How To Budget Money In 2022 (and Many Years Onwards)

A Guide to Getting Your Budget and Finances in the Right Order

One of the things that you should consider thinking about at the start of a new year is how to budget your money. Having a good plan as early as possible can help you take better control of your finances over the coming months.

Chances are you have heard of many different ways on how to budget but it could be that it is all a blur, too confusing or you just have no idea where to start. Don’t worry. Below is a step-by-step process you can try to get your money sorted.

It is going to be a bit thorough but hopefully informative for you. Grab a little drink and a snack. Get some materials to take notes. Feel free to pin or bookmark this page so you can come back to it any time should you decide to take a break in between.

Ready?

Let’s get into it.

1. Establish Your Financial Goals

It is always a good idea to know why you are doing something. A defined purpose can motivate you to kick off and keep doing it in the long run.

Think of your short-term, medium-term and long-term objectives.

Some of the general reasons why people create a budget are to be accountable for their spending, to pay off debt and to boost savings. Later on, goals change to achieving financial freedom and building wealth. Make sure you jot them down so that you can periodically remind yourself.

The more you get reminded, the higher the chances of achieving them.

*Do it SMART-ly

For a better likelihood of success, your financial goals should ideally be SMART (specific, measurable, attainable, realistic and time-bound). If such is new to you, this provides a detailed explanation. 

Let’s apply it to budgeting via an example. To make your short-term financial goal of increasing your savings specific, set a certain amount or percentage of your income to save. Let’s say, in February, you want to keep $1000 for your first home deposit.

To measure whether you achieved this, simply compute your total savings at the end of February and then see whether it reached $1000.

Is this aim attainable and realistic? This is for you to decide. You probably have some idea about your financial situation. If it is proving difficult to determine, don’t stress too much. Try to make a general assessment. You can always revisit this later in the process, just don’t set unrealistic goals that can discourage you even before starting out. 

In this example, your goal is clearly defined by 1 month period (time-bound).

An example of a SMART long-term goal is paying off your home mortgage worth $300,000 over the next 10 years which can be attained through serious budgeting habits.

2. Calculate your Net Income

Keep your set goals in mind. It is now time to assess your last year’s net income. As you may know, your net income is the total amount of money you take home after all deductions.

To do this, gather and check your income statements like payslips and bank accounts from all your income streams. Then add the money together.

This will include some of the following:

• salary from your job/s
• business earnings
• income from side hustles
• government and other support payments (pensions, child support, Austudy/Youth Allowance – in Australia)
• scholarship payments
• insurance payouts
• other regular allowances and income sources

*Special Situations

Don’t forget any pretax income you may be receiving as part of salary packaging or sacrifice arrangements.

If you receive inconsistent earnings (casual job or fluctuation in business activity) then last financial year’s income tax statement may be helpful. Alternatively, check the last 3 months’ pay and multiply this by 4 to get an annual estimate. This may also be the way to go if you just started a job and have no idea of your annual salary yet.

*Deductions

Should the income sources listed above come as post-deducted sums, you can move on to the next step. Otherwise, note and add all your deductions like:

• income tax (Federal and State taxes in the US)
• student loan repayments (for example, HECS in Australia)
• social security payments

Subtract the total deductions from the total income received (pre-tax). This will yield the net income. It is a great idea to have both annual and monthly figures as these will help when evaluating your budget at the end of each month and the year.

Aside from this, it is your call whether to have a weekly or fortnightly sum. This will largely depend on how you get paid or just out of personal preference (for instance, you may want to do a weekly budget if you pay rent every week).

3. Determine your Expenses

Okay, the third step is to write down your expenditures and categorise them – essential versus non-essential.

Essential items include things you require to survive daily like food (except takeaway and junk food), accommodation, and transportation. Non-essential or discretionary expenses are those that theoretically you can live without such as streaming subscriptions and alcoholic drinks.

Your bank transaction records will be valuable in this step if you use a credit card, debit card or online banking in general. Also, gather any invoices or bills you may have kept from the past year. One-off payments like car registration and land rates for homeowners can be easily forgotten.

Things like insurance can also creep up every year, so check the rates for this year.

