If you want to get your finances on track this year, you are going to have to confront what to some people is a bit of a dirty word: Your budget.
But don't worry, it will not be as boring as you might think. It's vital that you know how much money you have coming in each month, and where it is going. You might be surprised at how many people are totally clueless about the workings of their bank accounts – even people who spend their days managing the finances of a business.
But if you do not have a clear idea of where your money is going, you have next to no hope of ever getting a handle on it.
Who do you share resources with? If you have a partner and share finances with them, it's a good idea to set your budget together. If you share a house with flatmates, you might want to bring them into the discussion about things such as your spending on utilities.
Your first step should be to look at the money coming in.
This will include your income from your job or business, your partner's income and any other money you earn from investments and any government support you might receive. This will be straightforward for people who are on a salary and earn the same amount each month but harder for those who are paid a wage and work variable hours, or who work in jobs where part or all of their pay comes in commission.
If you can, look at the most recent 12 months of work and add up each month's income, then divide the total amount you earnt by 12. This will give you an average monthly income to work with for your budget. If you know your income is going to be very variable, do the budget on the basis of one of your leaner months.
Then, you need to write down your expenses. Start with the things that crop up each month: Your power bill, your phone, your mobile, your food shopping, the costs associated with running your car, your insurance, any public transport costs you pay, donations you regularly make or regular costs for your kids' school. You should also include any payments you need to make on loans or to pay off your credit card.
Do not do this off the top of your head. Even the most switched-on people forget about some of the payments they make each month.
Log into your bank account and print out your recent statements. If it helps, use different coloured highlighters to work out what each payment was for. This will give you a quick visual representation of your spending and help you determine whether money is going where it should.
While you are doing this, consider how well you are paying your bills. Do you pay them as soon as they arrive, by the due date, or do you sometimes ignore them for a while? Leaving bills late each month and being stung with a penalty fee is a pointless waste of money – and a good habit to quit. Many providers will offer discounts to those who pay their bills on time. Missing out on these is just throwing money away.
Some of the things you need to budget for won't happen every month, so it's helpful if you can pull your bank statements from the past six months or even a year. Add together the amounts you've spent on things such as the registration and servicing of your car, going to the dentist, or getting a haircut then divide by the number of months. That will let you know how much you need to have set each month to be able to pay for those expenses when they do arrive.
It is really tempting to write a "perfect budget" with only the things that you really have to spend, and conservative amounts at that. But be honest with yourself about where your money is currently going, to give you an accurate representation of where you are now.
There are online budgeting tools and free apps available to help you set a budget but they are not compulsory – a piece of paper, will do the job, too.
Once you have your existing budget in place in front of you, you should be able to see whether anything is left over that you can save, as well as where there is the opportunity to trim spending to create more of a surplus at the end of each month.
Then it is time to create a new budget, for the future.
Subtract the amount you work out that you can save each fortnight or month from the total income you have coming in. That leaves you with your new spending allocation.
Start with the expenses you can't change and work through the other categories, allocating amounts to each.
You will probably find that you can only trim things such as your power bill a bit, by shopping around for a better deal, but there might be more flexibility in things such as the cost of eating out or your hobbies.
While you may want to cut your spending in a number of areas, it is important to be realistic. No matter how good with money you become, it is unlikely that your spending habits will be magically transformed over night. While you might be able to give up takeaway coffees for a month while you are feeling really inspired, is that likely to be a long-term fix? In my experience, it's usually not terribly long before a friend invites you out for lunch and you end up with an unexpected expense creeping in there.
Have a look at what you have spent on things such as movies, lunches, shopping, drinks with friends, beauty treatments, stuff for your car, app purchases or craft beer. If you only set aside $20 a month for shopping but you are currently in the habit of regularly buying $200 pairs of shoes and a new dress each weekend, you will find the budget too hard to stick to and quit.
If your goals require too big a cut in any category, you may need to extend the timeframe or work out whether there are ways you can boost your income to get you there.
It might help to consider the 50/30/20 rule: About half of your spending each month should go on the basic stuff such as paying for the oof over your head and your power bill. Unnecessary but nice to have expenses, such as your Netflix subscription, can be another 30 per cent and the remaining 20 per cent can be set aside for your future, paying off your loans and saving.
It can help to have a "sanity saver" column in your budget, available solely for the purpose of treating yourself if you start to wobble on your new plan. It is not your savings account – because you do not want to get into the habit of raiding that when you want to treat yourself. Even $10 a month will add up over time and give you the ability to buy yourself a guilt-free indulgence every now and then.
Once you have finished writing your budget, don't just stick it in in a drawer, never to be seen again. If you can, print it out, laminate it and put it on the fridge. Or keep it on your desk at work or in your bag so you can refer back to it frequently. Each month, set some time aside to check back through your budget and your spending to see what has worked and what hasn't. If there is an area where you routinely blow out, it could signal that you need to reassess how much money you have set aside.
Do you follow and of this budget advice?
Written by Susan Edmunds. First appeared on Stuff.co.nz.