The purpose of budgeting explained

In today’s fast-paced world, where financial obligations and expenses continue to rise, it has become increasingly important for individuals and households to take control of their finances. Budgeting is a crucial financial tool that helps individuals and households effectively manage their money. In an era of increasing costs of living, it has become even more important to stay above water and strive towards our financial goals.

While budgeting may not be the most exciting activity, the benefits it provides make it well worth the time and effort. Let's explore our top tips for budget planning and why they could help you.

The benefits of budgeting

Budgeting offers numerous benefits that go beyond simply tracking income and expenses. Let’s explore some of the key advantages of budgeting: 

1. Financial control

Budgeting gives you a comprehensive overview of your financial situation. It helps you understand where your money is coming from and where it is going. This awareness can help you to make conscious decisions about your spending, identify areas you can cut back, and direct funds towards your financial priorities. 

2. Goal achievement

Budgeting provides a framework for setting and achieving financial goals. Whether you’re saving for a house or paying off debt, a budget helps you to allocate resources efficiently.  

3. Debt management

One of the significant advantages of budgeting is its role in debt management. By tracking your expenses and income, you can identify opportunities to pay off debt faster. A budget allows you to allocate additional funds towards debt repayment. 

4. Improved decision making

Budgeting encourages thoughtful and informed decision making. It helps you to evaluate the financial impact of different choices before making a purchase or committing to an expense. By considering your budget, you can assess whether a particular expense aligns with your overall financial goals and make decisions that can support your long-term financial wellbeing. 

Types of savings goals

Failing to plan is planning to fail. Setting clear savings goals is an essential step in creating an effective budget. By envisioning what you want to achieve and devising a plan to attain it, you can significantly increase your chances of success.

Future-you will undoubtedly be grateful for the efforts you put into a budget plan. Here are considerations when it comes to saving.  

The little things

It’s hard to splash out on new things when all your money is in one transaction account. Starting a separate savings account where you can access your money quickly and easily when you need it, is the perfect way to squirrel away small amounts as you can. Saving for the little things can also be phrased as setting some short-term savings goals.

Short term goals are those you aim to achieve within a relatively short period, typically less than a year. Examples of short-term goals include:

• New clothes: refreshing your wardrobe with a few key pieces. 
• Christmas and birthday gifts: setting aside funds for special occasions and presents. 
• Eating out: Allocating a budget for dining out and enjoying meals at restaurants.

The fun things

It can be helpful to set a date for when you want to have a certain amount of money saved by. Going travelling in New Zealand in winter or getting married in spring? Calculate how much you need to save between now and then. Stay disciplined, and if you get tempted to go shopping, you can think about using your small savings account instead.

Medium-term goals are typically set for a timeframe ranging from 1 to 5 years. They usually involve larger expenses or significant life events. Examples of medium-term goals include:

• Going on holiday: Planning and saving for your dream vacation. 
• Buying a car: Saving up for a down payment or purchasing a vehicle outright. 
• Wedding: Allocating funds for wedding expenses and creating a memorable celebration. 

The big things

Long-term goals often require substantial financial commitments. Whether it’s purchasing your dream home or planning for a comfortable retirement, these goals require careful planning and long-term savings strategies.

In the case of home-ownership, KiwiSaver savings can provide assistance by allowing you to use a portion of your savings towards a first home purchase. Regularly contributing to your KiwiSaver account and exploring additional investment options can help you reach your long-term goals more efficiently.

Long- term goals encompass major milestones like buying a house and preparing for retirement. Examples of long-term goals include:

• Buying a house: Saving for a deposit and homeownership expenses. 
• Retirement: Planning for financial security in your later years.

KiwiSaver can help you to achieve both of those goals. Not only can you save for your retirement, but you can also choose to withdraw a portion to buy your first home. The generally locked in nature of KiwiSaver helps you to save, as you can’t access your savings  unless you fit strict criteria, for example, turning 65.

Retirement can feel like a distant goal, but small, regular investments can help you enjoy your retirement. This retirement calculator can help you set a goal to retire comfortably.

Save for the unexpected things

Sometimes things can go wrong. Preparing for a rainy day helps you stay on track when the unexpected happens. Some suggest starting a savings account, but insurance can be one of the best ways to prepare for a rainy day.

What happens if disaster strikes and you don’t have enough to cover it? You may use up all your savings and lose all of your progress. This can be helpful to think about when making a budget plan. Examples of unexpected events include:

• Car accidents: Covering repair costs. 
• Theft and damage: Protecting your belongings and property. 
• Losing your job: If you couldn’t work due to an unexpected injury or illness, Income Security Insurance could provide a weekly benefit. 

Explore savings tactics

While setting goals can help, implementing budgeting tactics can be equally important. Here are some common approaches to consider: 

1. Automate savings

You could set up automatic transfers from your primary account to your savings account each month. This can ensure consistent savings without relying on willpower alone. 

2. Track expenses

Monitoring your spending habits and identifying areas where you can cut back can be helpful. Use budgeting apps or spreadsheets to categorise expenses and gain insights into your financial patterns. 

3. Cut unnecessary costs

Review your subscriptions, memberships, and discretionary spending. Consider cancelling or reducing expenses that don’t align with your priorities. 

4. Increase income 

Explore opportunities to boost your income, such as taking on a side gig, negotiating a salary raise, or investing. The additional funds can accelerate your progress towards your savings goals. 

5. Conscious spending 

When you track your expenses, you become more aware of where your money is going. It helps you develop a conscious spending mindset by forcing you to consider the value and necessity of each purchase.

This awareness can prevent impulsive buying and encourage more intentional financial decisions. Another helpful way you can be conscious of your spending is to compare the cost of what you’re thinking about buying to what that money could look like in your savings account. 

6. Prioritise debt repayment

If you have outstanding debts, you could allocate a portion of your budget towards paying them off. Reducing or eliminating debt can help to free up more resources for savings. 

Monitor your budget

Budgeting is an ongoing process that requires regular monitoring and adjustments. Here are some steps to help ensure the effectiveness of your budget: 

1. Review regularly

Set aside time each month to review your budget and track your progress towards your goals. Identify areas where you may be overspending and make the necessary adjustments. 

2. Be flexible

Life is dynamic, and circumstances can change. Be prepared to adjust your budget when necessary. Adapt to unexpected expenses or changes in income by reallocating funds or revisiting your goals. 

3. Celebrate milestones

Recognise and celebrate your achievements along the way. When you reach a savings milestone or achieve a financial goal, reward yourself (within reason) to stay motivated and maintain a positive mindset. 

4. Seek professional advice 

If you feel overwhelmed or uncertain about your financial situation, consider speaking with a financial adviser. They can provide personalised budget advice based on your unique circumstances and help you optimise your budgeting strategies. 

Discuss your goals with MAS

Budgeting may not always be the most exciting thing to do, but it's a powerful tool for financial success. By setting clear goals, saving strategically, and regularly monitoring your budget, you can take control of your finances and work towards a brighter future.  

Whether you’re saving for the little things or focusing on long-term milestones, budgeting empowers you to make informed financial decisions. For information on MAS insurance and investments, make an appointment with a MAS Adviser.