Budgeting - a journey not an end point

Ok, so the title is deliberate.  We want to convey that we don’t see ourselves as experts.  We’ve worked out a budget that works for us but we are always up for tweaking it.  It’s evolved over the years and what we have currently reflects our desire to track savings and focus on the daily household expenses.

What we are sharing is the simply the where we are up to in this point of time.  To really make this point, we have been rethinking the purpose of budgeting light of tracking.  But at this stage are still convinced that a budget is a cornerstone of smart money management - but this could change.

Our budget is simple, it is split into two halves, income and expenses.  Both sides have access to viewing the info in weekly, fortnightly, monthly and yearly.  This is important as it allows you to view it in different ways. For example, we are always looking at what our yearly expenses are.  This is an important figure for us as we need to hit a level of passive income so that one of us can retire, something we are just on the borderline of being there, but we want a little breathing room + we have a major debate coming up around retiring vs staying home to parent.

Income consists of all money coming into the house.  I guess this is a good time to stress that if you’re in a serious relationship (whether that be married, defacto, dating for a good chunk of time/living together etc) then you should have a joint account that both your income goes in to. If you are a team then there is no ‘yours and mine’ money. Everything should be considered ‘ours’. This is an incredibly important first step of a solid budget. So...all money (wages, government assistance, working for families, etc) goes into a main joint account, once it hits that account a portion of it goes toward your expenses. We have a separate expenses account and have found that works really well. Our expenses includes food, power, rates, car regos, phones etc. Basically everything that we need over the course of the year.  If you are unsure what expenses you have then go through your bank statements and see where your money is going. We’ve worked out how much per week we need to put away to cover these expenses as often they’re paid at different times (our rates are quarterly, phone is monthly, food is weekly etc).

In terms of discretionary spending we have a ‘pocket money’ allowance that goes into a private account each. So if Liam wants to spend his money on investing and Aleisha wants to buy cheeseburgers, then we both have the discretion to spend that on whatever we want, no questions.  We include the pocket money into our household expenses list.

Sooo… this leads us to two really important tools to help with your future planning and thinking.  The savings figure and the savings rate. We have a formula on our budget which calculates these two rates.

The savings figure - this gives you an understanding of how much each week you can put aside.  We work on using the expenses figures to capture our living costs - this might sound obvious, but for us personally what goes in expenses are the minimum costs associated with us being able to live our current lifestyle.  The money left over (which has gone up and down over the years) goes towards funding our emergency fund, savings account, investments, car breakdowns, holidays, movie dates, clothing etc.

The savings rate - this is Liam’s favourite and what he considers the dessert of this blog post...  This is the figure that provides all sorts of mental financial goal setting. This shows you what percent of your income are you able to save.  Liam has a minor obsession with getting this below the 50% mark… it is currently at 53%. You can alter it by increasing your income or decreasing your expenses.  We found that when we first started our figure was up around the 80% mark. We have cut this down through better controlling our expenses. I think all people find that when they first start budgeting they are able cut so much fat out of their budget.

The savings rate is also a good guard against lifestyle inflation that can often come from increasing your income.  Some people cut so much fat out of their expenses that they don't enjoy their lifestyle. We certainly have not done anything extreme, although I am aware how subjective that it.  People might think that we have cut heaps. I guess the measure comes back to your own reflections… are you loving your current lifestyle? For us, we seem happy. We feel we are on a journey to be able to cut loose from the 9-5 work week some time in the hopefully not too distant future.

Now, we hope that we have explained reasonably well how we set up our current budget. It’s not super flash or complicated but it works for us. There are lots of online tools available for you to create a template for free and we hope this blogpost can help you to complete that. If you would like a copy of our budget we have the template available for $5.00 at www.maxandmillie.co.nz.

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