There are two main parts to a savings plan.
#1: Have a good budget
#2: Choose how to invest your savings
For a lot of people, the idea of having a budget is horrifying. People often consider a budget as a restriction of your spending where every single dollar has to documented and accounted for and used to make yourself feel guilty.
But a budget doesn’t have to be that way, there are many different ways to set your budget.
It’s important for a household to have a budget, so you know roughly how much money you spend and can then save a reasonable amount of money for you. You may have noticed that if you leave your money in your bank account, it tends to spend itself.
So, how do you set your household budget?
1. Estimate your household expenses
This is much easier said than done.
If you’ve never had a budget before, you may have no idea where to start.
I estimate my expenses fortnightly and I break them down into the following categories: Food, Transport (petrol, public transport), Mortgage, Clothing, Car costs (registration, insurance), Entertainment (phone, internet, netflix), Electricity, Gas, Water, Council rates, Strata fees, Additional bills (e.g. a licence every 5-10 years), Presents, Household expenses (e.g. furniture, my candle addiction) and Health.
I find it easiest to split my different types of bills because that way I can see whether we are spending above or below our expected budgets.
Once you have your categories, you need to figure out how much you spend in each of these categories. You can look at your recent transaction history for this or just make a good guess.
2. Set your splurge budget
Lots of expenses come up that aren’t regular – going out bowling, buying a new game, having dinner out with friends. You need a budget for this too!
Decide on a number that is reasonable for your family.
Be realistic with this number. Too small and you will become frustrated at having to say no to things. Too large and you won’t be saving as much as you could.
Your splurge budget should be a little restrictive so that you occasionally have to get creative and have hot chip rolls in a park instead of going out for lunch. But it shouldn’t cause you frustration.
3. Decide how you are going to track your expenses
You may be a spreadsheet lover like me who tracks every dollar and categorises it fortnightly to see how we’re going with our spending.
Our you might transfer your splurge and savings to another account and be left with the money you need for the bare essentials. Out of money in this account? Looks like you won’t be buying new clothes this month.
It’s up to you how you want to track your expenses but it’s important that you do it at least somewhat so you can see whether your budget estimates are accurate or whether you need to adjust some of the categories.
There are apps that can help you with this or you can write it down in a notebook – whatever works for you!
4. Save the rest of your money
Once you have your budget figured out to cover your bare expenses and you’ve decided on a reasonable splurge budget, it’s time to save the rest of your income (if there’s any left! If not, you might need to go back and adjust some of your spending).
I suggest transferring it straight out of your everyday account into another account for now, but eventually you will want to invest it somehow.
We will discuss this more in part 2 of Starting your savings plan.
How do you track your household spending? Let me know in the comments below.