How to budget your money – the results and what does it all mean for you
After completing the Personal Financial Budget worksheets we need to look at what it all means. Yes, there was a little legwork on your part but, nothing worthwhile is easy! The hard part is over and what you just completed was the key in self-assessment and moving forward. By going through the actions in learning how to budget you were made accountable for ALL your inflows (income) and outflows (costs). I’m sure you were shocked (as I was) just how many outflows there really are! We all remember the big events in life (our first love, first car, wedding day – and for some people wedding day(s), first job – the list goes on) but, who can remember what we did on April 25th last year or the day after that? For most, the days mould into one and are soon forgotten and this is the case with daily financial inflows and outflows too. It’s too easy to glance over the details in your daily financial struggle but, they all add up very quickly and until you shed light on them you can’t possibly hope to control them.
Savings / Investment Capacity Surplus
Congratulations! You have a surplus amount remaining from your income after all your lifestyle expenses are deducted. You either earn way too much or you are very thrifty in your spending habits. Either way, you have options now and they are vast. This is where a solid financial planner will be able to assist more with your personal situation and offer advice on particular products but, I have listed two options for thought prior to the discussion:
- Save for a purpose – put the kids through university, enjoy a relaxing month long cruise around the scenic waters of Canada, take an energetic ski trip in the Swiss Alps or retrofit that aging bathroom. The choice is yours.
- Invest – there are a number of lower risk investment vehicles to investigate here such as quality common stocks, low cost index funds, mutual funds, government bonds or property.
Savings / Investment Capacity Deficit
It’s ok, relax. This is the reason you are visiting this site. Depending on how bad the situation is will depend on how drastic the change will need to be. If you are only marginally under your break-even point then some simple tweaking of your costs should bring about a positive result. If on the other hand you are WAY under the break-even point then some hard decisions will need to be made. Getting back in the black may take some time for you – my advice, by patient and diligent. Keep working at the end game and don’t lose heart or focus. Doing nothing won’t achieve anything.
There are two ways to pull things around 1) increase your income and 2) reduce or eliminate costs, with the latter being the quickest and easiest. In terms of costs, a suggested approach would be to address the items with the least impact on your lifestyle and see if they are really necessary then move on to the high value items. The following details can be applied to all personal circumstances so take what you need from it and massage it to your own situation.
Step 1 – Spending Worksheet
Start with the Spending Worksheet and the minor recurring expenses. Does your dog Cleopatra really need professional grooming once a month? Or do you really need that annual subscription to Lazy Lakes Bass Fishing? See if you can you eliminate or reduce any of the items. Get ruthless! If you haven’t used it in the past 12 months or it won’t really affect your lifestyle then get rid of it. If you lack the inner strength then someone else to do it for you. Often, there are quite a few non-essential items found here that you could simply cut and save a lot of money. FM Tip – A good way to sniff out all the hidden items is to check your credit card statements for recurring figures as these can continue without your current knowledge. In terms of reduction, can you cut back on the frequency or quality of some items like dental or clothing. I said cut back, not eliminate. I don’t want to be responsible for you walking around in a potato sack with half your teeth missing!
If this first round of cutbacks isn’t sufficient then move onto the major recurring expenses. Get creative in elimination and/or reduction of these items. Food is usually the largest household expense after the mortgage so there is plenty of room to cut the fat! We try to eat healthy (lots of meat and fresh vege’s) and my wife makes it very clear to me every week just how much this choice of lifestyle costs. She has become very frugal with shopping ideas like shopping for fruit and vege’s at the farmers market or buying in bulk so I know there are opportunities for savings here. Other areas – look at your major utilities and see if you can switch to a better plan or provider, be more conservative in your water and electricity consumption, evaluate the level of need for your child’s education or extracurricular activities, car pool to save on fuel, get your car serviced less frequently. The options are only limited by your creativity so start brain-storming!
