Budgeting

On the second Tuesday of May each year, the Commonwealth Treasurer stands up in Parliament to deliver the Federal Budget. It’s an event of enormous importance to the nation, with the media and public alike paying close attention before and after the big night.

Your household budget might not have the same national importance, but from your perspective, it's far more critical to your financial wellbeing than anything the Treasurer announces.

At its heart, a personal budget focuses on two things: your income and your expenditure. The goal is simple: ensure your income exceeds your outgoings to get ahead financially. Yet, many of us struggle to know exactly where our money comes from and where it goes. Budgeting is the process of tracking this flow of money to understand your financial habits and plan for the future.

The benefits of budgeting are immense. It empowers you to make smarter financial decisions by showing you what you can truly afford. Sometimes, it delivers tough news: you might need to cut back. But often, it brings pleasant surprises. Many people discover they have more room to breathe, ramp up their investments, or boost their superannuation contributions—once they've crunched the numbers.

Viewed from another angle, a budget can show you how much you need to earn to support the lifestyle you desire. For some, this has been the catalyst to seek a higher income after calculating their present and future cost of living.

Either way, budgeting provides vital information for managing your finances. Knowledge is power, and budgets provide powerful knowledge. 💡

The best part? In today's digital age, budgeting is easier than ever. Forget dusty ledgers; if you can use a smartphone or a computer, you have all the tools you need. From simple spreadsheets to sophisticated apps that link directly to your bank accounts, technology has made tracking your finances incredibly straightforward.

This e-book is designed to guide you, step-by-step, in creating your own income and expenditure budget, putting you firmly in control of your financial future.

We hope you find it valuable, and please feel free to share it with anyone who might benefit.

Do you know what your income truly is? You might be surprised to find that many people don't. Then again, you might not be surprised at all!

Part of the reason is that "income" can mean different things. For instance, if your employer pays you a salary of $90,000, they see that as your income package. However, that's your gross income, before tax. Based on current tax rates, a pre-tax income of $90,000 would incur about $19,588 in tax and Medicare levy. This means you only take home around $70,412. From a budgeting standpoint, this after-tax figure is what really matters.

Superannuation is another layer. Your employer must contribute a percentage of your earnings to your super fund. This rate is currently 12%. On a $90,000 salary, that’s an additional $10,800 your employer pays towards your retirement. While it's certainly part of your total remuneration, it’s not money you can spend today, so we don't include it in our working budget.

For your personal budget, we focus on what's called ‘purchasing power’. This is the actual amount of money you have available to spend, save, or invest. So, a pre-tax salary of $90,000 results in purchasing power of about $70,412 per year. In this e-book, when we say ‘income’, we mean your purchasing power—your take-home pay.

Sources of income

For most people, the main source of income is their job. However, there are many other forms that should be included in any budget.

Beyond traditional employment, think about any other money that regularly comes in. This could be from investments (like share dividends or rent from a property), government benefits, or child support payments. In today's economy, it's also common to have income from a 'side hustle', freelance projects, or the gig economy—driving for a rideshare service or selling crafts online, for example. All of these should be included.

Please note, we do not include potential lottery winnings as a source of income! (But we do include the tickets as an expense in the next chapter…)

Calculating your income

To calculate your total income, you simply need to add up the cash you expect to receive from all your sources. The table below shows an example.

As you can see, the income streams arrive at different times. To make sense of it all, we need to convert everything to the same time period.

We recommend using a monthly period, as most regular expenses like rent, mortgages, and bills are paid monthly. This consistency makes it easier to compare your income with your spending. To convert different pay cycles accurately:

• Weekly to monthly: (Weekly amount × 52) ÷ 12
• Fortnightly to monthly: (Fortnightly amount × 26) ÷ 12
• Quarterly to monthly: Quarterly amount ÷ 3
• Yearly to monthly: Yearly amount ÷ 12

Here is the same table, with all income converted to a monthly figure.

Now we have a clear, single figure for the money available to spend each month. We encourage you to create your own version of this table to calculate your monthly income.

Last year’s or this year’s income?

Strictly speaking, a budget is a plan for your future income and expenses. Where possible, use figures for the coming year. If you know you're getting a pay rise, use the new amount.

However, some income sources can't be known for certain. Investment returns fluctuate, and freelance or gig economy work can be unpredictable. In these cases, using an average from the last 3-6 months often provides a more realistic estimate than relying on a single month or the entire previous year. The goal is to use the most accurate and representative figures you can.

Hopefully, working out your income was an insightful exercise. Now for the other side of the coin: tracking your spending. We'll be honest, this part can feel a bit more confronting. Most of us have only a few sources of income, but money seems to flow out in dozens of different directions.

The key to a good budget is getting a realistic handle on your expenses. Let's break down how to do it effectively in this digital age.

Fixed vs. Variable Expenses: Know What You're Dealing With

Before we start tracking, it's useful to understand the two main types of expenses:

• Fixed Expenses: These are the predictable costs that stay the same each month. Think of your rent or mortgage, loan repayments, insurance premiums, and most subscriptions like Netflix or your gym membership. They are the foundation of your budget.
• Variable Expenses: These costs change from month to month based on your activities and choices. This category includes groceries, petrol, eating out, entertainment, and shopping. This is where you have the most control to make changes.

A good budget accounts for both, ensuring the essentials are covered while giving you a framework for your discretionary spending.

How to Track Your Spending in the Digital Age

In the past, budgeting meant hoarding receipts and manually entering every purchase into a ledger. Thankfully, it's much easier now.

