Personal financial management and how to prioritise your budget, is not commonly taught in schools. Most people learn it through experience, parents, mentors, seminars, books, videos, and podcasts. However, not everyone is fortunate enough to learn how to build wealth from a young age, and some have been brought up in an environment that was not efficient with money.
If you are currently in debt, it is important to learn the basic principles of personal finance to get out of debt and stay out of debt. For this blog post, we will feature our Financial Foundations Pyramid to help you understand the core fundamentals of a strong budget and help you to prioritize your spending. This chart will be a very helpful guide for those of you who are confused about how to handle your finances, especially since sometimes it can seem like your budget pulls you in so many different directions. Please note that the chart below is only a general guide. Feel free to adjust according to your current needs and financial situation - and if you need financial debt help, call us!
The Foundations of a Great Budget
Creating a great budget and reviewing your past spending will give you a bird’s eye view of where your hard-earned cash goes, and how to prioritise your money for the future. It’s important to be realistic when budgeting your money, because whilst you might have the best intentions, unexpected expenses also happen! Here’s how to prioritise your budget and stay in control of your spending!
Foundation 1: Budget for Essentials and Reduce Expenses
Though it goes without saying, having food on the table and a roof over your head is the most important thing you need to survive! Thus, when you sit down to do your budget, it’s important to prioritise these essentials first! In addition to food and shelter, insurance is an especially important expense to cover, especially if you own the property, and so too are utilities such as electricity, water, phone/internet, and body corporate fees and council rates. Transport is another essential for getting to and from work. Finally, to prevent yourself from getting into trouble with debt collectors and racking up extra fees and interest, it is recommended to pay at least the minimum repayment amount on your debts. Because this list of expenses is inevitable – see if it is possible to shop around and reduce your costs. If the housing market is going down, you might be able to negotiate with your managing agent for a cheaper rental rate when your lease is due for renewal, or alternatively move into a cheaper property. Otherwise, if you have a mortgage you might be able to refinance with another bank at a cheaper interest rate! For more general tips on budgeting your money, see our article: “How to check your budget in 5 easy steps”.
Foundation 2: Start an Emergency Fund
Once you have your basic finances under control, it is recommended to set up an Emergency Fund to cover you for those inevitable unexpected expenses. At a minimum, aim to save $1000, then increase this amount to one month’s worth of your total expenses. For more information about how emergency funds work and why you should have one, check out our article: “Emergency funds, why are they so important?”.
Foundation 3: Pay Down High-Interest Debts
High-interest rates are the number one thing that prevents people from getting on top of unmanageable debt. When you do up your budget, write down a list of your debts and the interest rates/penalty fees for each one (credit cards, personal loans, buy now pay later loans, payday loans). Whilst there are a few different methods for paying down debt, we suggest the snowball method whereby you start by clearing the smallest debt and move onto the next biggest. This method for paying down debts is great for people who have more than one debt and don’t know where to start because once you clear a debt, the repayment amount is freed up to contribute towards paying other debts. This strategy allows you to build momentum easily, which in turn boosts your motivation to keep going.
Foundation 4: Increase Your Emergency Fund and Mortgage Repayments (or Save for a House Deposit)
Once your debts are paid off and under control, the next step in building a rock-solid financial foundation is to increase your Emergency Fund to 3 and then 6 months’ worth of expenses (save a years’ worth for the ultimate failsafe)! Once you feel secure with your Emergency Fund, then you can look to increase your mortgage repayments, or start saving for a house deposit (you’re better off paying your mortgage than somebody else’s (renting) because at least if you own the property, you get to keep the equity). See our article: “Considerations on Saving for a Property (Pre-Purchase and Financing)” to get a better understanding of the costs of buying property.
Foundation 5: Set Up Sinking Funds and Savings Goals
If you are expecting large expenses in the future, now is the time to look at setting up some “sinking funds” and having a look at your short, medium and long terms savings goals. A sinking fund allows you to set aside money to pay for upcoming expenses (i.e. the cost to replace your car or paying extra into your house maintenance fund to cover any incidentals) and avoid dipping into your savings to finance an expense, whereas a savings goal will help you stay on track to funding something for your future (i.e. taking maternity/paternity leave or going on a holiday).
It is also important to mention that sinking funds and savings accounts should be separated from your emergency fund account, as this psychologically helps you to distinguish your financial priorities and not accidentally overspend. At this point, regardless of your age it also pays to look into boosting your retirement savings, as the power of compounding interest can help you grow your wealth effortlessly! For more information about saving for retirement, check out our article: “When Should You Start Saving for Retirement”.
Budgeting can be stressful, but by explaining how to prioritise your budget, we hope this article has given you a better understanding of how to reach your personal financial goals, and get out of debt with the long term goal to build wealth. If your current finances don’t allow you to save any money at all, or worse, your debts are mounting faster than your ability to pay (and getting a pay rise or boost in your income isn’t feasible), you may likely need some professional financial debt help to get back on track!
There are many debt solutions available, and it can be confusing trying to decide which option is best for you. Our expert team of Credit Counsellors will be able to assess your current budget, review your debts and help you find a way out of debt so that you can start fresh with your finances and implement these financial foundations in your budget. With interest-bearing debt, these fees and charges aren’t going to stop compounding unless you take action, so don’t wait until it’s too late! Call us today on 1300 003 328, and we can help you get on with rebuilding a solid financial foundation.