Traditional budgets have many flaws – while they consider what you spend every month, they don't address the reality of daily life. Many budgets include income, rent, electricity and supermarket expenses, but what about takeaway coffee, school uniforms, annual holidays and car repairs? 

This guide aims to fix the problems with budgets that can still leave you with a cash crunch, unpaid bills and/or an overdraft. We aim to help you manage your cash and avoid any surprises by taking a complete look at your expenses. 

​This guide covers:

• What is overspending?
• Why should I budget?
• Know this: ​A Budget needs to have a purpose
• Don't walk towards a debt crisis – get in control before it's too late
• What can I do to stop overspending?

Overspending is not complicated, and quite simply means spending more than what you earn. Such a situation can start off small – paying less than the full balance owed on your credit card, going into overdraft to pay for a necessary purchase like fixing the car, or buying something with long-term finance unsure if you're able to repay what's owed in the interest-free period.  Overspending doesn't happen all at once – it creeps up. And debt is often expensive. Not making a repayment means interest costs, which soon eats into the money you can spend on what you actually need. Overspending is never good, and solving the issue comes down living within your means. 

A budget, when properly calculated, is the most accurate tool to measure your finances. Its answer tells you exactly what where you spend your money. It doesn't matter if you are a high-income earner or a beneficiary, unless you're a hermit spending a fraction of what you earn, it's a sensible idea to do a budget. Most importantly, a budget answers two questions:

You probably don't need a budget to tell you this – if you're spending your savings or drowning in debt, you're like to be overspending. However, without preparing a budget, it's tough to see where your money goes and what you can cut back on. If you're continuously crashing into debt by way of unpaid credit cards, store cards and/or overdraft, it's not a happy existence. 

If you're significantly overspending, a debt crisis (LINK) is a real risk, and for this reason alone a Budget Planner is essential to give a full assessment of your finances and confirm if you do spend more than you earn.

The Budget Planner will tell you where you are spending, which allows you to adjust and prioritise what you do with your money. The aim is to avoid overspending and live within your means. How successful a budget is comes down to one thing – willpower. If you can follow the budget, then you'll forever be happy in a financial sense. 

Budgets typically focus on one month, but no month is like another, and therefore you're setting up yourself to fail by underestimating what you really spend. Christmas presents, a new appliance and holiday costs are seldom factored into a budget, yet it's these costs which can stretch finances the most. 

A traditional budget will be vague - categories like 'motoring', for example, make it near-impossible to account for all of the motoring costs that you have to pay every year. 'Motoring' costs are not budgeted by allocating $100 or $200 a month, but by exhaustively adding up everything motoring-related. This means 'motoring' must include WOF costs, repairs, new tyres, petrol, car insurance, roadside assistance cover, parking fees, speeding fines and more. The Budget Planner we recommend has over 50 separate categories.

Before you deep dive into setting up a budget, consider the tips for completing it successfully:

1. Who are you filling out the budget for…you, you and your partner or your family?
If you're part of a couple living together, it's likely your finances cannot be separated. This means you're best to sit down and complete it together. If you're a parent with children, you'll need to consider everything that everyone living with you spends. The good news is it's not as difficult as it sounds and you can make real progress without spending hours and hours. 

2. Are you unsure of the exact numbers? Estimate a larger amount to avoid being caught out. 
Purposely underestimating your expenses is a big budgeting no-no – by doing so, you're only causing misery later on. Try to be as accurate as you can, and if you are not sure, put down a number that's a bit larger than what you believe you spend. Be sure to avoid double-counting too – if you've put car insurance in the motoring section, don't list it again in the insurance section.

3. Do you have a credit card? Include all the debt you have in the credit card section
The Budget Planner's credit card section's purpose is to cover ALL of your existing credit card debt. This section doesn't relate to credit card spending, i.e. groceries and petrol charged to your credit card – those expenses go in food and motoring respectively.

4. How do you budget for holidays?
When you go away, you'll spend on things you would at home, like groceries, heating and petrol. To be cautious, and because holidays can be more expensive even for the best budgeter predicted, you can add in your holiday costs and reduce your home expenses slightly to counteract. 

As an example, if you usually spend $150 a week on groceries, $50 on petrol and $50 heating, if you go away for a week, you'll spend $200 less at home, but it's still added in your weekly budget. Your holiday costs are budgeted on top of this. If it's too difficult to calculate, don't panic - leave it as is – the more expenses load in your budget, the better off you'll be at managing your finances.

​How long does completing the budget planner take?
We estimate that the average person will take about two hours to complete it. We suggest getting comfortable with a drink and enjoy the challenge to take on the role of a detective. Ultimately, the more you put into it, the better your budget will be. You will also find out where and what you are spending your money.  

What do I need to start?
To make life easier, we recommend downloading or collecting the following:

1. Bank and credit card statements – the most recent three months is preferred. For example, if today is April 15, take the statements for January, February and March. This will give you a good overview of your direct debits, automatic payments and 
2. Supermarket receipts – if you can hunt for these, they will provide you with a good idea of where your grocery bill goes. 
3. Payment slips – while your bank statements contain your net pay, student loan repayments and child support are taken out of your gross income, and being aware of those costs is essential.

It's likely you'll be surprised to see how many things you spend your money on, and how much you spend on certain things. To make sure your budget planner is 100% effective, you need to be completely honest, and putting in a bigger number rather than a smaller number is the best way to give you some breathing space. 

Remember, there are always ways to save – cutting back and finding low-cost alternatives is easy enough, so don't feel guilty about 

MoneyHub would like to attribute many of the fundamental principles and points to MSE (UK). The spreadsheet is based on the freely available work of (insert). 

Related Guides

• Debt help
• KiwiSaver hardship