5 key steps to budgeting

Create a budget in five simple steps

No matter how modest your financial goals, reaching those key milestones will require discipline – and the easiest way to build discipline is to follow a plan. A budget is simply a plan to help you get a better handle on your finances, and you can create one that suits your personal situation with a few basic steps.


1. Determine your income

If you are an employee of a company, the chances are you are paid regularly and your take home salary (after tax) is around the same each month. This is your net monthly income, and the first piece of information you need to create a budget.

If you are self-employed or earning income from a variety of sources, add up all those sources to determine your cumulative income over a full year. If you own a business your income may vary from month to month, so calculate your average income over a full year and divide by 12 to create an average monthly income for budgeting purposes.

Before personal finance apps came along, determining this figure might involve gathering your financial documents, including bank statements, pay slips, investment account statements, and any other record that can help you accurately determine your monthly income. Humaniti can make this process a lot easier. Once you securely link your financial accounts to the app, we do the hard work for you to surface your incoming funds. With your average monthly income accurately calculated, you now have a starting point to budget for your expenses and savings in order to reach your financial objectives.

2. Calculate your expenses

The traditional way of calculating your monthly expenses is to prepare a list of goods and services you pay for to get a rough idea of how much you spend each month. This might include rent payments, mortgage repayments, fuel, insurance payments, utilities, groceries, clothes and dining out. Expenses such as insurance, mortgage and rent are likely to be a fixed amount each month, but you may have to estimate how much you are likely to spend on variable expenses including petrol, dining out and groceries.

When you’re signed up to Humaniti and have linked your savings, superannuation and other finance accounts, the calculations are done for you. The smart logic behind Humaniti’s personal finance app will categorise your spending, identify recurring expenses such as subscriptions, and present a view of spending that is easy to analyse at a detailed level. 

3. Subtract expenses from income

Now we get to the calculation side of planning. Once you have established your average monthly income and worked out your average monthly expenditure, deduct total expenses from total net income. This will immediately tell you if you’re earning enough to cover your expected costs. 

When your income exceeds your expenses, you have a budget surplus. This represents an opportunity to set some funds aside for longer term goals. When your expenses exceed your income, you have a budget deficit and will need to boost your income, reduce your outgoings, or both. With a budget deficit, use the 50-30-20 rule to test if your income is being appropriately allocated: 50% of your income goes towards essential expenses, 30% to your wants, with the remaining 20% of your income is set aside for savings. If you are able to lower your expenses, you will grow your budget surplus and potentially invest any excess savings.

4. Set spending limits

Once you have a clear view of your income and your monthly fixed and variable expenses, you could consider setting spending limits to each category of expenditure. This will prevent you from spending more than you’ve planned and help you build the discipline to keep you on track towards your financial goals.

5. Measure your progress

The last step in setting up your budget is to track your progress to make sure you are building your financial discipline and heading in the right direction. You may consider using a personal finance app like Humaniti to help you do this. Humaniti can help by providing a 360° view of your financial position, and by enabling a clear view of your spending in close to real time. This helps you stay focused in the short term with your budgeting plan and goals, as well as understanding the bigger picture of your personal finances.

If you don’t yet have a personal budget, now is the time to get started. You will quickly get a better understanding of your financial situation, will be set up to save as planned to finance significant purchases, and if needed, cut back on unnecessary debt. By following the five key steps to budgeting, you can create a successful budget for yourself that will help lead you to a brighter financial future.

* Disclaimer – the information in this post is general only and does not constitute financial advice. 

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