*Essential Spending

To give you an idea, some necessary expenditures are:

• Household – rent/mortgage, home maintenance, water, sewerage, electricity, gas
  • Homeowners – land tax, council rates, strata fees (apartment and townhouses), home insurance
• Food – groceries (essential food)
• Communication – phone bills, internet
• Work or school – uniform, shoes, tools, stationery, tuition fees, books, computers
• Transportation – fuel, car repayments, car insurance, car registration, car maintenance, driver’s licence, public transport, parking and toll fees
• Health and personal care – basic clothing and shoes, medicines, health insurance, check-ups, toiletries, eye care, dental care
• Debt – minimum payments for personal loan, credit card payments, other debts

*Non-Essential Spending

Typical non-essentials (but nice to have):

• Food – dining out or food delivery, alcohol, junk food (chocolates, flavoured drinks)
• Entertainment – music / movie subscriptions, cable television, magazines
• Personal – fashion clothing and footwear, accessories, gym membership (debatable), hobbies, gadgets, cigarettes
• Miscellaneous – gifts, holidays, birthdays and other celebrations

Your expenses and priorities may be different to this list. Be sure to personalise it. Think about yourself, what you do and what is important to you. For example, you may not need a separate internet connection if you have a generous data allowance through your mobile plan.

Like your income, do the totals with yearly and monthly figures. Subtract the total expenses from your total net income. Is there any money left? If yes, then great.

If the books say otherwise (negative or zero), please do not be disheartened. Instead, use this as your motivation to go through your spending habits. Try not to think of loans, credit cards or buy now pay later schemes as your backups. There are better measures you can take.

*Minimise Costs

First, look at the non-essential list. This is where you can cut down the most as there are usually free, less costly alternatives. You may also actually not need them at all.

Ponder cancelling your music subscription. Spotify has a free version or you can listen to the radio. Try to avoid lunching out, cooking at home is cheaper. If you are serious about looking at your discretionary spending, this article may prove beneficial.

There may be also avenues to decrease costs from your essentials list. For instance, a different energy provider could offer lower supply fees or maybe it is time to shop around for your insurances. You will be surprised how much money you can free by switching companies.

If you regularly shop online, websites like Shopback and Cashrewards can give you money back to your budget. Plus when you sign-up using the links above, you will get some dollars to start with.

The main thing is to try to keep all your expenses low, live within or if you can, below your means.

4. Identify a Budget Plan and Allocate your Income

This is where you need to find a good budgeting technique that works for you. There are various ways such as the bucketing methods (50/30/20 and 80/20 rules), the traditional approach and the envelope system. You can stick with one of these methods as a start but most people like to mix them up.

The one discussed here is based on The Barefoot Investor 2020 Update: The Only Money Guide You’ll Ever Need by Scott Pape. It is also a bucketing or is sometimes called the ‘sub-savings account’ method where money flows from one bucket to the other. You can skip this part if you have a different budget approach in mind.

*The Barefoot Investor Method

As an overview, your net income is split into 4 accounts under the main bucket, Blow. The excess from this goes to the Mojo bucket and when this fills up, you then move your money to the Grow bucket.

In a bit more detail, the Blow bucket is where your income gets deposited. It is broken down into 2 everyday transaction accounts and 2 high-interest savings accounts.

• Account 1 (everyday transaction account) – this is named ‘daily expenses’ and is so self-explanatory. Put 60% of your money here to spend on all bills or general cost of living such as your accommodation, food, electricity.

• Account 2 (everyday transaction account) – called the ‘fire extinguisher’ which is allocated 20%. This money is used for paying off debts and putting off ‘financial fires’ like unexpected situations such as a major car repair

• Account 3 (high-interest savings account) – referred to as ‘splurge’ gets 10%. This is all your ‘fun money’ for electronics, social gatherings and nice new clothes as examples.

• Account 4 (high-interest savings account) – given ‘smile’ as a name also receives 10% and is intended for big purchases like a car upgrade and vacation spending.

The Mojo bucket is your emergency fund on a separate high-interest savings account and bank if possible. It prevents you from getting loans, using credit cards or succumbing to buy now, pay later platforms. Open this account with a deposit of at least $2000.

All the excess money from the fire extinguisher gets transferred to the Mojo bucket until you accumulate 3 to 6 months worth of your income. Once this happens, the money then can flow to the Grow bucket.

Money in the Grow bucket is for investments so that you can increase your net worth and accumulate wealth. It can be anything you desire such as stocks, bonds, real estate property or your retirement fund.

For a more in-depth explanation, I recommend reading the book itself.

If saving is your main goal, this trick ensures you keep what you intend to by saving before you spend right after receiving your income. It also helps you pay your debts, have emergency money and eventually invest for the future in that order, while still living an enjoyable life. Hence, it covers most people’s financial goals as mentioned earlier.

*Adopt and Personalise

Nevertheless, this exact approach may not suit your circumstances. Consider adopting the suggested buckets and then allocating your income in a way that makes more sense to you.

