21 March 2022 | By Lending People
3 easy steps to make a budget
It’s a boring word, but having a simple budget can give your finances a massive boost, and have you feeling pretty chuffed with yourself.
There’s nothing sexy about the word ‘budget’. It screams accounting, accountants, numbers and scrimping. Like that friend who, when out for a meal, would tell you they can’t pay because they’re ‘on a budget’. Ugh.
But that’s them doing budgeting wrong. It’s not about telling everyone you can’t afford something, it’s taking control of your finances and making sure all your money is working for you where it needs to be.
Getting started on a budget can be a little daunting, so here are 3 steps to make an easy budget to help you reach your goals.
1. The 50/30/20 rule
You may or may not have heard about this one, but it’s a great starting point. In an ideal world, you want to split your weekly/fortnightly/monthly (pick what works for you) income into three groups. The first and most important group is ‘essentials’, then ‘spending’ and finally ‘debt payments/savings’. Let’s break these down:
- Essentials (50%)
This is your rent/mortgage, bills, groceries, transport/fuel, childcare, and minimum loan or debt repayments. This can be the biggest hurdle for people, as they think this needs to be exact – truth is, it doesn’t.
Some factors are easy to get, like your rent or mortgage costs. Others can be guesstimated, like groceries or fuel. You don’t have to trawl through your receipts or bank statements, just pick a number that sounds right and start from there. You can always change it down the line. This should (hopefully) work out to be about half of your income.
- Spending (30%)
This covers the things you like having, like subscriptions, travel/holidays, entertainment, drinks and meals out. You don’t need to work out each one, it’s just taking a straight 30% out of your income. You can do this by multiplying your income by 0.3 and writing the number down.
- Debt payments/savings (20%)
If you have debt, you’ve already covered your minimum repayments, so here’s where you can clear it quickly. Paying 20% (income x 0.2) of your debt can help you become debt-free much faster. If you’ve cleared/don’t have any debt, this 20% can go towards your goal(s), whether that’s a holiday, a car, a house or anything else you want.
2. It doesn’t have to be exact
Different people have different circumstances, so it’s important to remember the 50/30/20 ‘rule’ is just a starting point. You can move the numbers around to suit your circumstances, this is just a guide to help you.
3. Putting your budget into practice
Once you have your numbers, it's time to make it work. Again, you don’t have to record each transaction you make – that’s tedious and boring. Instead, make your bank account do the hard work for you.
Most online banking apps or web pages let you open a new account almost instantly, so separate out your money. Have one account that handles your budget, another for your spending and a third for your debt payment/savings.
All you have to do then is set up some automatic payments. You can set these up to suit you, moving money into your spending and savings accounts on a daily, weekly, fortnightly or monthly basis. And that’s it, you now have a working budget.
- (Optional) get a budgeting app
This step is completely up to you. If you’re someone who likes to see bars and charts and visual things, getting a budgeting app can be very helpful. There are loads out there, some free, some paid for, some that will connect to your bank and others that you can access from your phone or online.
The ones that connect to your bank aren’t usually free, and with this style of budgeting, aren’t really necessary. If you’re giving yourself a set amount in every automatic payment (i.e. 30% of your income for spending), that’s all the info you need to easily plot your progress in an app, as it’s likely a set number each time.
The benefits of budgeting
While the setup can sound a little daunting, it’s actually easier than it looks. The hardest part is just deciding to do it.
But once you have a budget in place, it can really empower you. You know exactly where your money is going, how much you have, and how close you are to your goals. That sort of control will let you focus on what matters, like paying off debt, saving for a house, or living the life you want.
And since you know how much spending money you have, and pay yourself daily/weekly/etc, you won’t be that person saying you can’t afford something because you’re on a budget. 😉
This blog is provided for general information purposes and is not a recommendation you enter into or exit any particular loans or insurance policy. Information on the website does not consider your particular circumstances, including your objectives, financial situation or needs. We recommend you seek advice from a financial adviser before taking any action as appropriate. The Lending People Limited (FSP240365) is a licensed financial advice provider and can provide advice on some types of personal loans. Find out more about The Lending People and how we may be able to help you.