Budget Buckets for Beginners

There are many ways to create a budget, and quite often it starts with analysing your current expenses. I'm certain that this prevents some people from taking the first step.

I try to simplify it as per in the example of my sample future client Chloe. Chloe is 18 and works in hospitality. She saves $200 per week which is great. However she spends $433 per week on having fun and treating herself. What Chloe doesn't know, is that she may never again have the ability to save like she does now. She learnt about compound interest at school, but promptly forgot that it might work for her one day.

There's no point in trying to build a budget for Chloe that fits a typical system where you expect to spend 60% of your pay on necessities.

My budget steps are to look at your fixed expenses per pay period - in Chloe's case, rent, mobile phone and Spotify. Chloe should have a bank account named Bills and transfer enough money here every payday to cover her fixed expenses and to allow for any weeks where she doesn't work. Round figures are easy to work with, so I've calculated a figure of $100 per week and I've assumed that she works and is paid 48 weeks per year. So she will have 52 weeks of fixed costs covered and 4 weeks of $300 spending money for those weeks where she doesn't work

If she earns $700 per week this will leave $600 which can be equally split between her other accounts that she sets up "savings" and "spending". I've created a template for Chloe where she inputs her take home income each week and it calculates what amount to transfer to which account.

It has formulas that change the proportion that is saved and spent depending on her income. This helps to reinforce the fact that you should not just spend any additional money that you earn.

If she sticks to this plan, and if she earns 4.5% interest, she should have close to $40,000 in two years.

Savings Goals

As a mortgage broker, I'd like to see Chloe save a deposit and buy a house. However she may want to travel, go to uni, move out of home, so she should think about her own goals.

As a person who knows things don't always go to plan, so Chloe should set up two more accounts - her emergency fund and her short term savings account. The savings from each pay should be directed to these accounts and once they hit their goals, then the savings are redirected back to the long term savings account (aka the house deposit).

"Emergency Fund" - this should have around 6 months of living expenses parked here. At her stage I would suggest around $2000, but each year she should assess her living expenses and top up this account using the weekly saving's amount. And note that this is an emergency fund, there should be no app or atm card access that lets you dip in because you overspent. This is for the bond if you suddenly need to leave where you are living, for a fridge if your fridge broke down out of the blue, this is your living expenses if you lose your job or are unwell and cannot work.

Once the emergency funds is established, if Chloe has a short term goal to save for, she should redirect her weekly savings here.

The point here is to aim to never take funds from the account for any reason other than its purpose. However we can redirect our weekly savings amount to where it needs to go.

You can access this template using the google doc link below. Please note that this is a sample only. If you would like me to create a template for you , please book a phone call through my website. In most cases I don't charge for my services.

https://docs.google.com/spreadsheets/d/1sXWfT0Q5BO2aoS78oabQt2IlMR5YtTI0Hm2jz4BMW6I/edit?usp=sharing