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How to best budget for the new year

08 February 2021

The new year is a great time to start a personalised budget – simply because it’s a fresh start, you’re feeling motivated and it’s the optimum time to plan for what's coming from holidays to savings goals and even paying down debts.

And putting a budget in place is a brilliant way to stay on track and reach your goals. It’ll put an end to indiscriminate spending or wondering where your money goes – which will help you develop financial confidence and establish strong money management habits long-term.

Here are some steps for budgeting, smashing your debt and saving over 2021.

Step 1: Create a budget you can stick to

It’s easy to budget for the regular expenses you know are coming up – like rent, utility bills and groceries. But where many of us fall down is forgetting to budget for all the other bits and pieces – visits to the GP, regular medications, daily coffee or lunches, online shopping for undies every three months or getting the car serviced. It all adds up!

To get an idea of where your money goes, you could try personal finance software like PocketSmith. It groups your spending into categories so you can clearly get insights into where you overspend (wine, anyone?). Or, do it manually by going through last year’s expenses month by month. A budgeting planner can also help you figure out exactly what you need to allocate money to. Don’t forget to include your debts so you factor in paying those down each month.

Step 2: Pay off high interest debt

Paying down high interest debts, eg credit cards, should be your priority. It will help you get on top of your finances sooner. Take this as an example: you save up $5000 whilst still having $5000 owing on a credit card. This would result in a monthly interest bill of $91.67 (assuming the interest rate on your credit card is 22 percent). On the other side of that coin, your $5000 savings would only yield $4.17 of interest per month (assuming interest rate of 1 percent).

Step 3: Set up savings accounts for different goals

Whether you’re saving for a new couch, a honeymoon or investment property, separating your savings goal into an account all of its own can be a powerful motivator. Instead of your savings all being lost within the main ‘pot’, here’s another way to set yourself up:

  • Create a high-interest account and give it a nickname that relates to your saving goal (you may even want to set up an account you can’t easily touch or withdraw from);
  • Decide on the overall amount that you want to save in the coming year;
  • Break it down into chunks and milestones (ie, ‘By August I’ll have $5000);
  • Work out how much you need to put away each week or pay to reach your goal;
  • Set up a direct debit from your pay so it’s even easier to build your savings;
  • Add in any extra cash you get – such as tax rebates or inheritance – to further grow your nest egg.

Step 4. You can use a credit card to budget

If used effectively, credit cards can be a handy budgeting tool, helping you stay on track of expenses – while racking up reward points you can put towards other things down the track.

Ideally, you’ll have already worked out your budget each month by using personal finance software or going through your statements. You then use one credit card for all your expenses, tracking your purchases online throughout the month to ensure you’re sticking to your budget.

The trick to staying out of credit card debt and making this strategy work for you is to pay your card off completely each month within the interest-free period, so you pay zero interest on your purchases. Once you’ve cleared the card, you then start afresh the next month.

Sticking to your budget all year

Some people may find a budget a valuable tool for meeting goals, while others feel too restricted by it – especially long term. So how can you stay on track? Here are some tips.

Pay with a debit card. There’s no doubt about it – Tap’n’Go doesn’t feel as if you’re spending real money like using cash does. So try transfering what you need for a week and to a debit card account. Once you’ve spent your weekly allowance, there’s no more spending until the next weekly transfer rolls around.

Sleep on it. If you’re a slave to instant gratification, force yourself to break the habit by giving yourself a night or even a few days to think about whether you really need to buy something. Chances are, the desire to buy will be much easier to resist.

Review your budget regularly. Things change, new expenses crop up – so a budget isn’t something you can set and forget. Check it regularly to ensure you’re on top of your finances – and for added motivation to keep saving and paying off debt.

Creating a realistic budget and sticking to it might be challenging at times, but it’s a no-brainer if you want to establish better financial habits – and meet your goals – instead of always living from paycheck to paycheck. We hope these tips have inspired you to create a budget and start kicking some financial goals for yourself in 2021!

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.