Budgeting for Beginners

September 30, 2008

It became apparent to me a few days ago that a person I was speaking to had little to no idea how to budget. And I was surprised. Very surprised. And this is because budgeting is actually the easiest thing in the world.

Here’s the theory. If you’re on a salary, or regular waged hours, then you have  a fixed income. And that’s a good thing in budgeting theory, because you always know exactly how much you have to spend. The scheme is that every payday you take this amount and subtract your fixed costs. These will usually include accommodation, utilities and food. Everything left after you subtract the fixed costs from your fixed income is what they call “walking around money”. Simple, aeh?

How I manage my own budget and easily work out my walking around money is to run the old two-bank account scheme. In this scheme you have one bank account into which your income gets put. Then you have a second account that your fixed costs come out of. The trick is to have an autopayment that goes out of your “income account” and into your “costs account” on the same day as your pay. This means that your costs get yanked out of your spending money before you even see it.

Or put another way, everything in your account on payday is spending money!! Or… savings. But that’s another issue. Let’s just get out bills paid on time first of all.

The only problem with this scheme is that not all costs are actually fixed. The mortgage or rent is usually the same every week, but things like power and food bills vary from month to month. What I do then is to guess roughly how much the utilities will be, and get the autopayment to cover that amount, plus a little more. I do the same with food. After all, the costs account is only there as a holding account. If there’s heaps of excess money I can always recover it.

The only worry with this system is that I might draw more money out for say, a christmas food bill, than I have in the account. But really the question there is checking on how much is in the account just before the accommodation costs are drawn out, and making sure the rent is covered. For power bills, just check how much you spend in a particular calendar month and set aside a little more than that amount for the same month this year.

If you’re just plain bad with over-spending on food bills, or the power bill fluctuated wildly, then run three accounts. One for spending, one for accomodation, one for non-fixed costs. That way if the food and bills account is in trouble, you’ve still got a roof over your head.

The good news is that if you’re reading this site then you’re probably interested in making sure that you don’t wildly overspend…

As I say, this system has worked for me for years. Having the rent and bills removed early means I know exactly how much walking around money (read: pub money) I had. As long as I didn’t blow the whole lot on wine and loose women I could always chip a little more money into the costs account if it was running a little low. And likewise, if the costs account was consistently in credit at the end of the month I’d draw a little out as a reward!

Ok! Questions!



  1. OK, it’s not a question, it’s a suggestion about estimating:

    Keep your bills. Keep a year’s worth of bills. And then divide your annual costs by whatever your pay frequency is.

    You could, like me, obsessively record every damned thing, but it’s not necessary for a rough and ready budget. But even a crude budget has to work at an annual level, for things like car registration or insurance premiums or your average number of trips to the doctor, things that don’t happen regularly or frequently.

    I don’t actually have a budget, per se. I just have a damned good idea what a usual month’s expenditure should be, and I put all excess into savings as soon as I get paid, knowing that there’s enough left for the bills and a wee bit of frivolity.

    I pay for frivolity out of a “personal” account, and bills out of a “business” account, and if a surplus builds up in either, it goes to savings on top of what I already put there.

    (I use Kiwibank, and one of the nice things about Kiwibank is that they offer an account that can be subdivided into subaccounts, but when they work out the interest, they look at the group balance. If your group balance is more than four grand, you pay no fees.)

  2. You’re so right. Budgeting is pretty straightforward.

    Also I agree with Stephen, in some cases budgeting over a month doesn’t quite make sense and you have to ‘budget’ over the space of a year to figure out what you really spend.

  3. i do the same. but it sounded like the main hurdle for the person i spoke to was just getting to the idea that some money was off-limits.

    it’s the old problem of seeing all the money in your paycheque as “spending money”, instead of saving you’re dipping into…

    i actually realised budgeting by hearing abotu an old soak who’d go home on payday, give the housekeeping money to the wife, then head to the pub with the rest.

    i thought, “good idea, as long as you don’t do the boozing bit.”

  4. Further on estimating. We keep a spreadsheet with 3 columns for each type of expense – week, month and year. Only one column is filled in by you – whichever one is appropriate, and the others are calculated from that. It means that you can fill in the numbers the way you think about them and still end up with a weekly total at the end.

    Extra bonus tip… use colour or bold or something to distinguish the entered values from the calculated ones, so you can easily see the basis for your estimation.

    Been using this setup for at least 8 years and 2 countries now.

  5. We don’t do anything quite so strict, but we have a very good idea of what we earn (after tax) and spend each year. So we know that we need to keep our bank balance at around x thousand dollars. If it’s getting a little low, we tighten our belts for a while. If it’s a little high and it seems to be staying that way, we reset our notional x thousand amount. We operate one of those revolving credit mortgages, and have done so for about 8 years now, very successfully. The trick is not to spend up large when the balance gets higher.

  6. hey, whoa there deborah… you’re starting to wander into ‘intermediate budgeting’ with all your talk of revolving mortgages…

  7. personally i don’t think budgeting is as easy as all that & loads of people find it extremely difficult.

    i think sites like sorted have good budgeting tools
    also if people have problems with budgeting you can get help through your local Citizens Advice Bureau.

    for people on a very low income only running one bank account is a good thing as multiple accounts = multiple fees each month..

  8. Sue, not all bank accounts have monthly fees. A lot of banks will offer a transaction account where you’re only charged for withdrawing money (i.e. automatic payments, direct debits etc). Kiwibank even doesn’t charge for transfers between your Kiwibank accounts.

    It’s worth checking out what other banks offer in account fees. Things are pretty competitive at the moment, so you should be able to get a better deal.

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