Five elements of a good budget

Five elements of a good budget

A household budget can be your best ally, helping you navigate the complicated and sometimes frustrating world of your finances.

The key, however, is to get it right from the start, so you’re on solid ground when it comes to building up your savings account.

Fortunately, it’s not hard to create a robust budget that organises your spending and leaves enough aside for a rainy day. Ideally, it just needs five key elements:

1. Plan out every cent

A budget is essentially a blueprint for what you are going to spend in the next month. Look through your past bills to work out how much you’ll need to set aside for the essential expenses, designate a number you’ll want to save each month and work out how much you have left for guilt-free spending. Be sure no stone is left unturned and watch out for commonly missed items in the budget planning process.

2. Know much you make

If you’re going to create an accurate spending plan, you need to first know how much you’re working with. There’s no use establishing a monthly savings total if it turns out you can’t afford it. So before you even start to do the above and map out your spending, first have an accurate gauge of what you’re making each month.

According to Australian Bureau of Statistics, the average weekly income of full-time employees in Australia is $1484.50 (May, 2015). Your income could be higher or lower than this, but the important thing is to know the exact figure you’re dealing with after tax. Gather up your payslips and come up with a figure. Be sure to include other relevant data, too. If you have an investment property, remember to factor in both the rental revenue you receive and, if it’s negatively geared, the interest you’re paying on your home loan.

3. Treat yourself

Keeping a budget is often seen as a chore  — particulary if it is overly stringent.  Denying yourself pleasures you would otherwise indulge in will make you resent your budget and potentially lead you to ditching it altogether.

Give yourself some room in your budget to spend money on more frivolous items.  It will help you let off some steam but stay focused at the same time. Research by Kristin Neff at the University of Texas, Austin has found that being compassionate to yourself not only improves your psychological health, it also better motivates you. 

4. Base yourself in reality

It’s self-evident that goals are an important ingredient to success. As the Harvard Initiative for Learning and Teaching has noted, numerous studies have shown that goal-setting is both empowering and helps increase motivation. 

However, in our desire to save more, it can be easy to set overly ambitious spending goals. This might include something as misguided as putting aside no money for self-gratifying spending, or assuming that you will save more than is possible. Constantly falling short of such lofty goals not only has the potential to de-motivate you, but it can also take a toll on your happiness.

5. Be flexible

A good budget isn’t set in stone. This isn’t an iron-clad contract that you’re wedded to for better or worse for the rest of your life — budgets should be regularly reviewed and amended as necessary. 

As such, you have to design and treat your budget as a living document. As conditions change — you receive a pay cut (or rise), or perhaps your home loan calculator shows a bigger repayment total this month — your budget should be malleable enough for you to shift things around relatively painlessly. When you draw it up, be sure to pick a format that lets you make changes easily from month to month. There are numerous apps and computer programs which can make the whole process remarkably simple.

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Learn more about savings accounts

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.