Not long now until it's a new year and a new decade – the perfect time to start cultivating a healthy new attitude to personal finance.

Getting your money under control may sound intimidating, but it doesn’t have to be. As the old saying goes, “if you can measure it, you can manage it.”

Here’s a step by step guide to creating a basic budget, to help you keep track of your money and achieve your goals.

Step one – Goals

What do you want to achieve this year? Do you want to:

  • Buy a house?
  • Start a family?
  • Go on a major holiday?
  • Get out of debt?
  • Make plans for retirement?

Keep your goals in mind when planning your budget, as they may affect the decisions you make with your money.

Step two – Gather money information

The more closely you can track your money’s comings and goings, the more you’ll have to work with when preparing your budget. 

Collect as much information as you can about your personal finances, including:

  • Bank statements
  • Bills
  • Payslips
  • Tax returns

If it’s written down, in paper or online, it may be useful. Every little bit helps.

Step three – Work out your income 

How much money do you take home each month? How about over a whole year?

Finding your income could be as simple as checking your bank statements or payslips from your job.

You may also receive income from other sources, such as earnings from a side business, renting out an investment property, interest on a term deposit, or dividends from shares. Make a note of which income streams are regular, and which ones are irregular.

For example, you may have a day job, but also freelance on the side, which could complicate your budgeting. The wages from a regular job should stay the same, but your freelance income will depend on how much work you have and the fees you charge per job.

For simpler budgeting, consider working out an average estimate for any irregular income.

Step four – Work out your expenses

Once you have money, where does it go?

Take a look back through your bank statements and receipts to work out how much money you typically spend in a normal month. If you’re making a budget in January, remember that December isn’t exactly a normal month, thanks to holiday spending!

Consider categorising your expenses like so:

  • Needs: Everything you can’t live without, or realistically avoid paying e.g. rent or mortgage payments, food, utility bills.
  • Wants: The fun stuff you spend money on, but could do without if you had to, e.g. pay TV and streaming service subscriptions, eating out, impulse purchases.
  • Savings: Money you stash away for a rainy day.
  • Debts: Paying off outstanding loans or credit card debts.

Just like your income, note which expenses are regular and irregular. For example, if you pay the same amount for streaming TV every month, that’s a regular expense. If you bought a couple of pairs of shoes last year, those are irregular expenses (unless you go through a LOT of shoes).

Some regular expenses are for irregular amounts. For example, your gas and electricity bills may be due every quarter, but their cost will likely vary by your seasonal usage. Similarly, the cost of your supermarket shopping may vary from week to week, depending on what you’re buying. In cases like these, consider working out an average to include in your budget.

Also consider leaving some extra room in your budget for surprise expenses, such as car repairs or medical bills. One rule of thumb you could use is to add a 10 to 15 percent buffer to your total estimated expenses. You may also want to review the last five years of car repairs and medical bills, to get an idea of the average annual cost.

Step five – Compare your income to your expenses

If, on a monthly or yearly basis, you receive more income than you spend in expenses, then your budget is in surplus. This is often a good thing, as there’s money left over that could be put towards your goals.

If you spend more money per month or per year than you receive in income, then your budget is in deficit. This could indicate a problem, which may need to be addressed to bring your finances back under control.

Step six – Work out what needs to change

If your budget is in deficit, think about what steps you can take to get things back in the black.

You could:

  • Cut expenses: Run through your expenses and get ready to make some hard choices. Pay special attention to both your irregular expenses and your ‘wants’ to work out what you can cut down or cut out. You may be surprised by how much you can spend per year on the little things!
  • Switch and save: You may be able to save money on both your ‘needs’ and ‘wants’, simply by switching to more affordable options. You could change your electricity or gas provider, swap supermarkets, or refinance your home loan with a new bank. If you’ve been putting this off due to the hassle, remember that it may be worth it in the long run.
  • Clear debts: If a chunk of your money is currently going toward a personal loan or outstanding credit card debt, work out if you could put even more of your money towards paying off this debt. Making extra repayments may mean some short-term pain, but once your debt is cleared, the income you’d been setting aside for repayments can instead be put to work elsewhere.

Even if your budget is already in surplus, that’s no reason to rest on your laurels. Think about where the extra money could best be used to help you achieve your goals: 

  • Put it in a savings account or term deposit to earn interest and grow your wealth while you wait for a rainy day
  • Add it to your superannuation to help grow your retirement nest egg
  • Make extra repayments on your home loan (if you have one) to pay off more of your property, which can in turn help reduce your interest charges
  • Invest your spare money in shares or other assets

When you’re working out what to do with your money, keep your financial goals in mind and make your decisions accordingly.

Step seven – Keep it up!

Simply making a budget won’t be enough to turn your relationship with money around. You also need to put your plan into practice.

Life is unpredictable, and your circumstances will almost certainly change over the course of the year. Stay flexible, and be ready to review and your budget every three to six months, to account for new changes and check that you’re still on track to achieve your goals.

Hints and tips

Be realistic

It’s natural to hope for the best-case scenario. Unfortunately, it doesn’t always come up.

Try not to underestimate how much you spend or overestimate how much you earn. Sometimes it’s better to hope for the best but plan for the worst.

Use apps and other online resources

MoneySmart has a budget planner that can take a lot of the hard work out of organising your money.

If you have a smartphone (chances are good you’re reading this on one), then you have options available to help you manage your money.

Check if your bank has an app that offers more than just basic online banking. Several major banks offer apps that can track your spending and savings goals, or alert you if you go over a self-set spending limit.

There are also apps available that can help put your digital “spare change” towards your savings or investments. For example, if you were to buy a large coffee in the city for $4.60, and pay with your debit card or phone banking, the app can “round up” the transaction to $5.00 and put the spare 40c into a savings account. It may not sound like much, but in time it can add up. Similarly, there are apps and reward programs that can help you get cash back on your shopping.

These apps include, but aren’t limited to:

  • ATO app and myDeductions
  • Carrott
  • Cashrewards
  • Everyday Round Up
  • Expensify
  • Finch
  • Free2Spend
  • Frollo
  • Goodbudget
  • Mint
  • MoneyBrilliant
  • MoneyPad
  • Moneytree
  • Pocketbook
  • Pocketsmith
  • Quit That! (helps you give up expensive habits, like smoking or drinking)
  • Raiz (formerly Acorns)
  • ShopBack
  • Sipora
  • Spendee
  • YNAB (or You Need A Budget)

Ask for help

If things aren’t going well, or you’re struggling to keep track of your finances, there’s nothing wrong with asking for help.

Consider contacting an accountant or financial counsellor that can offer personal advice on how you can best manage your money. Check their qualifications first, to be sure you don’t end up with a less than reliable budget management business.

If you’re struggling with debt, consider contacting the National Debt Helpline on 1800 007 007.