The best way to prevent yourself from spending more than you earn is to create a budget. A budget allows you to plan how you want to allocate your future income to cover your future expenses. Income refers to what you earn such as your wages, bonuses and any income you might earn from investments such as shares. Expenses refer to what you spend on items or services such as rent, food and entertainment, and can be broken down into two types: fixed and discretionary. Fixed expenses are the essential ones such as rent and food which you can’t easily minimise. On the other hand, discretionary expenses are those that are non-essential and that you can minimise your spending on e.g. movies, games and luxury goods.
Sam earns \$1000 a week working as a miner. On top of this, he earns a bonus of \$50 on average and receives allowances for undertaking wet and dangerous work of \$80. He also earns \$200 a week on average from his share portfolio. As for his expenses, he pays \$300 a week for rent, \$20 for phone and internet, \$50 for electricity, \$20 for water, \$100 for food, \$80 for car costs, \$200 for entertainment and saves what he has left over.
Following advice from his mum, he decides to draw up with a budget. The following table shows what his weekly budget looks like. Note that budgets can be created for different time intervals such as monthly or yearly, not just weekly.
Income | Expenses | ||
---|---|---|---|
Wages | \$1000 | Rent | \$300 |
Bonus | \$50 | Phone and internet | \$20 |
Allowances | \$80 | Electricity | \$50 |
Investments | \$200 | Water | \$20 |
Food | \$100 | ||
Car running costs | \$80 | ||
Entertainment | \$200 | ||
Savings | \$560 | ||
Total | \$1330 | Total | \$1330 |
By coming up with a budget, Sam is now able to manage his money properly and to ensure that he doesn’t spend beyond his means. However, it is important to keep in mind that just like a weather forecast may turn out to be off, so too can a budget. This is because we do not know in advance the exact amount of expenses such as electricity, water, phone, etc. They could rise in the future either from a price rise or from us using more electricity, water, etc than we initially planned.
For example, suppose that because of a drought food prices spiked and water costs increased. Moreover, suppose there was stockmarket crash that wiped out Sam’s entire share portfolio. The following table shows what Sam’s new weekly budget would look like.
Income | Expenses | ||
---|---|---|---|
Wages | \$1000 | Rent | \$300 |
Bonus | \$50 | Phone and internet | \$20 |
Allowances | \$80 | Electricity | \$50 |
Water | \$40 | ||
Food | \$200 | ||
Car running costs | \$80 | ||
Entertainment | \$200 | ||
Savings | \$240 | ||
Total | \$1130 | Total | \$1130 |
As you can see, Sam’s income from investments has disappeared and his water and food expenses have both doubled, leaving him with savings of only \$240 (compared to \$560 before).
Chris is a year 11 student who works part-time at the local fast food restaurant, earning \$200 a week for his efforts. On top of this, he receives \$65 a week in pocket money from his parents. He has moved out of home to live with his older brother, splitting the \$200 a month rent between the two of them. He spends \$40 a week on food for his meals and \$10 on junk food such as lollies, chips and chocolate; and \$20 a week for games, movies and other forms of entertainment. He also owns a car which draws annual expenses of \$300 for registration, \$1500 for insurance and \$200 for maintenance, and weekly petrol cost of \$30 for travel to and from school. For his phone and internet, he is on the \$50 a month phone and internet bundle with unlimited use. For his electricity and water bills, Chris budgets for these by using the average figure from the previous year. His previous four quarterly electricity bills were \$150, \$120, \$140 and \$160, and his previous four quarterly water bills were \$100, \$80, \$90 and \$120. He deposits whatever money he has left over into his bank account.
Income | Expenses | ||
---|---|---|---|
Wages | Rent | ||
Pocket Money | Phone and internet | ||
Electricity | |||
Water | |||
Food | |||
Car running costs | |||
Entertainment | |||
Savings | |||
Total | Total |
Income | Expenses | ||
---|---|---|---|
Total | Total |
Income | Expenses | ||
---|---|---|---|
Total | Total |
Income | Expenses | ||
---|---|---|---|
Total | Total |
Now you are required to research income and expenditure for yourself based on the following scenario.
Step 1: Choose a job and research the possible income for the first year in this job. You also need to research tax payable in order to calculate your net income (after tax).
Step 2: Research living expenses. In this scenario you will be renting accommodation. Decide what type of accommodation you would like to live in and what the rental fees would be. Research costs of all other possible living expenses
Step 3: Create a budget spreadsheet. Create a spreadsheet showing your income and expenditure and calculate whether there is any surplus or deficit.