This month I want to write about the importance of understanding finances and budgeting. BORING I hear some of you groan, but it’s YOU who should read on! Unfortunately, whether you like it or not the world runs on money, economists call it the oil of the world. So best to keep your piece of the pie as yummy as possible!
What is the importance of budgeting?
What’s the point doing something if you don’t know why? When you begin budgeting you can have many reasons and great results. Some of these include:
- To know the truth about your financial state so you don’t get a scare or live beyond your means
- To use your money wisely so it better reflects your priorities and wants
- To save for something you really want maybe a ticket overseas, computer, car
- So you’re not getting ripped off by banks, other big institutions
Ok, so budgeting is important but how do I do it?
Keep a record of what you spend. There’s lots of ways of doing this, I keep a spreadsheet on my laptop but I use to write spending into the back of my diary. Some people keep all their receipts, others only use cards so they have a record online. However you do it you have to keep a record of where your money is going for budgeting and also in the future for tax.
I always start a budget by breaking down the cost of basic living weekly, fortnightly or monthly, whichever period works best for you. Refer to the useful links to get a downloadable or printable template to start budgeting with!
Firstly ask yourself what do you need, and how much do these cost. I have found some general ‘rules of thumbs’ for these. Rent or housing costs should equal about one third of your gross income (before tax). Utilities bills such as gas, water, electricity average about $2 to $3 a day in usage costs only, plus the annoying charges they seem to add on for no apparent reason, usually between $20-$30 a quarter. Transport is a real killer that lots of people forget. Tram tickets for students average to be about $3 a day, whilst cars can average $10 to $18 a day after insurance, servicing and petrol. Mobile phones and internet connections are always big killers for students’ hip pockets considered the number one cause of student debt. Generally you should not spend more then 10% of your net income (after tax) on these. Groceries are another big expense which can be difficult to calculate. I try to aim to spend no more then 20% of my net income on them. As students this probably doesn’t leave you with much! But if we can budget right we should have enough for the suggested 10% to 20% in savings.
The next thing is to look at what do you want to do? How much would you like to spend on going out, presents, clothes? What is necessary to keep you sane? Maybe you want to go to the movies once a week for $12 or out to dinner for $20, see a gig or get a few drinks at the local pub. Add these costs onto your budget too and see how realistic you’re expectations are.
An example of a typical student fortnightly budget might look like this:
Income - $680 net a fortnight
|
Work
|
$450
|
Net
|
Centrelink
|
$230
|
Net
|
Outgoings - $610 a fortnight
|
Rent
|
$290
|
Approx. one third of gross income
|
Bills
|
$30
|
Between $2 - $3 a day
|
Public Transport
|
$40
|
Between $2 - $3 a day
|
Phones & Internet
|
$35
|
Less then 10% of gross income
|
Groceries / Food
|
$155
|
Less then 20% of gross income
|
Going out
|
$60
|
Approx. $30 a week
|
Savings - $70 a fortnight
|
Between 10% and 20% of gross income
|
Not much room to move is there? This is why savings is important. If you lived on a knife edge like this and didn’t save you would have a very fragile lifestyle. Any little problem like an employer paying late, getting an infringement notice or going over on your phone bill will mean you won’t be able to make ends meet.
After you’ve done you’re budgets some ways of improving it should become clearer. In terms of spending maybe you need to change your mobile phone arrangements, find cheaper rent, eat in more or get rid of the car. Or maybe you find that you’re living comfortably within your basic needs and you are wasting lots of money on unnecessary things such as daily red bulls and trashy magazines? Maybe this money can be spent on bigger and better things instead.
On the other side of the coin maybe you need to earn more. This doesn’t necessarily mean you need to work more. Changing your pay structure can help, for instance, if you are a casual employer and on Centrelink re-structuring your contract to a part time basis can even out your pay over holidays and sick days so you can claim more from Centrelink fortnightly. Or instead of working Saturdays try and work Sundays on a higher hourly rate. Or refer to last month’s magazine and ask for a pay rise!
Never the less, a budget should highlight that once daily needs are met you must prepare yourself for larger one off costs such as car insurance, a special friends birthday present, tickets to an expensive concert or a new piece of furniture etc. These things must therefore be saved for in advance, not via the credit card approach.
How to save
To save successfully it is important to have a goal. Ask yourself, how much do I want to save and by when i.e. ‘I want to have $1,200 by Christmas’, then work backwards. Ok, if Christmas is 26 weeks away I will have to save $46 a week,
26 x $46 = $1196.
But this is EVERY week, if you are likely to miss a few weeks over the next 6 months allow for this and factor it into your weekly amount say an extra $10. Therefore,
26 x $56 - $224 (4 missed weeks) = $1232.
If you currently have debt this should be your number one priority to save for and pay off. As a young person I often hear old people say, ‘In my day we didn’t live beyond our means and only bought things when we had the money in the bank.’ Well this is good in theory but our generation realizes that life is short and we take opportunities when they arise. This doesn’t mean you will never pay it back, it just means you have chosen to enjoy it now and pay for it later. When the ‘later’ comes be sure to pay your debts off from the one with the highest interest first. Many people make the mistake of paying the largest amount off first. The interest you save by paying off a higher interest card first will enable to you pay the lower one of faster later.
