10 Steps To Create The Perfect Budget

Budgeting methods, such as envelope system and zero-based budget, can be incorporated in creating your perfect budget. Here’s how and then some.

Setting up a budget is a prerequisite to a great financial plan. When done right, you’ll have the power to control your own money!

“Control over your own money,” imagine that? As J.K. Rowling said, “It gives you a superpower. It frees you.” Okay, I’m paraphrasing her quote on money, though she might be referring to a different amount. We’ll get back to that.

As mentioned, envelope system and zero-based budget are widely practiced so there’s no harm in incorporating them in creating your own plan. As easy as it may sound though, let’s dissect a ‘perfect budget’ strategy to make it palatable and feasible.

1. Figure out your spending patterns

Your budget should be based on your spending patterns. Have a firm understanding where your money goes before you create a budget. This will eventually lead to reduced spending.

Write down what you spent from the past 3 months. Organise your expenses into categories: essential and non-essential, or a more specific one, however works for you.

You can use the information to consider the opportunity cost of your spending habits, opportunity that will require sacrifices.

2. Determine your actual income

After you’ve figured out the amount you spend regularly, you can now determine your actual income.

Aside from salary, add in other sources of income. These can be sales online, gift cards, coupons, or sales of used goods. It can also include rental income, child support, etc.

3. Allocate your income

Consider the following income allocation:

• Savings — at least 20% after tax income. After you’ve put aside your savings, you can now spend the rest.
• Needs — 50% after tax income
• Wants — 30% after tax income
  

This is a suggested allocation. You can adjust it based on your situation (ex. paying debt). The point is, you know how to prioritise.

4. Prioritise which ‘want’ to spend on

Look at your ‘wants’. Where do you spend too much? Do not fall victim to purchases that add up quickly, like cups of designer coffee and subscriptions.

Cut those that are low on your priority list to maintain what is more important. Perhaps it’s time to cut down on ordering in food to keep your gym membership and stay fit. 

5. Savings goals

The amount you allocate for your savings goals (at least 20%) may be a little too steep for you. It’s alright! Readjust as necessary, depending on your financial circumstances. Remember to set aside savings first before spending.

It ‘s better to do it sooner than later. Before you know it, you’ve saved up for that dream vacation or you have more than enough to use for hospital bills.

6. Pay off debts

Your budget needs extra care if you’ve racked up debt over the years. Whether you’re doing alright,  living pay-to-pay, or completely broke, getting out of debt now should be one of your top priorities. 

7. Separate accounts & automatic withdrawals

Execute your plan as easily as possible. For each of your goals, set up separate savings accounts. Transfer the amount into each account with automatic withdrawals so it’s hassle-free.

It’d be much better if it’s in a different bank than your main checking account so that they’re literally separated.

8. Track your progress

One of the best practices to stay on top of your budget is to track your progress. It’s mostly satisfying to record when you’ve met a savings goal.

9. Be realistic

Don’t be too hard on yourself when you break your budget from time to time. It’s okay! Just get back on track asap.

Remember to balance the process. If you do it too painstakingly, you might break under pressure. If you can’t let go of your splurges, perhaps create a separate budget for it.

Set expectations and always stash away for emergencies.

10. Stick to it

Have fun with the process. It doesn’t have to be stressful. Have a healthy relationship with money to keep your budget.

• keep a monthly track,
• wait a little while before making any big purchases, and
• expect once in a while that you’ll break your budget and that’s alright.
  

If you liked our “10 Steps To Create The Perfect Budget” and took away some valuable and useful information, check our blog space regularly for more tips on how to budget and updates on the best budgeting apps in Australia.