'Illogical to run without one': Expert tips on how to make a financial budget work for you

Wallet with New Zealand dollars
Experts share top tips on how to get real results from your budget. Photo credit: Getty.

For a budget to work, spending needs to be tracked against it and there should be money left over, experts say.

The New Year is an ideal time to step out of the day-to-day rush, review last year's spending and set goals for the year ahead. 

A budget shows where money goes, when goals are likely to be reached and how much is left, and can be a huge help.

A budget lists everything coming in (income) and subtracts fixed costs (e.g. rent or mortgage, power, rates and insurance), flexible costs (e.g. repairs) and discretionary expenses (e.g. entertainment and memberships).  

EnableMe managing director Hannah McQueen says a budget gives people the opportunity to check their progress and put things back on track. But for those who want to avoid reverting back to old habits - and their budget becoming a theoretical spreadsheet - it's important to track spending against it.

"A budget is only useful if you track spending against it...the goal of any budget is to make sure there's money left over, so that it can be put to work," McQueen says.

Budgets either work well or fail, Moneyhub founder Christopher Walsh says. People who find themselves still trapped in debt or buying things they don't need can start by cutting back on their biggest expenses.

"For example, if your entertainment budget is $500 a month and you spend that in over a week, you need to take action," Walsh says. 

"Entertainment costs are the biggest budget blowouts because it's an emotional spend and people don't control their money as they would with other expenses," Walsh adds.

Food is another big household expense and an area where people often overspend.  McQueen suggests adding up the total food budget  (takeaways, coffees, wines, extra supermarket stops and brunches) and either withdrawing the money in cash or keeping it in a separate account.  This brings attention to all those small, incidental purchases that add up over time.  

"Determine a total, withdraw it in cash and test that budget for six weeks….I guarantee you'll spend less," McQueen adds.

As timing of costs like property rates and insurance can put pressure on household cash flow, it's useful to keep an eye on both the budget and how much is left in the account before spending more. More money can be saved by remembering a budget is a limit, not a spending target.

"Budgets should be used as limits, but you don't need to spend what you've allocated... having a surplus by underspending gives you a buffer and lets you invest in your future," Walsh adds.

Budgets encourage people to check not only their bank balance but also the amounts going in and out of their account. This keeps spending front of mind.

"Companies and government departments all have budgets, so it's illogical for individuals to run without one. 

"Budgets are great for everyone irrespective of income and assets," Walsh says. 

Once money has been allocated, rather than be restrictive, a budget allows money to be spent without guilt. Instead of being frittered away, that left over cash could be invested, put towards a house deposit, repaying the mortgage faster, a desired lifestyle in retirement...or just enjoying time away.