Step 2 – Borrowing Worksheet
The next area to investigate would be the Borrowing Worksheet. Start with the Other costs and then move onto the Personal costs and finally the Investment costs. Take the same investigative approach you adopted from step 1 and eliminate or reduce. Make sure you have the best mortgage available for your personal needs. I recently saved $2,400 annually on our personal home mortgage just by shopping around. Credit cards are a death trap for the financially unaware and reckless! Get rid of them. This should be a primary focus in the cost cutting diet. There is no sense in paying for something with someone else’s money and getting slugged 20+% for the service. Interest free days are fantastic if you are routine in keeping on top on this. If you are reading this, chances are you are not routine enough to afford this luxury. Something else worth considering is debt consolidation. It’s a common debt reduction strategy suggested in the financial planning industry. This is the process of taking all your debt sources like your mortgage, car finance, personal loans and credit cards and combining them into a single and more manageable debt facility. The advantage is simplicity and a lowering of the actual cash outflow as the smaller debts (credit cards, personal loans and car loans) with their super high interest rates are diluted by the larger debt (home mortgage) with its much lower interest rates. The option improves cash flow but, over the long run of say 30 years (a typical home loan period) you will end up paying proportionately more in interest. The process requires professional advice and some balancing so be sure to contact a registered financial adviser if you choose to go down this path.
Step 3 – Insurance Worksheet
Insurance. The catch-22 dilemma. More likely than not you will never end up claiming what you actually paid in premiums BUT, you play the roulette risk wheel in not having it, so for the sake of prudence and in the spirit of this site which is to teach sound of mind and sensibility in practice I would strongly recommend having it. What insurance and how much you need will depend on your needs and personal circumstances and once more I would suggest enlisting the advice of a registered financial adviser to assist with this. Do your homework in the meantime and start with your Personal insurance. Private health insurance is mandatory in Australia to avoid the Medicare Levy Surcharge (up to 1.5% of Gross Income) but, there are a host of providers and options to look into that could result in some significant savings. Using my personal situation as an example, we lowered our insurance coverage about 18 months after my youngest was born because the extra features were no longer required. This saved us $960 a year with no real loss security. Lesser publicised and thought about insurances such as Income Protection and Life Insurance are just as important on the insurance scale and there is room for improvement here too. Rather than hold separate polices in these two areas I simply added them to my Superannuation provider and saved a HUGE amount of money, around $1000-2000 a year when I research it some years ago.
Step 4 – Income Worksheet
The potential here is the single greatest out of all the options but, also the most demanding of your time, energy and resolve. The Income Worksheet provides four areas for investigation of which three are under your direct control. Start with Rent from Investment Properties (if you have them), this is the easiest source to generate some extra cash. A marginal and fair increase (<10%) in your tenants weekly rent will greatly assist your cause. After this, the next impact point would be your work. When was your last pay increase? Maybe it’s well overdue. My personal thoughts on this matter would be to make yourself indispensable, you will then have some leverage but, this site isn’t designed to provide tips on employment negotiation. There are a multitude of resources available both online and at your local bookshop or library. A brilliant resource on this subject is “The 4-hour Workweek” by a mind that is revolutionary in thinking, Timothy Ferriss and his teachings in this area should equip you with solid skills going into the negotiating arena. The final area of investigation is the income from Investing. There is no short-term risk-free option for significant income generation through investing, the optimal time horizon spans years and even better decades. While investment activities play a vital part in securing a strong financial future the pathway isn’t beneficial in short-term cash flow correction unless you have multi-million dollar portfolios that accrue hefty interest payments or which you can liquidate to raise cash.
Step 5 – Other Ideas
While the purpose of this site is to promote asset accumulation, if you have applied all that you can from the sections that precede this one and you still fall short then another resort may be a temporary liquidation of assets to correct your current position and allow you to regroup and set in place a new financial plan.
Outsource Your Time
We all have talents, some are better than others. Look at what you are good at or what you have experience in (work or personal) and find a way to capitalise on this on a casual basis for some extra income. Are you particularly handy with design work or computer IT or handyman tasks, try offering your services to friends of friends or the public. It doesn’t take much to register a business as a sole trader, it’s free and takes about 30 minutes.
Up next – Investing
Now that we have touched on enhancing your awareness of personal budgeting we will take a look at what we can do with excess funds – investments. I have addressed two main categories for the time being:
- Index Funds
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