How to create a budget

By Tara McCabe ·

A budget is really handy to have, whether you constantly find yourself low on funds or just never seem to be able to save up enough cash to pay for that shiny new kitchen appliance you’ve been coveting. 

Keeping track of what you’re spending is the best way to keep on top of all your bills and still be able to enjoy the finer things in life, like taking a yearly holiday or getting popcorn with your weekend cinema trip. But if you’re not sure how to even get started when building a budget, don’t worry. We’re the budgeting experts, and we’ve laid it all out for you.

First of all, what is a budget?

You might be wondering what a budget even is? A budget is simply a forecast of your earnings versus your expenses over a set period of time, say a week, a month or even a year. Having a budget allows you to review how much of your pay check you might be spending on rent, bills, groceries and even entertainment and then make adjustments so that you’re not spending outside your means and you can hit your savings goals.

Where to start: the building blocks of budgeting

Before you dive into calculations and start analysing your latest bank statements, the first step is to decide how you want to layout your budget. Getting this step right is crucial to the success of your budget Some great options are:

  • A neat spreadsheet. If you love laying things out in an orderly fashion then you may like to build a spreadsheet to keep track of your income and expenses.
  • Good old fashioned pen and paper. It could be as simple as that, if maths and formulas aren’t for you then try drawing up a budget in your notebook. Top tip: dedicate a notebook to your budget - don’t mix it in with other notes or you’ll lose track!
  • Download a budget app. There are so many great budgeting apps to choose from and if you need help picking one, here’s our review of seven of the best.
  • Check out Mozo’s budget calculator. It’s simple to use and will help you break down all your different expenses, so you don’t forget anything.

Next, think about what time period you want your budget to cover, and whether you’ll work to a weekly, fortnightly, monthly or annual budget. Some important factors to take into consideration are:

  • How often you get paid. If you receive your pay check weekly then you may want to set up a weekly budget plan so that you can plan to stash money away every time you get paid.
  • How often you pay your bills or loan repayments. If you have multiple bills due monthly then you may want to review your outgoings once a month, so that you know exactly how much you have left over after you’ve paid everything, for either fun stuff or savings.
  • Whether you’re saving for something big. If you’re saving for something big, like a car or even your first home then you may have a goal to save a certain amount over one year, in which case it might be handy to draw up a yearly budget, which you can then break down into a weekly or monthly spending limit.

Remember if you want to budget monthly but you receive your pay weekly then an accurate way to figure out your monthly pay would be to multiply by 52 and then divide by 12. Or if you want to budget weekly and you receive your pay monthly then you will have to multiply by 12 and then divide by 52.

Create your budget in three easy steps

This brings us to actually creating your budget, which may seem intimidating, but is actually probably easier than you think. Here’s how to do it.

1. Start with your net income

It’s important to understand the difference between gross and net income. Gross income is what your employer pays you before tax or other deductions are taken off and net income is the amount you receive after all deductions, such as tax and superannuation are taken off.

Quite simply, your net income is the amount you receive in your bank account from your employer, so you need to budget based on this number. It may be written as “net pay” on your pay check, or you can simply check your bank statement to find it.

If your pay varies with each pay cycle, because you work part-time or you pick up a few extra shifts now and again, then you may want to work out an average net income for your budget. 

For example, if your net income for one fortnight is $1,300 but $1,600 the next fortnight then you would add these two figures together and divide by two to figure out your average fortnightly pay. In this instance the average would be $1,450 and you could build your budget around this figure.

2. List and categorise your expenses

The next step is to figure out all your expenses and list them out, putting them into different categories to make them easier to prioritise. Broadly, the categories to work in are:

  • Expenses such as rent, mortgage and car payments would be fixed payments. These are payments that you make regularly, they usually stay the same and can’t be compromised on.
  • Necessary expenses are payments that can change from month to month, but are usually a priority to pay. They’re often things that are necessary for your day to day life, including payments for your phone or energy bills.
  • Discretionary expenses are optional and could include things like entertainment costs, like going to see your favourite band play, or money spent on new clothing, shoes and accessories.

Consider thinking about your expenses as a pyramid where the most important expenses make up the largest foundation, and the least important, discretionary expenses, are the cherry on top.

3. Calculate your incomings vs outgoings

Once you’ve categorised all your expenses, subtract your total costs from your net income to see if you’re spending within your means. For example, if your monthly net income is $4,000 and you’re spending $3,415.99  each month, then you’re in the clear, with $584.01 left over for savings and other fun stuff.

If however, your net income is $4,000 a month and you’re spending $4,005.99 each month, then you’re in trouble.
This is when you need to re-examine your discretionary costs and start cutting things out to get back in the black. Make sure all of your fixed and necessary expenses are taken care of before deciding how much you can afford to spend on the fun stuff.

In the words of Charles Dickens, “Annual income twenty pounds, annual expenditure nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

How to budget better

Once you’ve worked out your budget and reviewed how much you spend on each category you might want to start thinking about how you could be budgeting your money better.

  • Review how much you spend on unnecessary items or fun stuff. If you’re shocked by how much you spend on eating out during the week or on clothing, shoes and accessories, then consider cutting down. Work out how much of your income is left after paying bills and adding to your savings stash, and then decide how much you can splurge on fun stuff - not the other way around. 
  • Make changes to your necessary costs. Just because they’re necessary doesn’t mean you can’t get a better deal! If your phone bill is always high then think about changing plans, or if your energy bill is a pain in the back pocket, think about switching providers or haggling for a better deal with your current one.
  • Make your savings goal a necessary expense. Think of it as a payment that you owe to yourself, and prioritise building up a savings buffer over shopping. You could even set up an automatic transfer to your savings account for the day or the day after you get paid.
  • Check up on your budget regularly. Once you’ve created your budget, reviewed all your expenses and thought about what you could be saving money on, make sure you keep it up. This could be as simple as filling out your spreadsheet every week, keeping your notebook up to date or setting reminders on your phone to stick with your budgeting app.

Ready to put together a budget and start keeping track of your expenses?

Why not check out Mozo’s budget calculator to help get you on the right track. The budget calculator helps you figure out what you’re spending on a day-to-day basis so you can start saving for all the fun things in life. And don’t forget to pair your new budget with a high interest savings account for your new stash!

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Tara McCabe
Tara McCabe
Money writer

Tara McCabe writes across all areas of personal finance here at Mozo from banking through to insurance. Tara is expert at practical money tips, showing readers ways to live richer and be socially conscious while doing it. She earned a BA (Hons) in English Literature from Canterbury Christ Church University.