sense of the Data
You can now see where you are spending your money over a typical three month period. In the above example, the amount spent was lower than total income by $91.32; this means on average you would have only $30 left over each month. This is the amount of money you can put into savings or other investments without impacting on your lifestyle. An amount this low indicates the person is spending what they earn; i.e. once the mortgage, bills and essentials are paid, they are using almost entirely what is left for discretionary spending.
If your expenses are higher than your income, you need to make immediate changes to your spending. Even if you have a surplus (as in the above example), you can still make easy changes to reduce your monthly expenses (thus further increasing how much you can save each month).
Looking for Savings
To reduce your expenses, the first place to start is your discretionary spending. Many people simply do not realize how much they spend each month, as very few people actually add this up to see where money is being spent. In the above example, $942.49 was spent in a three month period - equating to $314 per month. Review the purchases you made. Were all the purchases really necessary (e.g. sneakers for your kids) or are there some purchases you could've lived without (e.g A pair of shoes you didn't really need, and will probably wear once or twice). Can you make a coffee at home in a travel cup for your morning commute, instead of buying one five mornings a week? Just one coffee purchased each morning adds up to over $900 per year. This amount will be much higher if you also buy a muffin or snack each time too.
If you would like to save money, I recommend setting yourself a monthly limit for discretionary spending. In this example, you may wish to cut back to $500 per month, and keep the remaining $400+ dollars in a savings account.
It would be quite difficult to keep a running total of your discretionary spending each month, and very time consuming to keep adding up every purchase receipt. You would also need to be very disciplined to make sure you're not tempted to overspend each month. For this reason, I suggest one of the two following solutions:
- Open a separate bank account, and transfer a set amount each month (in this example $500) into it. Use this new debit card for all your non-essential purchases only, and make sure you never use your regular debit card (i.e. for your main bank account) for any unnecessary spending.
- Alternatively, obtain a re-loadable prepaid debit card. Load this up with your set budgeted amount each month to make sure you don't overspend. As in the above example, use this new prepaid debit card for all your non-essential purchases only, and make sure you never use your regular debit card (i.e. for your main bank account) for any unnecessary spending. NerdWallet is a get website to visit for information on prepaid debit cards.
Discretionary Spending—The First Place to Look for Savings
Looking for Household Savings
Let's look at the remaining expenses, and see where savings can potentially be found:
- Education/School—These expenses are savings of $120 per month. This is approximately the minimum you need to save for your child's education costs, aiming for the recommended 1/3 of fees.
- Groceries—A total of $2,200.09 for three months, equating to $733 per month (family of 4). This falls within what is deemed a 'low cost meal plan' for a family of 4. It is unlikely you would want to reduce this further, however keep an eye open for coupons and special offers.
- Insurance—Medical insurance family coverage (out of pocket cost) at $353 per month. If your health insurance is through your employer, your choices may be limited. If you are paying 100% of the premiums from your own pocket, have a look online for comparison websites for potential savings. Be careful to ensure you are comparing like policies for like (i.e. ensure both have the same level of coverage).
- Credit Card Repayments—Essentially a fixed cost, as $60 is likely to be the minimum repayment.
- Mortgage—If you have not re-mortgaged recently, have a look to see what interest rate you are paying, and if the rate is fixed or variable. Compare this to deals currently on the market. If you have a good credit rating, I recommend using a search tool to research if you will be able to save money each month from switching lenders.
- Motor Vehicle—Whilst fuel cannot easily be saved on (unless you are willing to use public transport!) you may be able to save on your vehicle insurance. Many people simply renew their policy each year with the existing insurer. When your policy is due for renewal, use one or more online search tools to find a better deal.
- Utilities—Again, use internet search tools to search for better deals. In this example, the AT&T ultimate bundle offers a good deal. Whilst $50 per month for a cell phone is quite reasonable, have a look when your contract is due for renewal for a lower deal with an alternate provider.
Review Your Position After Three Months
After completing the above process and making savings where possible, complete the process again after three months. Compare this to your original budget, and see how much you have saved. Rolling your cell phone contract back by $10 per month may not seem like much, but when combined with several other savings will really be noticeable in the big picture.
If you find you've been able to make some good savings in your household expenses, and have cut back your discretionary spending too, why not open a savings account (if you don't have one already)? You never know when all the money saved will come in handy in the future.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.