If you want to stay on top of your finances, a budget is a game-changer — but the best budget in the world won’t work if you don’t actually follow it. Your budget doesn’t need to be restrictive, but it does need to suit your situation, preferences and habits. Think of it as a plan that tells your money what you want it to do.
In just two years Serena Ryan has gone from maxing out her credit cards to the tune of $16,000 to being credit-card-debt free, all thanks to prudent budgeting.
Serena, 43, lives in south-western Sydney and her podcast, Adding Up, documents her journey to get better at budgeting.
“In 2018, I took stock of our financial situation. I decided to remove debt from our life and create financial freedom. I didn't want to work harder. Instead, I decided to be creative with our budget and make the most of what we have,” she explains.
Initially, Serena did an audit of her expenses and set a challenge to feed her family on just $100 a week.
“Every week I check what we have in the pantry and fridge and write a shopping list. Next to every item I write what I am willing to spend on it. I make sure the total doesn't go over $100. When I’m shopping I keep a running tally of what goes in the trolley to make sure I don't go over budget. I only withdraw $100 in cash, and I’ve taken all my credit cards out of my wallet.”
While this approach doesn’t work for everyone, being mindful of how much you spend at the supermarket can be a budget-buster.
Another option is to challenge yourself in small ways to find cheaper alternatives, which exactly what the Ryans did to make the budget they had work harder.
“I have also cancelled Foxtel. We now have Netflix instead, which only costs $13.99 a month versus more than $100 a month for Foxtel. I also cancelled my gym membership and instead go to the park and walk or run, and have a home gym set up,” she explains.
“We’ve also found ‘hidden’ money to reduce debt. For example, we make weekly payments on our home loan instead of one big monthly repayment. Last month I used money we had accrued on our home loan redraw facility to make a bulk payment of $790 on the last of three credit cards.”
One of the reasons Serena’s approach is so successful is that she’s consistent, which is the absolute key to successful budgeting. It’s all about never taking your eye off the ball.
There may be a period of readjustment when you start budgeting—but if you’re consistent it will soon become second nature and can have benefits far beyond having more cash in your account. In fact, financial control, along with relationships and a sense of purpose, make up the ‘golden triangle of happiness’ identified in research undertaken by Deakin University for the Australian Unity Wellbeing Index.
Serena’s technique is based on the “cash-only” budget. As the name suggests, you only spend the cash you have in your wallet. This is great if you’re disciplined about not taking out extra money, but there are also plenty of other ways to budget.
1. Incremental budgeting
What is it? Incremental budgeting is the method most people think of when it comes to budgeting. In this approach, you review of all your expenses and income from the previous year and put this information into a spreadsheet; with expenses in one column and income in another. (The best place to get this information is from your bank statement, so you have an accurate picture of your incomings and outgoings.) Then you use this data to formulate your budget, aligning your budget frequency to your pay cycle, whether that’s weekly, fortnightly or monthly.
Who does it suit? If you have an ongoing love affair with Excel and like digging into data, then this budget is for you.
Pros and cons. Incremental budgeting is a great way to identify expenses where you can achieve some cost savings. Holidays and incidentals like drinks with friends, or that sneaky 3pm snack, are good examples.
The benefit of this budgeting technique is that it’s based on real information. But it also requires self-control, and this can be the biggest hurdle to success. If you think this might be an issue for you, it’s a good idea to stash a small amount from each pay cycle into a slush fund, so you can splurge from time to time without going outside your budget.
2. Zero-based budgeting
What is it? Zero-based budgeting is the opposite of a traditional budget. Rather than starting with your real income and expenses and designing a budget around these figures, you apportion funds to different expenses based on how much you expect them to cost. For example, you may decide to allocate $2,000 a year to your energy bills, $30,000 a year to rent or mortgage repayments, and $8,000 a year to food.
Who does it suit? The hardcore budgeter, if you’re committed to saving up for something, such as a house deposit or a trip to Europe, this budget will keep you on track.
Pros and cons. With this method, you know exactly what you are going to spend your pay on, down to the very last cent. The benefit of this method is that you give each dollar a purpose, which is particularly helpful if you’re paying off debt. But there’s also very little wiggle room to make mistakes and it’s easy to incorrectly assign money to your expenses. You may find you need to spend more money on certain expenses or that you don’t need to spend as much on others, which can misalign your budget and can make it less accurate than other methods.
3. Balanced money budget
What is it? Using the balanced money budget technique — popularised by the likes of the Barefoot Investor — you split your money into different “buckets”. You might decide to spend 50 per cent of what you earn, divided further into 25 per cent spent on “wants” and 25 percent spent on “needs”. Then you might save 25 per cent of the balance and invest the remaining 25 per cent.
Who does it suit? If you want to know where your money is going, but would like some flexibility, then this budget could suit you.
Pros and cons. The advantage of this technique is that it ensures you’re saving and wealth building. But it can also be unrealistic and doesn’t allow for unforeseen events, such as having to buy a new car if your existing vehicle dies unexpectedly.
There are lots of different budgeting techniques, which all have different pros and cons. If you find one method isn’t working for you, don’t give up. Try different methods until you find a budgeting strategy that suits. The trick is to be consistent, and to have some room in the budget in case unexpected expenses crop up.
And the result? A plan that helps you to live within your means, builds savings, but still have enough for the odd indulgence from time to time. Sounds good to us.