If your money seems to have a habit of disappearing soon after you get it, a budget can help you get a clearer picture of where it's all going. It can enable you to manage it better, and even grow it. To work out your budget, follow the steps below:
1. Write down what you earn (your income),as close as you can make it to a weekly amount.
2. Do a little experiment where you write down everything you actually spend money on over a week. Then check out the gap between what you think you spend and the reality!
3. Now work out which of these weekly expenses are fixed (i.e. you can't change them - like rent) and which expenses are flexible (i.e. you can really do without them, or buy a cheaper version).
4. The amount you can save each week should be the difference between your income and your expenses. If you aren't saving enough, keep adjusting (reducing) your flexible items until you have the right amount of money to achieve your savings goal. You could also aim to earn more money to increase your savings.
If you find you really can't save enough money to achieve your goals, then you may have to wait longer to achieve them or further adjust your budget. Starving for a week to pay for tickets to your favourite band is a bit extreme, but taking your lunch from home instead of buying takeaway isn't!
2.How savings and interest can make you money
When you put money in a savings or investment account, it accumulates interest. The money starts to work for you! There are two ways interest is calculated:
Simple interest
(Although not used very often) this is where interest is earned only on the amount you have invested as the principal. Even if interest is earned and added to the principal, further interest is only calculated on the original principal amount, so the interest amounts don't change.
Compound interest
This is the more common way interest is calculated. When you earn interest, it is added to the principal and the total amount earns more interest during the next interest period, so you earn interest on your interest!
Interest rates
It’s also important to understand how even a small difference in interest rates can make a big difference to the return on your investments. The table below shows how.
Effect of interest rates on an investment of $10,000
Interest rate per annum |
10 year investment |
20 year investment |
5% |
$16,289 |
$26,553 |
6% |
$17,908 |
$32,071 |
7% |
$19,672 |
$38,697 |
8% |
$21,589 |
$46,610 |
3.Don’t forget inflation
Inflation is the increase of the cost of living (that is, the prices you are charged). Inflation is also measured as an annual average by the CPI (the Consumer Price Index). It's important if you are thinking about investing to find out the inflation rate before you invest. The simple rules are:
4. Saving for a short term goal
Saving for a holiday or a car? The table below shows at a glance how even small amounts can add up. Use the Savings Calculator to do your own sums.
Result of $25 a week invested over 1-5 years
@ |
1yr |
2yr |
3yr |
4yr |
5yr |
8% |
$1,352 |
$2,817 |
$4,403 |
$6,120 |
$7,980 |
9% |
$1,359 |
$2,845 |
$4,471 |
$6,249 |
$8,194 |
10% |
$1,366 |
$2,874 |
$4,540 |
$6,382 |
$8,416 |