Some of us watched the Federal Government present their annual budget, with forward projections and estimates down to the last dollar. Others just picked up the highlights the next day. In either case you’ll hear the media comment on whether it’s a surplus or deficit budget - and break down the effect it has on your finances. But do you have the same handle on your own financial situation?
Why not apply the same standards to yourself? You’ll soon know if you deserve your own ‘Back in Black’ coffee mug, or if you’ll continue to be a fan of Simply Red.
If there’s one account that doesn’t lie, it’s your bank account(s). A quick check is to compare the balance from 12 months ago to today. If you’re in surplus or deficit, the next question is: Why? Where did it go?
If you ask any small business owner what’s most important to them, “cashflow” is the most common answer.
Cashflow is simply the difference between the money you have coming in compared to what you have going out at any one time. For a business this is critical, as they need to pay suppliers and staff and need to make sure there is cash in the bank. For most people it’s not as front of mind, and many of us don’t know what our position is at any one time, or over the year.
To do your own budget assessment, total all your incomings: wages, salary, investment income, government benefits etc., just as you do at income tax time.
The next step is to total all your outgoings. This includes rent or mortgage payments, bills, credit card payments, school, childcare fees, insurance, groceries, entertainment and so on.
The best way to make sure you capture all the different ways of spending your money is to use a budget calculator and spending tracker app.
There are many budget spreadsheets online, but one of the best is Moneysmart’s budget planner. It breaks up your expenses into different categories and sub-groups, and you can adjust the frequency so you can more easily capture your expenses.
The next step is to track your spending for a while and see where your money goes. It’s not a lot of fun, but there are apps that will help you. Canstar, who are an independent ratings agency, have rated the best budgeting and tracking apps for you, with Pocketbook being the most highly rated.
Some of these apps can connect with your banking apps and automatically track your spending and shopping patterns. It’s a great help if you’re running a deficit and need to look for ways to cut spending.
If you’re in deficit, or neutral, it’s time to review and sharpen your spending habits. Depending on your style, you might prefer to start with small items, or tackle the big ones first.
For instance, if you have a mortgage, you should shop around and see what other rates are on offer, then contact your lender – you might be surprised at how quickly they come down. A 0.5% reduction on a $500,000 loan is equal to a saving of $2,500 a year.
If you’ve been with the same insurer for 20 years and made minimal claims, it’s time to review their rates and shop around too.
You don’t have to give up smaller items, such as your daily take-away coffee. But if you cut out two a week, that’s a saving of around $520 per year – or a flight to Cairns.
When building towards a budget surplus, don’t save what you have left after spending. Save first, then spend what’s left. Even better, automate your savings using automatic transfers from your transaction account, into your savings account. Make sure the amount you transfer covers your savings targets, and your important expenses, such as rent, mortgage payments, bills, school fees etc.
This way, you have to put off spending on ‘nice to have’ items until you have more cash coming in. This is the art of managing your cash flow.
With interest rates so low right now, it’s going to be hard to rely on interest to grow your savings. You’ll have to rely on your discipline.
If you’re saving for a big ticket item, such as a deposit for a home, which will take a few years, you might consider investing instead. For instance, a managed fund invests in markets that aim to deliver above bank interest rates, such as shares and even diversified portfolios. You’re taking some risk, but you’re also giving your money time to recover from any downturns.
If you’re a first home buyer look into the government’s First Home Super Saver Scheme as a way to use your super fund to save for your home deposit.
The biggest drain on a budget is personal debt e.g. credit cards and buy now pay later services. The high interest rates and late payments fees can cause your debts to grow faster than you might realise. (And it shouldn’t be used to pay for the Cairns holiday.)
First, know what your debts are and list them out including the interest rates and minimum payments due. Then prioritise them for repayment. It’s important to always make the minimum repayment on each loan otherwise you can end up with more fees.
A great tool for planning your repayments is unbury.me – it’s a debt calculator that helps you build a payment plan to minimise interest and get debt free as fast as possible.
Another strategy is consolidating them into one – such as a home loan, a secured personal loan or transfer the balances from multiple credit cards to one. Some credit card providers offer zero interest for balance transfers which can help put a dent in your debt. Be careful though as they often charge a much higher interest rate after the interest free period so anything you have left will attract the higher interest rate.
As you pay off each debt, close the account if you don’t really need it. This removes the temptation to slip back into bad habits.
Fantastic. You’ve been following your plans, and you’re either a frugal saver, or making so much in income your worries are where to spend your next dollar.
Money is a means to an end, and you should enjoy the fruits of your labour without worrying about where the next dollar will come from. Plan where your next holiday destination will be, what your next investment could be, and maybe start thinking about how to look after your loved ones once you’re gone.
Talking to a financial planner will help you organise your finances and put together a budget to turn your deficit into a surplus - or guide you in managing the one you have.
If you’re still learning about the basics of managing your money, check out our Money Matters modules at eisuper.com.au/MoneyMatters, which cover lots of financial topics in a language you’ll understand.
Alternatively, to make an appointment with one of our financial planners, please call 1300 369 901 (select option 2).
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