To Budget or not to Budget?
Budgeting is a word that many people unfortunately pay very little attention to. These people generally spend more money than they earn and typically have greater amounts of debt due to poor money management. Most times these people don’t even realise there is a problem, proving that ignorance is indeed bliss, or realise too late and find themselves in serious financial hardship.
If you are somebody that has never worried about budgeting or don’t know the ins and outs of budgeting successfully, this article is for you.
What exactly is a budget and why is it important?
A budget is a plan that is created to show if you are living within your means by figuring out exactly what you spend over a given period of time and comparing it to your incoming earnings. Without a budget it can be very hard to tell if your spending more or less than you earn. Where debts such as credit cards and mortgages that accrue interest are concerned, you may think that you are ahead when in actual fact you could be losing money and slowly gaining more and more debt. Drawing up a budget can bring these unseen problems to light so you can the reverse them and hopefully create a more positive cashflow with steadily increasing savings.
How do you create a budget?
Start by creating a list of all of your expenses including:
Groceries
Utilities
Mobile phone/internet
Mortgage/rent
Credit card
Subscriptions
School/day care
Cars/transport
Any other expenses
Once you have worked out how much you spend, compare that to your incoming earnings by subtracting your expenses from your income. If you end up with a positive number, good Job! That means you are on the right track. If it comes out negative, then you know you have some work to do. To bring this number into the positive will depend on your frugality. You will need to reduce your expenses related to non-essential purchases as much as possible.
In some instances, if your expenses largely outweigh your income you will have to make larger adjustments to your lifestyle and purchasing habits. Buying second hand or buying generic rather than branded products can help but you may need to take it further and cut some things out completely. You may even have to do without Netflix for a while until your finances are in better shape. It can be hard living without the things you’ve become used to, but it will be required if you ever want to achieve any semblance of financial independence.
One of the best tactics in your budgeting arsenal?
You’ll find that it can be relatively easy getting on top of your finances by employing this handy strategy. The idea is to create multiple sub-accounts within your main bank account. Name them however you wish based on the below.
Account 1
This is your main account where all of your bills get paid from. The bulk of your income should come here. Put slightly more than what is required to pay all outgoing bills.
Account 2
This account is used for bigger bills that are less frequent, such as car insurance etc. It is also in case of any unforeseen occurrences, for example, if a pet becomes ill and you need money to pay vet bills.
Account 3
Your savings go in here as well as any funds that will go towards any investing or wealth building. Hopefully you have some money left over after depositing into accounts 1 and 2 to put in here. If not, you will have to make changes to your spending habits to reduce expenses as this savings account is key to your financial independence.
Account 4
This is your play money account. The money in here can be used for anything you want, guilt free. Put whatever is left over from your income in here that hasn’t already been placed in the other accounts. Be mindful not to place too much that it inhibits your savings capacity but put enough so that you can still have fun. I recommend not more than $50 per week unless you can easily afford it. This account will increase your overall adherence to your budgeting plan by giving you a way to purchase things you want but don’t necessarily need.
As time goes on you might also like to add extra accounts to save up for holidays or for your child’s future, but by having those four to start with will help you stay on top of your incoming and outgoing finances.
A financial planner can help you work out your budget and put you on the right track to financial independence. They can help you set goals and gain a clear picture of your expenses and help you create a plan that you can stick to, while getting you out of debt and increasing your wealth substantially ready for retirement. It is never too late to start getting on top of your finances so why not start now?
Book in for your complimentary consultation - 0423 313 486 or kate@solacewealth.com
Kate Trost
Senior Financial Adviser and Director of Solace Wealth Management (AR numbers 465078/1262350)
Authorised Representative of Avana Financial Solutions (AFSL 516325).
