Coaching Centre
Budgets and emergency funds
Building a personal budget from income and fixed and discretionary expenses, converting costs to the same time period, saving targets, and an emergency fund of 3 to 6 months of living costs.
A budget is a plan for your money before you spend it, not a record of where it went. People on good incomes still end up in debt without one, and people on modest incomes get ahead with one. The maths is simple. The hard part is being honest with the numbers.
Building a budget
A budget lists income (take-home pay, so after tax) against expenses, all over the same period. Expenses split into two kinds:
- Essential (fixed or needs): rent, groceries, transport, phone, bills and insurance.
- Discretionary (wants): eating out, entertainment, clothes beyond what you need, subscriptions.
Whatever is left is the surplus, which can go to savings. If expenses are bigger than income, there's a deficit, and something has to change.
Tom, 19, takes home $\$1150$ a week. He spends $\$320$ on rent in a share house, $\$130$ on groceries, $\$70$ on transport, $\$35$ on his phone and $\$60$ on bills, plus $\$180$ eating out and $\$60$ on clothes and other things. Find his weekly surplus and his saving rate.
Same period for everything
Bills arrive weekly, monthly, quarterly and yearly. Convert everything to one period before adding, using $52$ weeks $= 12$ months $= 4$ quarters $= 1$ year.
Emergency funds
An emergency fund is savings set aside for a job loss, a big car repair or an unexpected bill. A common guide is 3 to 6 months of essential expenses. Without one, an emergency usually goes on a credit card at $20\%$ interest, which is how small problems turn into debt.
Tom wants a 3-month emergency fund based on his essentials of $\$615$ a week. Find the target, and how many weeks it takes if he saves his whole surplus of $\$295$.
Check Examples 1 and 2. Switch to a 6-month fund: how many weeks does it take now?
Tom's rent goes up by $\$60$ a week. Change only the wants so that he still saves at least $\$250$ a week. What did you cut?
Your turn
Mia's essential expenses are $\$680$ a week. Find the target for a 6-month emergency fund.
Show the working
Monthly essentials: $680 \times 52 \div 12 \approx \$2946.67$. Six months: $680 \times 52 \div 12 \times 6 = \$17\,680$.
Weekly income is $\$980$ and weekly expenses are $\$812$. Find the weekly surplus.
$980 - 812 = \$168$.
Car rego costs $\$520$ a year. How much is that per week?
$520 \div 52 = \$10$.
Rent is $\$2600$ a month. Find the equivalent weekly rent.
Yearly: $2600 \times 12 = \$31\,200$. Weekly: $31\,200 \div 52 = \$600$.
Which is a discretionary expense?
Concert tickets are a want. The others are essentials.
Essential expenses are $\$2400$ a month. Find a 3-month emergency fund target.
$2400 \times 3 = \$7200$.
How many weeks does it take to save $\$7200$ at $\$180$ a week?
$7200 \div 180 = 40$ weeks.
Using the 50/30/20 guide, how much of a $\$1250$ weekly take-home pay should go to savings?
$20\%$ of $\$1250$: $0.20 \times 1250 = \$250$.
Rent is $\$450$ a week and take-home pay is $\$1500$ a week. What percentage of pay goes on rent?
$450 \div 1500 \times 100 = 30\%$.
Exam style: Lily's essential expenses are $\$540$ a week. She saves $\$220$ a week toward a 3-month emergency fund. How many whole weeks until she reaches it?
Target: $540 \times 52 \div 12 \times 3 = \$7020$. Weeks: $7020 \div 220 \approx 31.9$. After $31$ weeks she has $31 \times 220 = \$6820$, not enough, so $32$ weeks.
Exam style: Sam takes home $\$4200$ a month and spends $\$1050$ a week. Find his monthly deficit.
Monthly spending: $1050 \times 52 \div 12 = \$4550$. Deficit: $4550 - 4200 = \$350$ a month.