With the end of financial year approaching, it’s a good time to review your personal balance sheet. If it’s not as healthy as you would like, perhaps it’s time to do a little budget repair of your own.
Just as governments need to set policy objectives and budget for future spending commitments, households need to feel confident they can meet their current and future financial commitments.
So no matter how much you earn, it’s always a good strategy to check that your spending doesn’t exceed your income. It’s also important to think about how much you need to save today to pay for all the things you want to achieve in the future.
Before we look more closely at your personal finances, it’s worth understanding how you may be affected by the big picture.
Cost of living pressures
The big economic issues for everyone right now, from the federal government and the Reserve Bank to businesses and households, are inflation and interest rates.
While economists talk about inflation, individuals experience this as an increase in their cost of living. Inflation increased by 3.5% in the year to December, with the price of fuel and the cost of buying a new home the biggest contributors. Prices of food, transport, health and insurance are also rising.i
Rising prices also put pressure on the Reserve Bank to lift interest rates to dampen demand. Lenders respond by increasing interest rates on mortgages and other loan products. While the Reserve Bank recently lifted rates, homeowners and investors need to be prepared for the increase in mortgage repayments.
While higher prices are not a major concern if your income is growing faster than inflation, annual wages growth is lagging inflation at just 2.3 per cent.ii In other words, unless you’re lucky enough to secure a big wage rise your finances could be going backwards in real (after inflation) terms.
Given these challenges, what can you do to get ahead?
Start at the beginning
Money may not buy you happiness, but having enough to afford the life you want to lead certainly helps. So how much is enough?
A recent survey by Finder found 25 per cent of Australians wouldn’t feel affluent unless they earned at least $500,000 a year.iii Not only is this almost nine times the average income of around $60,000, many of today’s rich listers started out with far less.iv
There’s nothing wrong with dreaming big but you are more likely to achieve your goals by being realistic and to start with, making the most of what you already have.
Before you can build wealth, you need to understand what’s coming in, where your money’s going and where you could make savings, by following these four steps:
Add up your annual income from wages, investments and government benefits.
Add up your spending on essential living expenses including mortgage or rent, groceries, utilities, transport and insurances; and discretionary spending on the fun stuff like clothes, dining out, entertainment and holidays. If you don’t have receipts, try tracking your spending over three months or so using one of the many free online budgeting apps.
Subtract your total spending in step 2 from your total income in step 1. If you spend more than you earn or barely break even, then look for areas where you could save. Things like cutting back on takeaways, impulse spending online, and streaming services you rarely use. Ring your mortgage lender to negotiate a better interest rate and when insurances come up for renewal, shop around.
Draw up a budget to track your spending and put a savings plan in place to achieve your goals. Even a simple plan will help with discipline and make regular saving automatic.
Putting it all together
Some of the most popular budget strategies take a bucket approach, with separate money buckets for needs, wants and savings.v Most aim to set aside around 20 per cent of your income as savings and paying yourself first by setting up regular debits to a savings account. If you have debts or don’t have an emergency fund, then these should be attended to before you direct savings to investments or other goals.
To be successful, a budget needs to be one you can stick to, tailored to your personal goals and financial situation. If you would like us to help plan your personal budget strategy, get in touch on (02) 8277 4605.