How budgeting works
A budget is a way of understanding how income and expenses are recorded over a period of time. Some people use budgets to review spending patterns, plan for future expenses, or understand how their money is allocated.
If you haven’t created a budget before, the process can feel unfamiliar at first. The steps below outline common approaches people use when getting started.
1. Review spending patterns
Many budgets begin by identifying where money is currently being spent. Understanding spending patterns can provide a clearer picture of regular expenses and occasional costs.
This may include everyday items such as food, transport, subscriptions, and bills, as well as smaller discretionary purchases.
People track spending in different ways, depending on what they find easiest to maintain consistently, including:
- Budgeting apps such as Frollo or PocketSmith
- Simple spreadsheets
- Written notes or paper-based tracking
The method used is less important than consistency over time.
2. Identify sources of income
When reviewing a budget, some people list their income sources to understand how much money is coming in over a given period. This may include wages or salary, government payments, or other regular income.
Income amounts can change over time, so budgets may need to be updated if circumstances change.
3. Create a basic budget structure
Once income and expenses are identified, some people choose to organise them into categories to better understand how money is allocated.
One commonly referenced framework is the 50/30/20 approach, which groups spending into:
- needs (such as housing and essential bills),
- discretionary spending, and
- savings or debt repayment.
This is a general guideline only, and many people adjust categories or percentages to reflect their own situation.
4. Review and adjust over time
Budgets are often reviewed periodically to check whether spending patterns have changed. Some people revisit their budget monthly or after significant life changes, such as a new job, changes in household size, or shifts in living costs.
Updating a budget over time can help keep it relevant as circumstances evolve.
Important information
The information provided here is general in nature and does not take into account your objectives, financial situation, or needs. It should not be relied on as financial, legal, or professional advice.
Before making a financial decision, you may wish to consider whether the information is appropriate for your circumstances and seek independent financial, legal, tax, or other professional advice.
Disclaimer: This article is for general information only. It does not take into account your individual circumstances and is not financial advice. Consider seeking independent advice before making financial decisions.
