In May of every year, the Australian Treasurer delivers the Federal Budget and all across the country, people sit and listen. Why? Because the budget tells us exactly how the government plans to spend its revenue in the following fiscal year. It tells us if they can afford to give tax cuts, and whether or not they expect to spend more than the previous year
Every small thing must be taken into account because if they don’t make realistic plans and stick to them – the Australian economy will end up in a financial crisis. And guess what? The same will happen to you if you don’t control your personal budget and finances. Set yourself up for a successful year ahead with our 5 steps on how to check your budget.
Easy 5 Steps to Check Your Budget
1. Should You Be Saving More or Spending Less?
They might sound the same but these two couldn’t be any more different! It is possible to save more – but it is typically easier to spend less money than to make more money! If you’re trying to save more but are having difficulty, it could also be because you’re spending too much, which is taking away from your savings balance. Instead, try to save a consistent amount each week, fortnight or month and move your focus towards spending less.
To help you do this, you can try the “pay yourself first” strategy. What does that mean? To “pay yourself first” means you allocate and save a percentage or dollar amount of income out of every pay check, and spend the remaining amount according to a well-defined budget. As part of this personal finance strategy, we also recommend to transfer those funds to a separate savings account (and even with a different bank) as soon as you get your pay check – this makes it harder to access or impulse spend the funds (due to the bank transfer delay) and allows to you see how much progress you have made.
The “big four” banks (Commbank, ANZ, NAB and Westpac) and even some of the smaller banks and credit unions, all offer goal savings accounts with low or no account fees, which allows you you can easily track your financial progress and earn extra interest! Shop around and see if you can find one with a good interest rate to help boost your savings! To make this even easier, you can even open an account online – all you need is an address and a tax file number (TFN). Another method which can assist you to spend less, is by setting a spending limit.
Of course, you will need to set up a budget, but with this personal finance strategy, you allocate a small amount of money (once you budget for expenses and savings), for discretionary spending on “wants” such as take out and entertainment. After you have set this amount, you then need to practice financial discipline and challenge yourself not spend any more than the amount you have allocated. At first, this money habit can be hard to stick to – but it allows you to appreciate every dollar you spend and helps you learn how to stop wasting money.
2. Work Out Where Your Money Goes
Completing this step will help you achieve tip #1! Things like your daily coffee, that $4 subscription you don’t really use or a sneaky sandwich on a busy day can all add up quickly.
Go through your bank statements and write down (honestly) where your money goes. If you know you spend $5 a day on coffee, it’s time to build that into the budget. Having a truthful view of your spending will help you understand how much money you really have. This below graph shows how much a daily $5 cup of coffee can really cost you if you were to have invested that money instead at an average ASX200 return (8.8 percent) over ten years. If you want to see how other types of investment have performed as compared to Australian equities, just check this out. When you compare actual vs. planned spending on a regular basis (i.e. monthly), it helps you to keep track of your money habits, assess where you overspend or underspend, and make the necessary adjustments.
3. Review Your Budget Regularly
Scott Pape, author of the best-selling book The Barefoot Investor, suggests that intentionally carving out time to review your budget, and turning this process into a fun financial date night (i.e. with some garlic bread and wine and in the company of another person) will help hold you accountable and make the process more enjoyable! It is absolutely crucial to review your budget regularly and adjust accordingly, as many expenses are variable (i.e. water, electricity and groceries) and life circumstances and lifestyles tend to change over time.
Setting aside the time to undertake this single task is a financial game-changer – by staying up to date with your money, you can account for the unexpected and make sure you don’t over-extend yourself. Proactively reviewing your budget on a regular basis will help you pre-empt the possibility that you cannot afford to cover all your expenses (i.e. savings and spending) within a given month before you are out-of-pocket. Reviewing your budget regularly is also important to beat the enemy of personal financial management, lifestyle inflation. What is lifestyle inflation?
Lifestyle inflation occurs when an individual’s income goes up (i.e. after a pay rise or pay out), and so too does personal spending. Lifestyle inflation means that a person’s net spending remains unchanged, and tends to become greater every time an individual gets a raise - which means that rather than growing their wealth, people stay in the rat race.
The name of the game in finance has always been to increase the net amount of savings, after your expenses have been paid. But if you succumb to lifestyle inflation it can prolong getting out of debt, saving for retirement, or meeting other big-picture financial goals such as saving for a house or being able to provide for family in the future.
Lifestyle inflation affects almost everyone in at least one point within their life. Therefore, you should understand how lifestyle inflation could be impacting you, so you can prevent this bad money habit before it is too late. Lifestyle inflation can be the cause of getting stuck in a cycle of living paycheck to paycheck. If you need help getting your current debt under control and creating a personal budget that you can actually stick to - speak to our team today on 1300 003 328. They’ll help you live your life, without having to sacrifice your freedom.
4. Ask Yourself Before You Spend
When you find yourself about to make a purchase – whether planned or unplanned – ask yourself this question: in the words of Marie Kondo, does it “spark joy”? If not, put it down and walk away. Avoid mindless spending by asking yourself questions like: “Do I really need this item? If so, do I need to spend this much? Can I get it for less elsewhere? If I overspend, what will I have to remove from my budget? How many hours will I have to work to pay for this item? Is it really worth it?” Every year, Australians spend billions of dollars on food they don’t eat, clothes they never wear and services that aren’t used. Spending less might feel like going without, but in reality, it just means that you are spending sensibly. If you avoid unnecessary spending, when you do decide to treat yourself, it’ll feel 10x better and 100% less guilty!
5. Track Your Debt
The worst thing you can do with debt is ignore it. Turning a blind eye won’t make the debt go away. Instead, it will only increase the amount you have to pay due to late fees and interest which all just end up prolonging the time that you spend worrying about it. To avoid high interest costs, pay off your credit cards every month. We strongly recommend to track your debt, budget and spending in a spreadsheet, so you can easily calculate figures and quickly make changes.
Make a list of each of your debts and the interest rates, and calculate the overall amount you will pay over the life of each debt. Then, decide on a strategy to tackle each debt. It may make sense to focus on the biggest debt first (the fire-hose method), or perhaps you will feel more motivated to stick with a debt reduction plan if you tackle the smaller ones first (the snowball method).
If you don’t see any realistic way of paying your debts off given your income, it is going to take an excessive amount of time to pay your debt off, or you have debt-collections nagging you – perhaps you may need to seek the help of a service such as ours, who will be able to review your finances and help you get out of debt. Contact us now for an obligation free consultation.