How to budget responsibly (and still live like a young person)

One of the most common questions I get from friends and family is: how to budget responsibly?

Managing money is a talent of mine. I’ve helped turn 30k debts into 30k savings accounts in just a year. And really, my method comes down to understanding the financial tools available to you and asking yourself a few honest questions.

How much are you comfortable spending on non-essentials?

This is the first question I’ll ask anyone who comes to me with budgeting questions. Some will want to work out how much to save first. But I think this is a better place to start.

Don’t include rent or bills. Just think about incidentals. Coffees, Ubers, drinks, eating out, clothes, your Netflix subscription. You need to put a number on how much you’re comfortable spending on intangible, day-to-day niceties that don’t contribute to your financial future.

Once you have that number, whatever it is, that is the amount of money that should live in your spending account. No more, no less.

If you start your budget by planning your savings, you can end up over-spending. Let’s say you want to save at least $500 per month so you transfer that amount into your savings account. That means you leave the rest of your cash in your spending account. And once it’s in there, it’s remarkably easy to spend.

As for me, I am only comfortable spending $1000 on random bits and bobs per month. So, I only ever leave $1000 in my spending account – the rest of my cash lives in different accounts. And if I run out, that’s my fault.

 

How much do you actually spend on non-essentials?

This is the painful bit that no one wants to do. Grab your bank statement, app or credit card statement and your phone calculator. Then add up all those coffees, the on-the-run lunches, the new sneakers, movie tickets, after work drinks… What does that number actually look like. I once had someone say they were comfortable spending no more than $1200 a month on random things. But when they added up all their incidentals it was more like $2200.

The idea behind this exercise is not to shame your spending habits, but to make sure you are comfortable with the amount of money you’re spending. If you’re comfortable with spending $2200, that’s fine. But many people are not. It’s important to know exactly how much is leaving your account. And what you’re spending it on.

 

How much do you want to save?

This is the next question I ask. A financial advice article I once read said that you should try and save 30% of your salary, but in cities like Sydney and Melbourne, it’s not that easy. Regardless, try and stretch yourself a little. Aim as high as you’re comfortable with.

Once you have the amount of money you’d like to save per month, you need to factor in how much money you’re comfortable with spending and how much you earn. If you want to save $2000 per month and you spend $1000 but you only earn $2500, then you have a problem.

Both numbers with have to shift slightly to be reasonable.

 

Set up different accounts

Most banking apps allow you to set up additional accounts in just a few seconds. So do it.

I recommend having at least three: long-term savings, an everyday spending and a rent and bills account.

When you get paid, transfer your monthly rent and bills money into the designated account. Leave it there and don’t touch it until you need to pay your bills. Then transfer the amount of money you’re comfortable spending on bullshit into your spending account – everything else goes into savings.

By having everything in it’s own separate account, you have a much clearer picture of exactly how much spending cash and how much savings cash you have. It also makes it a lot harder to accidentally spend your rent when it lives in a different account.

 

Now, the hard part – reducing your spending

The problem that many people have is reducing their spending to a number that is healthy. It’s all well and good to say you only want to spend $1000 per month on incidentals, but it’s hard to stick to. The idea is still live but make the occasional concession.

It’s not that you can’t live. You need to still be able to enjoy yourself, or saving and budgeting becomes a slog. If there isn’t room to let loose, you won’t stick to your budget.

So it comes down to choices.

 

Remember when you pulled out your bank statement and calculated your incidental spending?

Go back to that list. Where is your money going? Dining out? Take away coffee? Drinks? Subscription streaming? The reality is that you can’t have it all.

For example, if you (as many people are) are subscribed to Netflix, Stan, Disney+, Apple TV+, Spotify and Apple Music, you’d be spending between $70 to $100 on entertainment services a month. And you probably don’t even use them all. This is where choices come in. Pick one music service and one video service and you could save yourself close to $1000 a year.

Another big one for some is takeaway food and dining out. You know that bowl of pasta your ordered on Uber Eats for $25, you could have made it at home it might have only cost $3 or $4. It’s not that you can’t eat out, but maybe choose to do so on special occasions. And try your best to get into the habit of cooking. Buy a fun cookbook and start experimenting.

We all know cooking at home is cheaper, but even that can get bloody expensive. So, if you’re in serious savings mode, you’ll need to look at budget-friendly foods that you can cook in bulk and freeze. Think soups, sauces and pot roasts. They’re delicious, cheap and freeze beautifully.

A hard one for some is alcohol and the reality is that you might not be able to afford to drink every Friday night. So you’ll need to pick. Choose your drinking nights wisely and make them good ones. Because if you’re committed to saving, you can’t get loose every Friday and Saturday. If you’re best-friend’s birthday is next weekend, you might need to stay in this weekend.

The next big issue is take away coffee. One person I budgeted with tallied up that they spent $240 a month on coffee. Is your take away coffee important enough to you that you’re willing to spend $240 a month on it? $240 can get you two or even three decent nights out at the pub with your friends. What would your rather? The coffee or the nights out? There is no wrong answer here. You just need to work out what you would rather do.

If you’re looking for more detail on how to reduce your spending (without living like a pauper), we’ll have another article coming soon.

 

Maxmise your money

Is your money working as hard as it could be? What the interest rate like on your savings account? 

Once you have about $25,000 in your account, you can earn about $1000 per year on interest. That’s money for doing literally nothing. But you can only access that if you have a decent savings account. Check out your current savings account interest rate, it will be listed in the banking app somewhere. The top rates in Australia right now are about 5% so if you’re not getting that, it might be time to switch.

You can also consider getting into things like shares and investment portfolios.

 

Eliminate debt

I know far too many people with crazy amounts of credit card debt that they’re paying stupid interest rates on. And you just don’t have to. Just balance transfer.

A balance transfer is where you move your credit card debt onto another credit card. Why would you do that? Because there are literally dozens of 0% interest deals and they’re incredibly easy to get. A simple Google search will show you just how many credit card providers are willing to let you move your credit card debt over and pay 0% interest on it for 6 months, 12 months or even 24 months.

A deal like this eliminates your interest repayments and allows you to pay down the actual debt – instead of paying interest and fees. Balance transfers allow you to take back control and give you more time to pay off your debt.

Just make sure you don’t end up making the debt bigger. If you’re not going to work hard to pay down your debt, then a balance transfer might not be the right option for you.