Set up multiple bank accounts, preferably with no monthly keeping fees, if you haven’t already done so. Then name the accounts like above or you may want to be creative and make your own.

When coming up with your percentages, evaluate your income and expenses which at this stage, you should already have a clear picture of. You may need to start with 70% for daily expenses and 10% equally for the 3 other accounts under the Blow bucket.

You may not have $2000 to put in your emergency account and that’s okay. We all need to start somewhere so take it little by little, maybe put $100 away every payday until to get to the target amount. You can consider selling things you own but don’t use anymore or find a side hustle.

Or if you are a bit further in your financial journey, you may want to spend 40% on your daily needs then have 60% for the rest. You do you.

*Plan for the Bad and the Good

Whatever method you choose, always, always have an emergency fund. It saves you from getting new debt.

In the same way, have a plan for any extra or unexpected funds. You may have received a tax refund at the end of the financial year. The wise thing to do is to either put this lump sump into your savings, pay off any credits or invest.

Sometimes though it can be really tempting to spend your excess cash on something nice. Try to hold yourself for a minute and think of the long-term. If you really must, then at least put a proportion first into your savings, then spend the remaining amount. Whether that amount is big or small, it will help.

5. Track Your Income and Expenditures

Steps 1 to 4 were mainly about getting set up. The next thing to do now is to act on your budget.

You can do this by using a budget sheet. It could be in paper form, an excel spreadsheet, software or a mobile phone application. I personally like using a spreadsheet but some people find them daunting.

I will soon write a separate entry on how I personally budget my money and manage my finances this 2022. For now, the spreadsheet I use is below.

*Develop Habits

When you get paid, it is best to input your income in your budget sheet right away. At the same time, distribute your money to your sub-accounts based on your planned allocations. If you are disciplined and trust yourself, then you may want to do this monthly instead of every payday to save time.

You then have to track your expenses. Do so as they occur especially if you tend to forget about some of them. It only takes seconds to minutes. By doing this, you are less likely to miss anything and will get a more accurate representation of your outgoings. If you find this too much, try doing it for 3 months minimum.

6. Review Your Budget Regularly and Amend It

Your life and your financial situation today may be different tomorrow. Throughout time, your priorities will change and it is fitting to reassess and revise your budget to make sure it serves its purpose and helps you sustain your needs and wants. Analysing your budget additionally provides you with an opportunity to evaluate whether the financial goals you set earlier are being met.

Remember that budgeting is a recursive exercise, so you can go back to any of the steps any time you need to. Ideally, set a time at least every few months to do a budget review so you don’t miss it.

Having an overall summary of your actual expenses will help you determine where you might be overspending and under what categories you may have overbudgeted. By all means, redirect the extra funds to where it is needed. Don’t forget to consciously decrease spending on the things you overspent on next time.

You may also find that the budgeting method you picked does not work in one way or another or is completely failing. This is time for you to explore others. It can be a trial and error process. You will eventually find one that suits you.

Other Budgeting Tips

Have Patience

Budgeting is usually time-consuming when you first start. Finding a perfect budget plan doesn’t happen overnight either. Be patient. Once you are set up, incorporate your budget into your daily life. When you get the hang of it, it will become easier.

Shift your Perspective

Having a budget to follow can feel restrictive initially. But a shift in perspective will help. Go back to your goals and think about how would you feel and how will your life change when you achieved them?

Knowing how to budget and acting on it also puts you in control of your finances which can be empowering. It can further liberate you from stress from living paycheck to paycheck and secure your financial future. A more desirable financial situation provides more options for a better life and brings peace of mind.

Get support

If you are not sticking to your budget, you may need an accountability partner (it could be a friend or a relative) or join a support group (online or in-person). There may also be deeper reasons for your money issues. In this case, seek the service of a financial therapist.

You are never alone on any journey. There is help around.

In a Nutshell

Budgeting is a process. It involves preparation, action and evaluation.

Set some financial goals and then work out your total after-tax income.

Categorise your expenses into essential and non-essential.

Then, find the difference between your net income and total expenses to see if you have money left to save. If not, try to cut down on some spending by going through your lists.

When this is done, identify a budget plan that appeals to you. I recommend using a bucket approach because it gets you to allocate income right away to specific buckets, therefore, allowing you to save money even before you spend.

Track your income and expenditures so you can assess if you are achieving your objectives. Review and revise your budget plan as needed.

Finally, knowing how to budget is an important life skill. It is not uncommon to struggle with it at first. Be patient and seek help if you need it.

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