The first step is to gather your spending data from the last two to three months to get a representative sample. For bigger, less frequent costs, you may need to look back over a full year. Here are the most effective ways to do it:

1. Use a Budgeting App
This is by far the easiest method. Apps like Frollo, WeMoney, or your own bank's built-in budgeting tools can securely link to your bank accounts and credit cards. They automatically download your transactions and categorise them for you. It does most of the heavy lifting, giving you a clear, visual breakdown of your spending habits with minimal effort.

2. Analyse Your Bank Statements
If you'd rather not use an app, your online banking portal is the next best thing. You can download your statements for the last few months (most banks allow you to export them as a CSV or spreadsheet file). Once in a spreadsheet, you can sort transactions by retailer to group them into categories (e.g., all your Woolworths and Coles shops go under 'Groceries').

3. Track Cash and Other Payments
While we live in an increasingly cashless society, you might still have some cash expenses. The simplest way to track these is to use a notes app on your phone to quickly jot down what you spend. Don't forget to account for repayments to Buy Now, Pay Later (BNPL) services like Afterpay or Zip. These can be easy to lose track of, so treat them as a distinct expense category.

Putting It All Together – Your Spending List

Now it's time to compile all your spending into a master list. The goal is to create a comprehensive list of what you spent money on over the last year, and then calculate a monthly average.

Look over your app data or statements for the past 12 months to catch those lumpy, irregular costs like car registration, insurance renewals, and holiday spending. For these annual costs, simply divide the total by 12 to get a monthly figure to set aside.

Here is an example of what your completed list might look like. We have used more up-to-date categories and figures that are more reflective of current living costs.

Forecasting Next Year’s Spending Budget

With a clear picture of last year's spending, you can now build a forecast for the year ahead. For each item, make a realistic estimate of what you'll spend. Add any new expenses you anticipate, like school fees for a child starting school or a new car loan.

If you don't know the exact future cost, use last year's figure as your baseline and adjust it. Many costs rise with inflation. For example, private health insurance premiums and council rates tend to increase each year, so adding 5-7% to last year's cost is a sensible move.

The basic rule is to be realistic, but if you're going to err, it's better to slightly overestimate your costs. That way, any surprises are likely to be pleasant ones.

You've done the hard work of tracking your income and expenses. Now it's time for the moment of truth. This is where you see your entire financial picture in two simple numbers and find out if you are operating with a surplus (a 'profit') or a deficit (a 'loss').

To find out, you simply subtract your total monthly expenses from your total monthly income.

Let's use the figures from our example in the previous chapters:

A positive number means you have a surplus, which is fantastic news. A negative number means you have a deficit, which is a clear signal that some changes are needed.

Planning for Lumpy Expenses and Smoothing Your Cash Flow

Your budget might show a monthly surplus, but that doesn't mean you'll have extra cash every single month. Life includes large, irregular bills—like car registration, insurance premiums, or council rates—that can disrupt your cash flow.

Instead of being caught off guard, plan for them. A great modern strategy is to create one or more "sinking funds". This involves:

1. Adding up all your expected annual expenses (e.g., $1,800 for car costs + $3,000 for a holiday = $4,800).
2. Dividing the total by 12 to get a monthly amount to set aside (in this case, $400 per month).
3. Setting up an automatic transfer of this amount each month into a separate, high-interest savings account.

When the big bills arrive, the money is already there waiting. This smooths out your spending and turns unpredictable costs into manageable monthly amounts.

What to Do If Your Budget Shows a Surplus

Congratulations! A surplus means you have money available to actively improve your financial position. This extra cash is a powerful tool for building wealth. The primary goal is to use it to grow your net assets (your assets minus your debts). Here are the best ways to do that:

• Build an Emergency Fund: Before anything else, aim to save 3-6 months' worth of essential living expenses in an easily accessible savings account. This is your financial safety net against job loss or unexpected crises.
• Pay Down High-Interest Debt: Tackling debt on credit cards or personal loans is a guaranteed investment. Paying off a card with a 20% interest rate gives you a 20% return on your money.
• Invest for the Future: Once your emergency fund is healthy and high-interest debt is gone, you can start investing. This could involve making extra contributions to your superannuation or building a diversified portfolio of shares and Exchange Traded Funds (ETFs).

Deciding on the best strategy depends on your personal goals and circumstances. A conversation with a financial adviser can help you create a clear plan to make the most of your surplus.

What to Do If Your Budget Shows a Deficit

Seeing that your expenses are higher than your income can be stressful, but your budget has done its job: it has given you the clarity needed to take action. A continued deficit is unsustainable, so it's important to address it right away.

There are two sides to the equation you can work on:

1. Reduce Your Spending
Your detailed budget is now your roadmap for finding savings.

• Start with variable costs: These are the easiest to change. Can you reduce spending on takeaway food, entertainment, or subscriptions you don't use often?
• Review your fixed costs: You may be able to lower these by shopping around. Compare providers for insurance, electricity, and your mobile/internet plan. See if you can refinance your mortgage to a lower interest rate. Small changes here can lead to big annual savings.

2. Increase Your Income
Look for opportunities to boost your earnings. This could mean:

• Negotiating a pay rise at your current job.
• Developing new skills to apply for a promotion or a higher-paying role.
• Turning a hobby or skill into a side hustle for extra income.

Often, a combination of reducing spending and increasing income is the most effective approach.

The most important thing to remember? Don't just do nothing! Your budget is the first step towards taking control.