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Financial Planning and the ABC of the Basic Budget

Given the average debt levels in Australia you could be forgiven for thinking that we don’t think much about money, but that’s not true. Most of us often think about it - and how very much we’d like to have a little more of it. We think about better jobs, pay rises, higher business turnovers, bigger and better homes and cars, and of course, getting to the stage where we can make good investments that will generate relatively passive income so that at some point, we can retire comfortably.

Some of us have a little trouble aligning those wishes with our actions – bad spending habits are one way to ensure that you’ll always be struggling and wishing.

You can break the struggle and wish cycle with a good financial plan - and that begins with a good budget. To formulate your basic budget, just think ABC – awareness, budget, cash flow.

Awareness

Know what you are spending your income on. If you don’t you may as well be playing roulette with your income. It’s easy enough to be aware of the cost of the rent, mortgage, car payments and any other significant loans. Many have a rough idea of the average weekly grocery cost too - but after that it’s often a matter of just hoping the money will be there when the bills arrive. If it wasn’t for life’s unexpected costs and impulse purchases, that might even work. But it usually doesn’t!

Try these two simple exercises in spending awareness:

1.     For the next week write down the cost of every single purchase you make over and above your grocery, fuel, mortgage/rental costs; every take away food item, video rental, forgotten shopping items, magazines and newspapers, clothing items, alcohol purchases and any other casual purchases. Total it at the end of the week.

 

2.    Make a list of all your bills and semi-regular costs for a year – rent/mortgage, telephone, electricity, gas, subscription payments, all insurance policies, car registrations and service costs, regular fuel and grocery costs, prescription medicines, hair dressing, garden services, education costs, dining out, birthday gifts and Christmas spending. If you holiday or take weekends away regularly, include those costs too. You may need to look at last year’s accounts and credit card statements to refresh your memory.

Now add all the items from List 2 together and divide it by 52 to give you a weekly figure. Next, add your spending from List 1 to your weekly figure. For many people, this figure is quite a shock – it’s when they realise they are spending almost as much if not more than they are earning. Suddenly the reason for their credit card debt or inability to save becomes obvious.

 

Don’t panic! Awareness is the beginning of good budgeting.

Budgeting

The lists you’ve created will now help you to create a budget. If you are spending more than you’re earning, then quite simply you either need to earn more or cut back on some items. You’ll need to:

-       Set limits for items that aren’t completely necessary and adhere to those limits.

-       Look for ways you can reduce costs, for example, getting better deals on your insurance and buying some grocery items in bulk.

 

Speaking to a financial planner at this stage can be particularly helpful. They’re often full of creative ideas when it comes to reducing expenses.

Cash flow

If all or almost all of your income goes back out on bills and household expenditure, the chances are that you have no savings and when an unexpected expense or emergency occurs, you’re thrust into a stressful crisis. To resolve it you might find yourself not paying one bill so you can pay another, or borrowing money that must be repaid. The cycle goes on and on. For many people in this situation, life is one financial crisis after another.

A good cash flow means having sufficient money available to pay your bills when they’re due and having sufficient funds to cope with an emergency expenditure such as an expensive car repair. This is the minimum financial position you should be in.

They say that money doesn’t make us happy but I think most would agree that it’s easier to be happy when our finances are in good shape.

If you have just discovered you’re spending more than you’re earning, you need to understand that it’s a serious problem and one that is probably holding you back in a number of ways. You’d be well advised to seek the help of a qualified financial planner. A good financial planner can speak to you about debt consolidation and reduction and help you put plans in place to improve your financial future - and that will surely make you feel a little better!

 

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