How To Set A Budget And Set Yourself Up For Life in 2021

This year, arguably more than any other year, may be the time for many people in Australia to think about their financial security. There’s no time like the present to start and stick to a budget no matter what financial position you’re in. If 2020 has taught us anything about money, it’s financial stability and managing your money in a planned way is an essential skill to master.

Three Basic Skills

Budgeting isn’t brain surgery but it will require you to think about your money and work a little harder to manage it. If you can track your spending, work at keeping your expenses under the amount you spend and then keep on doing that month by year, you’re going a long way to make yourself financially secure.

Although starting a budget may feel overwhelming, it doesn’t have to be painful or difficult either.

Ongoing Strategy

Budgeting is not a set-and-forget process. Looking at your spending one month, tweaking one expense and then going on your merry way isn’t the best way to budget. The process of budgeting is ongoing and requires head space and a little effort. You might need to set aside 5 minutes at the end of the day, or once a week and go through your spending and expenses to keep yourself on track. If you want to set yourself up for life, you’ll soon realise budgeting is an everyday occurrence.

There’s no use working long hours and earning the most amount of money you’re capable of earning if you then just end up losing it. Once you have your money in your hands – make it work for you. This required commitment!

Calculate Your Income

Now that you’ve set the intention of planning a budget, it’s time get into the numbers. The first thing to do it is calculate your monthly income. If you earn a wage or salary, calculate it monthly. If you’re a freelancer or your income is not in regular payments, work out a three to six monthly average of your income. Don’t forget to add in all streams of income – bank interest or insurance payments if you have them. You should know exactly what you’re incomings are.

Calculate Your Expenses

Now’s the time to see where your money is going. You’ll need to look at your regular expenses, such as utilities, phone, internet, subscriptions, car payments, mortgage, gym membership etc, so you know exactly where you stand. The fixed costs should be easy to find if you’re looking at your bank and credit card statements.

These are not all of your expenses though. You’ll also need to look at your variable costs.

Your variable costs are items such as food, clothing, going out, medical appointments, car maintenance and repair, home maintenance and repair, credit card payments and fuel. You can add up your monthly total, or average out your expenses from three to six months.

Adding your fixed and variable costs will show your baseline spending. You don’t want your incomings and outgoings to be break even.

What’s Next

In order to save and set yourself up for a financial future, you need to plan for it. This includes setting aside money to put into a savings account or into your super fund, not just using your ‘left over’ money that might be available each month.

State your goals. They can be whatever you want to save up for – a holiday, home deposit, car, retirement. Other goals you might have are building en emergency fund or paying off your debt. When you work out your goals, figure out how much you’ll need to set aside each month.

Consider these savings to be a part of your fixed expenses.

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Discretionary Spending

The next part of your budget plan, now that you’ve calculated your total expenses that include your savings goals, it’s time to work out your discretionary spending. These expenses your variable expenses, for entertainment, clothing, eating out. Have a look at your previous expenses in your variable list. This may be quite revealing. For instance, you might find that you’ve spent $200 a week on buying lunches and going out for dinner.

Don’t worry. That’s a good thing because now you know where you can cut back and you can adjust your discretionary spending amounts to suit your budget and your variable costs are where you can do that.

Compare and adjust your expenses where necessary. It is important to note that it’s better to reduce your discretionary spending before you cut your savings or pay off your debt.

Plan For Tax

The tax you pay is an obligatory expense. If you earn a wage or salary, your employer will automatically take out an amount of your wage and send it to the Australian Taxation Office (ATO) on your behalf each pay period, known as Pay-As-You-Go (PAYG). When you lodge your tax return, sometimes during 1 July to 31 October, you can claim back some or your work-related expenses. The more you can claim, the more money is in your pocket.

If you’re a freelancer or sole trader, it’s important to calculate your tax and set it aside into another bank account that you don’t touch. That way, you’re not out of pocket and scrambling to find money at tax time if you find yourself owing.

Keep Your Receipts

The best way to maximise your tax return is to keep your receipts and tax invoices. Once you’re up and running with your budget, this should be an easy step. The ATO may ask you to prove your claims up to five years from the date you lodge your tax return, so it pays to be organised. You can keep an electronic copy of your receipts, as long as it’s a true and clear copy of the original.

The ATO has three rules when it comes to claiming tax deductions:

  1. The expense must be work-related
  2. You must be able to prove your expense
  3. You must already have incurred the expense.

Pro Tax Tip: Hiring a tax professional will help you maximise your tax return. Not only can you claim the expense on next year’s tax return, but you’ll net yourself a bigger return.

Budgeting Can Set Your Free

If the idea of budgeting sets your teeth on edge, think about your life and the opportunities you’ll have once your money is organised. By determining your spending, you can build the framework for the finances to fit your life – stress free.

ITP The Income Tax Accounting Professionals have helped Australian individuals and businesses for 50 years. There’s not a lot we don’t know about tax and finances. Phone 1800 367 487 and chat about your budgeting needs and how we can help you save on your tax dollar.