Budgeting is an important step to taking control of your finances and achieve goals like saving, investing and becoming financially secure. Best of all, budgeting is simple.
When it comes to many of life's goals, like saving for a first home, paying off the mortgage, growing investments or putting aside money for retirement, we just never seem to have enough money. It's easy to think our financial problems would be solved if we earned a fatter pay packet but that's not always the case.
Only one in two know where the money goes
Achieving financial goals starts with having control of your cash – yet the majority of Australians don't really know where their money goes.
Government research in 2012 found the average Australian household spends around $69,000 annually on general living expenses. Yet only around one in two people know exactly where the money goes.
That's where budgeting is so useful. It's the single best way to regain control your money because your household budget will show if you are spending more than you earn, and highlight areas where you can cut back spending without too much pain.
Your budget can also let you see firsthand how much those 'bad' habits are costing - like regular takeaways, or gym memberships that aren't used.
Best of all, drawing up a household budget is something everyone can do.
Let's break the process down step by step.
As easy as 1...2...3...
The first step in drawing up a household budget is to identify all your after-tax income – from wage or salary payments and government support payments to returns on investments like interest earned on savings accounts.
Step two is to list and total your total spending. This is the hard part because we have a habit of under-estimating what we spend. Some apps can help here – like the government's free TrackMySpend app. Or just keep a spending diary for a week or two.
The key is to identify all your spending. In fact it pays to sweat the small stuff because regular low-value payments can quickly add up to significant sums.
The third and final step in your budget is to subtract total spending from your overall income.
Take a look at the simple budget planner developed by Mortgage Choice. It makes it much easier to write up a budget.
How to use your budget
If your budget shows you are spending more than you earn, it's time to take serious action - take a look back through your budget to see areas where you could reduce spending and save.
If your budget shows you are spending less than you earn, give yourself a pat on the back – and then look at sensible ways to use that money. This spare cash should be added to a savings account, tipped into your super fund, used to fund an investment property or to pay more off your home loan.
The key is to take action to make this money work harder – don't leave it in your wallet or everyday bank account where it's as good as spent.