How to create a budget you don’t hate

I’d been tracking expenses for a grand total of two months when I spent $500 in one month on eating out.

“Jesus Christ,” I thought. “Am I doing that every month?” For me, $500 in a month (for one person, with no super-fancy meals) was a lot. Thankfully, I’ve rarely come close to that since.

Budgeting doesn’t have to be a drag.

Fine dining isn’t high-value for me, but quality time with friends is. That month, I’d caught up with two friends who were in from out of town, a group I hadn’t seen in ages, and a few other catch-ups here and there. The money was worth the quality time spent. I managed the financial impact because I have a budget that I don’t hate.

You’re doing yourself and your money a disservice when you don’t have a plan. Without one, your money will disappear, even if you don’t mean it to.

Having a structure where your dollars know where they are all going, whether they’re reserved for fun or work, allows you to get the most return on the time you spent getting the dollars in the first place.

Account types

Here is a heads-up on the types of accounts you’ll need for your budget:

• Regular expenses: The expenses you need to pay – housing, utilities, food, childcare and direct debits such as health/pet insurance, gym membership etc.
• Irregular expenses: The expenses that are irregular and often sting. Think car registration, servicing and insurance, professional registration costs, dentist, specialists, optometrist, etc.
• Treats: Stuff that isn’t essential to living but essential to happiness.
• Debt paydowns: This is where you take your debts from your shit list to your hit list. If you have no debt, you won’t need this.
• Emergency fund: I use “emergency fund” as most people are familiar with this term. However, think of it more as your ultimate empowerment fund. You can build this up for whatever you want – quitting a job, replacing your hot water unit, insurance excesses, emergency flights home, etc.
• Sinking funds: This is a goal account for whatever you want: holidays, school fees, starting a charity, home cinema, tattoos, etc. I once had a client with a knitting fund.

Step 1. Start with your regular and irregular costs

Let’s get the basics squared away. Go through at least three months of bank transactions. Currently, you’re looking for your regular and irregular ‘needs’ expenses.

Have them on two different lists, one for regular and one for irregular. Include what they are, how often they occur and how much they are.

It’s always better to acknowledge and plan for your weaknesses, rather than relying on your self-control.

I recommend going back anywhere from six months to a full year to catch your irregular expenses in full, and to get a better idea of your utility costs. There can be a big variation between your summer and winter costs for these.

Even though a mortgage is a debt, if you have one, count your repayments as a regular cost in this part rather than a debt paydown. Debt paydowns should focus on non-housing (and usually high-interest, high-stress) debt. Your notes will look something like Betty’s:

A rough outline of Betty’s first budget.

Work out what this means

Assuming you’re doing your budget weekly, you need to convert these to weekly costs. For your utilities, get a full year’s worth for accurate averaging. Taking Betty’s examples from above, we take the irregular expenses and convert them to an annual figure. This comes out at $3380. Divide this by 52 and you get $65 a week.

Looking at Betty’s regular expenses, we calculate them depending on their regularity. For her utilities, which are either bimonthly or quarterly, we add up the total yearly cost across the different amounts and then divide it by 52 weeks.

The amounts that are monthly we just divide by four (or 4.33 if you want to be really precise), and the fortnightly amounts just by two. If possible, we add a small buffer into the weekly amount to provide some coverage when things fluctuate slightly, or if we don’t quite have enough in there to cover the expenses the first time around while the system is getting set up.

This gives us a total weekly cost of $801.

Note on regular expenses

I highly recommend setting up as many of your expenses as you can to match your budget regularity. So, transfer $23 a week to your electricity account, $6 to water, and pay your rent and phone bill weekly.

This minimises your chances of accidentally spending money from your regular bills account because you forgot that your phone, health insurance and Spotify bills are all coming out the day before you get paid next week. After doing this step, Betty is left with $634.

Step 2. Controversy

Rather than adding your debts or emergency fund next, I recommend choosing your treats fund. Let me explain why. A common problem when sticking to a budget is that we aren’t giving ourselves permission to spend.

In both financial counselling and financial coaching, clients would say, “I keep dipping into my savings/bills/expenses account and blowing it,” or “I can’t stick to the budget I set myself.” They all wanted to know how to change what they saw as a moral failing.

I asked them how much money they give themselves to spend and 90 per cent of the time they said, “None, I can’t afford to be spending money on myself with these debts” or “Whatever’s left at the end”.

In theory, that’s all good. But money was getting spent anyway, and it was getting spent hard. They would have this shame-spend cycle where every time money was spent when it “shouldn’t be”, they were miserable and swore to do better next time.

Deprivation causes desperation. If you’re starting a new system, having a healthy dose of money to spend makes it far more enjoyable, and you’re more likely to succeed.

