How to create a household budget from scratch

If I could only offer you one piece of money advice, it would be this: track your spending.

If I could offer you two, it would be track your spending and then create a budget.

If you have never tracked your spending in your life, you can also download my personal spending tracker here and follow me on Instagram here to see how I use it.

Illustration: Dionne Gain Credit:

If the only thing you did as a result reading this column was to start writing down everything you spend, I would be happy. If you colour-coded all your spending using highlighters that correspond to my 10 household budgeting categories, I would – frankly – be ecstatic.

Did you miss my series breaking down my 10 spending categories? No worries, sign up to receive my free weekly newsletter email via this link newsletters.theage.com.au/moneywithjess or newsletters.smh.com.au/moneywithjess. I send out links each week to my 10 budget category worksheets. If you’re impatient, email me!

Ok, let’s assume you are mildly familiar with where your money goes, it’s time to create a budget. If you’re not, I still encourage you to still have a stab. Download my free monthly budget template here.

First: set a time frame for your budget and determine your income. I budget monthly, even though I am paid fortnightly. Because I am paid regularly, I can just divide my annual salary by 12 to get my monthly income. For people on irregular incomes, you can either choose to estimate a sum you think you are likely to receive, or you can budget off the minimum you know you will receive. Up to you.

Then, you need to list all your outgoings across three different types of expenditure: direct debits, variable spending and regular contributions towards large expenses or spending goals (I call these “Future Funds” – more later).

Direct debits

First, start by listing all the direct debits that hit your accounts on a regular basis. My list includes my mortgage interest, electricity, internet, cloud storage, gym fees, Netflix and union fees.

Variable spending

Second, consider your variable spending. My monthly amounts includes cleaning supplies, basic hygiene items, petrol, public transport fares, parking fees, tolls, food, doctors and specialists, medicine, after-school care, books, stationery, clothes, haircuts, eating out and all entertainment expenses (I set a monthly sum of $100 each to amuse both myself and my son).

Now, if you haven’t tracked your spending, it’s likely you will have no idea how much you spend on each of these. That’s OK. Take a wild guess. Only then can you enjoy the fun insights later of “oh wow, I spend WAAAAY more than I think” or, conversely, “oh cool, I’m not spending as much as a I thought”.

Budgeting is not about perfection; it’s about gaining insights into your spending habits. On a deeper level, it is also about figuring out if what you spend money on actually makes you happy. But baby steps first, people.

Future funds

Third, and this is the hard one, you need to consider all those big expenses that sit outside your usual budget horizon or that only hit it irregularly. For me, these fall into seven categories.

They include:

• Household: strata fees, council rates, home insurance, water bills and $1000 a year for emergency household repairs
• Car: registration, comprehensive insurance, compulsory third party insurance, regular servicing and repairs, parts and roadside assist
• School: school fees, uniforms and extra curricular activities
• Health: health insurance and $1000 a year for unexpected medical expenses
• Birthdays and Christmas: gifts for myself, my son and others
• Holidays: all costs associated with taking a holiday
• Professional fees: financial, legal and other fees to get my financial affairs in order

At the start of each financial year, I make an estimate of my likely expenses in each category. Because I budget monthly, I then divide those costs into 12 and include them as line items in my budget (“Household Fund” etc) to make sure I am provisioning for such future costs. If you don’t, one big bill is going to blow your monthly budget entirely.

Once you have a rough idea of your spending, you can simply deduct it from your income to figure out how much you can potentially save each budget period.

Savings can be in the form of things such as cash, investing in shares, contributing to superannuation or, most commonly, paying down or retiring debts (including principal repayments on credit cards, personal debts and mortgages).

It’s taken me a long time to get my head around it, but principal repayments on debt are actually a form of savings, because they either discharge you of a debt or build equity in an asset you own.

It’s a trick, though, because lenders generally don’t tell you what your principal repayments actually are. You have to calculate them as a residual between your total debt payments and interest charges.

In my budgeting system, I list my interest costs under my expenses and factor in repayments on my mortgage principal as a part of my savings. If that is too hard at this stage, you have my permission to just include all debt servicing costs (total mortgage payments etc) as an expense. Baby steps.

If this all sounds a bit like hard work to you, congratulations! You’ve grasped it. All good things are worth a bit of work. And seizing control of your financial future is one of them.

But you’ve read this far, so I reckon you’re up to the challenge.

You can follow Jess’s budgeting and money adventures on Instagram at @moneywithjess and subscribe to her free weekly email via the Sun-Herald here and the Age here.