Does the word “budgeting” scare you? Do you feel ‘shaken’ to your core? Perhaps your brain automatically changes the subject in your inner monologue when the ‘B’ word is spoken. You are not alone. According to Compare the Market, more than half of Aussies admit their savings are going backwards, and less than a fifth don’t even budget at all. That’s why we’ve put together these essential Personal Budgeting Tips to help you get on track.
In these fragile financial times, it is more important than ever to be aware of our own financial position and make good spending decisions. Do I really need to eat out four times a week? Can I cut back on a streaming service? Surely instant coffee isn’t that awful?
When we start with a new client who is tired of constantly chasing their tail in managing personal cash flow, we ask them to review their current spending. Although this seems like a gruelling task, it is essential in order to lay a strong foundation moving forward. It’s best to rip the band-aid off and get stuck in. Here’s what you will need:
- Printed out Bank Statements for the last 6 – 12 months
- 3 coloured highlighters
- Determination
- A mirror for when you need to take a long hard look at yourself… (sorry am I being too brutal already?!)
Step 1: Categorise Your Expenses
Colour 1: Highlight all the essentials (and I mean ESSENTIAL) living expenses
- Rent / Mortgage Repayments
- Utility Bills & Car Rego
- Healthcare & Insurances
- Family expenses (childcare, sport, tutoring, school fees, pet vet fees etc)
- Clothes
- Groceries
- Petrol & Transport
Second Colour: Highlight all your Lifestyle living expenses
- Eating out including coffee runs
- Streaming Services
- Luxury fashion items
- Alcoholic beverages & Tobacco
- Gifts
- Appliances
Final Colour: Highlight all the ‘treat yourself’ moments
- Holidays
- Special events out
- New shoes you wanted
There should not be any items left unaccounted for on your statements now. Once you pick yourself up off the floor and see the dollars that have been flying out the door, it is time to consolidate and decide what you SHOULD be spending your money on.
Step 2: Calculate Your Monthly Averages
Next, I’d like you to add up all the items from your expenses (still separated into their three categories) and divide them by the number of months that you have looked back through. For example, if you have 6 months of statements divide the whole number by 6, if you have a year’s worth of statements, divide by 12. Do it for each different colour group. This will give you an indicator of what you should allocate monthly to your living expenses framework. These Personal Budgeting Tips will help you see where your money goes and where you can make adjustments (see how I didn’t use the ‘B’ world there!).
Step 3: Set Up Your Accounts
Just the same as when using Profit First for your business, the key to success is in setting up the five (5) separate bank accounts:
- Income accounts – where all your income comes in
- Recurring payments account – for your living expenses
- Day-to-day – for your lifestyle expenses
- Vault Account – or Rainy Day account, the ‘oh crap’ account
- Debt Destroyer or Savings Account
Once you have played around with your percentages and expenses, you can start allocating money that comes into your income account. Whether you are paid monthly or weekly, as soon as the money comes in, allocate it based on your percentages. These Personal Budgeting Tips will help ensure you manage your finances effectively. Sure, some tweaks may be needed in the initial months, or perhaps you need some assistance in working out your allocated percentages, we can help with that.
Step 4: Creative Thinking and Adjustments
This is where your creative thinking will need to come into play. To allocate money into all 5 accounts you will likely need to cut back things from your ‘day to day’ expenses to put money into your vault or savings account. Perhaps it is something simple, like pausing some of the streaming services you have been paying for, and just keeping one active at a time? Instead of purchasing multiple coffees from the cafe each day, cut it back to one. Maybe your savings account is to take the kids to Disneyland, or maybe it’s to buy a new car. Putting money aside gradually is the best way to boost your savings long term.
If you are interested in setting up Profit First for your personal finances and would like expert guidance, please get in touch. As a Mastery level certified Profit First Professional, I live and breathe this system. I can personally attest that it works for business and personal finances alike.