So, find a way to increase the fun money as much as possible – even if it means reducing debt payments to their minimum for a while, or reducing your savings rate (especially if you were dipping into it anyway). And if you can, increase it a lot to start with.

Once you acknowledge the shame or despair the overspending is causing, invite it to come in and take a seat at the budgeting table. It chills out. If you get your amounts and strategy right, you’ll often have money left, you’ll be more relaxed about buying things for yourself, and you’ll end up spending less.

The trick is not to force it. If you start feeling guilty about treating yourself, remember, it’s all part of the process. The more generous you are, the quicker you’ll adapt to having permission to spend, and then you can tweak the budget amounts as you go.

Adding the treat fund

Most people have a rough idea of what their minimum debt repayments are, so keep this in mind when you’re choosing your amount, though you can always rejig this if you get to the end and the numbers aren’t where you’d like them.

Betty knows she has roughly $150 a week in debt payments, so she’s not going to give herself $600 a week. She’s also got a couple of other things she wants to add. So, Betty gives herself $275 a week because she wants to be generous, but she feels $300 is excessive.

Step 3. The battle of the priorities

When it comes to emergency funds versus debt, which comes first? This is a fine balancing act. You don’t want to miss payments on your debts because you’re trying to build up your emergency fund, but if you have no emergency fund, the chances of having an emergency are much higher.

Wherever possible, I’d recommend making minimum payments on your debts, and then adding to your emergency fund. There will be ways to increase the debt account and start your proper debt paydowns, including:

• Adding more to the debts account if there’s leftover.
• Reducing the treats fund over time.
• Having extra money come in from somewhere.
• Having enough in your emergency fund that you feel safe pausing it for a while.

Creating multiple “sinking” funds can help you save for that unexpected expense, like a surprise vet bill.Credit: Nine

Conveniently, Betty has $169 in minimum debt repayments (just a little more than her estimate), leaving her with $190. Betty doesn’t have any money in her emergency fund yet, so she’s going to drop $100 per week in there until she has a bit of a cushion.

If you already have an emergency fund, or you don’t have any debts, the choice is easy. You can smugly skip this step.

Victoria Vivente’s book is out now.Credit: Affirm

Step 4. The sink and swims

Here is where your sinking funds come in. The options are endless with how many you can have and how much you put in each one. You could have 10 sinking funds that each get $10 a week.

I started with two in the beginning and added more as I realised there were other things I wanted to account for specifically and separately. A lot of this depends on your thinking style.

Some people love to have lots of labelled compartments, and some people prefer just a couple. I’ve had quite a few clients set up a “going off the rails fund” because they have a mental illness or health condition that causes them to lose a lot of control when it comes to spending.

This particular sinking fund acts like a stopgap. The person prepares while things are good, so when things are bad, they go through that reserved money first, reducing the harm to the other accounts. It doesn’t necessarily prevent the use of the money from their other accounts, but it usually lessens the blow.

It’s always better to acknowledge and plan for your weaknesses, rather than relying on your self-control. Do you always go overboard at Christmas or Eid or Hanukkah? Let’s make an account for it and save all year round.

Want to invest? There are sinking funds for that too. Your sinking funds don’t all have to be goals, and they don’t have to be lofty, fancy ambitions. They are whatever you want.

Betty decides that she’s going to have two sinking funds. She’ll save for a cat and for laser eye surgery. Each fund will get $30 for now. It’s not much, but she’ll work on adjusting it as she goes.

With her last $30, Betty wants to save for a trip, but because she doesn’t have any savings to work with, she’s going to top up her irregular expenses account for a while, just in case something is due before she’s saved enough from her $65 a week.

Considerations when choosing your sinking funds

What always catches you out in your money cycles? Is it council rates, school supplies (and the dreaded shoes), specialist appointments or insurance renewals? For me, it was always my licence, registration and pet insurance, so I needed to make sure that was planned for somewhere.

What do you always wish you had more money for, or always feel bad about not having money to spend on? Maybe that’s flowers for yourself or your partner. Maybe it’s gifts, donations or cute stationery. Maybe it’s the movies – they cost a small car repayment these days.

Now is the time to create space for that thing. Sometimes, clients found this an absolute joy, and other times, having the money there meant the craving went away. Either way, it’s a win.

Leftovers

If you feel like you’ve done what you need to do on your sinking funds and still have money left over, you can:

• Top up your emergency fund.
• Top up your irregular expenses.
• Start smashing your debt down.
• Create a “hold and wait” sinking fund until the answer finds you.
• Consider investing.

This is an edited extract from Know Your Worth: Heal your relationship with your money and yourself by Victoria Vivente (Affirm Press, $29.99). Out Now.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.