Back to Basics: Making a Budget, Cash Flow, and Generating a Surplus

Follow Steps to Making a DIY Financial Plan and Beat Financial Stress

If you’re feeling overwhelmed due to financial stress, it may be time to go back to basics: making a budget, understanding your cash flow, and building money-saving habits.

There are a variety of budgeting methods out there to help you create a personal budget that works for you. There are also different tools you can use to get you started – some people like using budget calculators and others prefer to create their own budget spreadsheet. However, in this article, we are covering the fundamental elements that make a budget: expenses, savings, and debt repayment.

Understand How You’re Spending Money

The most important first step in any budget is understanding your income and expenses (i.e. how you’re spending your money). Make a list of everything – and we mean everything – you are spending money on weekly, monthly, quarterly, and yearly. You can look at bank statements to help you track all your expenses, see your actual income, and discover how you spend money. Once you have this list, make a note of which expenses are negotiable and which are fixed expenses.

Account for Fixed Expenses First

Fixed expenses include things like rent or mortgage repayment, loan repayments, utility bills, insurance, your grocery budget, fuel budget, vehicle registration, and other such overheads that you have to pay. These expenses are non-negotiable and they are the first thing you need to account for in any budget plan. Once you’ve done this, you will know how much money you have to work with.

Take Stock of Unnecessary Expenses & Where You Can Save Money

The next step is to see where you are regularly spending your money – not including fixed expenses. This would include streaming services, other subscription payments, eating out, events, holidays, etc. Once you have this list it’s time to trim the fat!

What can you live without and what is genuinely bringing you joy? Make a plan to cancel or cut expenses for anything that isn’t adding value to your life and keep the expenses that do – from these items you now have a rough idea of what your lifestyle budget should look like and this can help you avoid lifestyle creep as your income or expenses increase.

What is Lifestyle Creep?

Lifestyle creep is an issue most of us come across where we start spending more as we earn more. As our incomes rise, so does our lifestyle spending. Whether it is entertainment, holidays, travel, housing, cars, boats, or furniture, it’s pretty clear that as we earn more, we spend even more. But what if this spending was not taking advantage of all the time you are giving up and the hard work you are doing to earn that income?

How to Avoid Lifestyle Creep

As suggested above, having a lifestyle budget can go a long way to curbing lifestyle creep, allowing you to enjoy life while managing your spending and savings. This can look like paying yourself a percentage of your wage first or sending a set amount to another account entirely.

Another method for those who struggle with saving money is to consider taking a 20% pay cut and living off a lower wage. Asking your work to transfer 20% to another account that you can’t easily access is a powerful move and can help you accelerate your savings. This method is not for everyone, but it can be amazing to learn how quickly you adapt and how it can simplify your lifestyle choices while fast-tracking a big financial goal like a house deposit or buying a car outright.

Ensure You Have a Savings Account for Your Financial Goals AND an Emergency Fund

From what you have cut from your negotiable costs, you now have more money to place into savings. You will need at least two savings accounts: a financial goal savings account and an emergency fund savings account.

Financial Goals Savings

A financial goal is your big, audacious goal – buying a house, house renovation, buying a new car, starting a business, overseas trip, etc. Whatever the goal is you will want to have a separate account with a high-interest rate to add to your funds while you save.

Emergency Fund Savings

An emergency fund is exactly what it sounds like – a financial safety net for when things go wrong and you get hit with big and unexpected expenses. A financial emergency could look like losing a job, the car breaking down, a major appliance (fridge, washer, etc.) needing repair or replacement, major house damage, big vet bills, etc.

When these things happen, it won’t matter what else you have going on – with an emergency fund, you have the financial means of taking care of the matter quickly and without breaking the bank! The goal for your emergency fund is to have at least 3 months of wages saved up.

Dealing with Debt

Now that you know how much extra income you have to work with after paying fixed expenses, paying yourself, and putting savings away, you can focus on reducing your debts (if you have any).

The best place to start with any debt repayments is to focus on the highest-interest debt (usually a credit card) and use your additional funds to pay that off sooner.

Need Help Creating a Budget or a Personal Finance Plan? Contact Novo Wealth

Novo Wealth is a dedicated ethical financial adviser based in Adelaide and helping individuals across Australia to work towards the financial future they’re dreaming of. If you are in need of a personalised financial plan that prioritises your goals and your personal values, contact Paul at Novo Wealth today to see how we can help!

Paul Garner 0424 224 225
Certified Responsible Investment Financial Adviser