A personal budget is a plan that allows us to take control of our finances. It can be used to manage our spending, prepare for unexpected expenses and help us save for future goals.
Using a personal budget makes it easier to:
- Keep track of spending so we don't spend more than we earn (i.e. we live within our means)
- Find the right balance between spending and saving
- Direct money to where it is most needed
- Stay on top of bills and loan repayments (maintain a good credit rating)
- Prepare for unexpected expenses (i.e. the fridge breaks down and needs repairs/replacement)
- Save money for future goals (i.e. travel, specialised courses, a new car)
- Avoid a reliance on credit, loans and debt
- Build awareness of our financial situation and make it easier to plan for the future
A personal budget can be used by anyone, regardless of their level of income.
For any budget, the two main components are income and expenses.
Income: money we earn
Expenses: money we spend
Expenses can be further classified into:
Fixed expenses: the same amount is spent each month. These expenses are paid on a regular basis (weekly, fortnightly, monthly), usually in the form of bills. Examples include rent or mortgage payments, insurance premiums, loan repayments, vehicle registration, household bills, subscriptions, gym and sporting club memberships.
Variable expenses: usually different amounts are spent depending on the situation. These expenses are often irregular and vary according to need or discretion (known as discretionary spending). Examples include the cost of food, clothing, household goods, fuel, emergency repairs/maintenance, medical expenses, entertainment and hobbies.
Savings: this is what remains after we subtract expenses from our income. A budget can help us decide which expenses to reduce or eliminate, in order to maximise our savings.
Most personal budgets are planned for weekly, fortnightly or monthly time periods, depending on when income is paid. In contrast, a budget for a business might extend over a full financial year.
A good budget needs to be flexible and able to adjust easily if costs or earnings change. For this reason, many people use a spreadsheet program to set up and maintain their budget.
Worked example
A weekly budget is shown in the table below:
| Income | Expenses | ||
|---|---|---|---|
| Earnings | $\$505$$505 | Mortgage | $\$147$$147 |
| Electricity | $\$23$$23 | ||
| Food | $\$64$$64 | ||
| Council Rates | $\$22$$22 | ||
| Insurance | $\$20$$20 | ||
| Water | $\$64$$64 | ||
| Clothing | $\$46$$46 | ||
| Entertainment | $\$56$$56 |
- Calculate the weekly expenses.
- Calculate the weekly savings.
- Calculate the percentage of income saved correct to $2$2 decimal places. Don't forget to include the percentage sign.
- Calculate the percentage of income spent on mortgage payments, correct to $2$2 decimal places. Don't forget to include the percentage sign.
- Calculate the amount paid on the mortgage in one year.
Solution
- Find the total of all the expenses.
Weekly expenses $=$= $147+23+64+22+20+64+46+56$147+23+64+22+20+64+46+56 $=$= $\$442$$442 - To find savings, you subtract the expenses from the income.
Weekly savings $=$= $505-442$505−442 $=$= $\$63$$63 - To express savings as a percentage of income, divide savings by income and multiply by $100$100.
Savings as a percentage $=$= $\frac{63}{505}\times100$63505×100 $=$= $12.475$12.475... $=$= $12.48%$12.48% (to 2 d.p.) - To express the mortgage as a percentage of income, divide mortgage by income and multiply by $100$100.
Mortgage as a percentage $=$= $\frac{147}{505}\times100$147505×100 $=$= $29.108$29.108... $=$= $29.11%$29.11% (to 2 d.p.) - Multiply the weekly mortgage payment by the number of weeks in a year.
Mortgage paid in one year $=$= $147\times52$147×52 $=$= $\$7644$$7644
Practice questions
Question 1
Amerie pays rent of $\$239$$239 per week, and must budget for electricity and water costs of $\$533$$533 per quarter. How much should she put aside each week to cover these expenses?
Question 2
Luke’s weekly expenses vary slightly from week to week. His expenses in the first 3 weeks are $\$225$$225, $\$218$$218 and $\$208$$208. If he can only afford to have an average weekly expense of $\$221$$221 every four weeks, what is the maximum expense he can have in the fourth week?
Let the amount he has to spend in the fourth week be $x$x.
Question 3
Beth’s expenses currently represent $30%$30% of her $\$920$$920 weekly income.
If her expenses increase by $6%$6% of their current value, what will be the new percentage of her income taken up by expenses?