“You must gain control over your money or the lack of it will forever control you.”
The headline is a ripper isn’t it? Straight to the point and sure to draw people in (insert crying laughing emoji here). Still, I did say that my next article would be a practical one on how to, so being a woman of my word, here it is.
Actually, I won’t jump straight into the how. A few words on budgets first.
Budgeting…. There’s no sexy way to say it. Even if you make a little pouty mouth and use your best husky voice it still sounds harsh and certainly unappealing! I’ve heard people say they micro sleep when they hear it. People hate the idea of budgeting because it feels restrictive and often creates a scarcity mindset. Rather like a diet… the minute you decide to embark on a diet you immediately want chocolate.
Really, budgeting is about choosing how you spend your money. After 20 years in financial planning it’s clear that you need to understand where your money is going to ensure that your spending is aligned with your values: with what’s truly important to you.
So the first step is figuring out your current spending to see where you money goes and then budgeting is step 2. Tweaking your spending so it fits within your income and is aligned to your values.
Now comes the practical part:
In terms of budgeting we can break expenses into two types: fixed and variable.
Fixed costs are just that – fixed. Think rent or mortgage, rates, power, insurance, registrations, rates… you may be able to change them slightly (renegotiate your mortgage interest rate or turn more lights off to bring the power bill down) but generally they are pretty standard.
Accept these fixed costs as a given and embrace forward planning. The annual rates bill isn’t a “surprise”; we know it’s coming each year. The act of breaking expenses into manageable fortnightly chunks takes away the “power” of a big bill as you already have the money aside for it.
These are the easy costs to put into the budget. You just go back over your banks statements and there they are.
Variable costs are the trickier ones. These are the costs that change a lot and are generally controllable/negotiable and not usually essential – things your Nanna probably calls luxuries. They aren’t as easy to put in the budget as you don’t always spend the same each month so you might need to spend a month or two keeping tabs on your spending (use an app or keep receipts).
To actually do the budget is pretty simple: you can download an app, use the Australian Government Money Smart budget or email me for a copy of mine. You can write it down the old fashioned way, on a piece of paper (but you have to do you own maths!)
Write down your after tax income… the pay you get in your hand.
Subtract the fixed costs (above)
Subtract the variable costs (above)
The result will be either a positive or negative number. If it’s positive – well done – you have “surplus” or spare income. If it’s negative you’re spending more than you’re earning and it needs a rethink!
So you could choose to leave it at this point. You at least know what your current cost of living is and where your money is going. Maybe that’s enough for you.
Step five: aligning the budget with your values
I would, however, suggest you go back to your list of what’s important to you and see how much of your variable expenditure is on these things versus just going on things that you just do without question. (If you need a refresher on this article click here)
Don’t get me wrong… I’m certainly not the fun police. I’m not suggesting you take the good stuff out of your budget, just what doesn’t align with your values or stops you doing what’s important to you.
For me, holidays and adventures are really important. I always have a long list of places to see and visit. I have an idea of what they will cost and when I want to go and always have a bank account called “holidays” and every fortnight money goes into that account religiously. Being self employed my income can be lumpy, so some fortnights my income isn’t as big as others…. My holiday saving is a non negotiable for me, I’d rather not buy new clothes than miss out on a holiday! I put my holiday savings in the fixed cost category! I have a client for whom family holidays are so important that she decided to send the kids to a less expensive school so they didn’t have to compromise on their family time.
If you have big ticket items on your wish list (holidays, new car, wedding, maternity leave…) it’s really handy to break them into fortnightly or monthly amounts so the total cost doesn’t seem so overwhelming and you don’t resort to debt to fund them.
Step six: Now your values and budget are in alignment, it’s time to do some maths. Annualise all the expenses. If you pay a bill weekly then multiply it by 52 and that gives you an annual cost, if you pay monthly then multiply by 12.
Step seven: Divide the annual amounts by how regularly you get paid and this tells you how much you need to set aside each pay for that particular bill.
For example: If you get your electricity bill every 2 months and it is usually $300. To annualise it I multiply it by 6 = $1800 per year on electricity. If I get paid fortnightly I divide the $1800 by 26 = $69.23 per fortnight on electricity.
Step eight: Add up all your expenses from step seven and you know how much you need to set aside each pay to be able to cover your lifestyle costs as they arise. You might find it useful to have a number of fee free bank accounts to help with this (ING Direct is a good fee free option). Give each account a name (bills, holidays….)and put the money from your pay directly into that account.
Doing this means that when a bill arrives you know you have the money sitting in the bills account for just that time. It’s also useful to have a small amount set aside each pay for play money… the frivolous mindless spending, knowing that the important things are taken care of.
Step nine: review it every 12 months or so and make adjustments from time to time
Step ten: sit back and relax, knowing you can afford to do that things that make your heart sing!
Well done for taking the important step toward acknowledging and understanding your spending. It can be confronting but the peace of mind that comes from having it sorted is well worth it.
As always, if you have any questions or are feeling confused and want help. Give me a call or an email.