No guide to improving your financial situation would be complete without at least a mention of budgeting.
In my opinion, there are two ways you can budget.
The hardcore way
The hardcore way is where you create spreadsheets to monitor your weekly spends, predict future expenses, and have your financial year mapped out in advance.
Your spreadsheet is 3 pages long and you’ve calculated every foreseeable expense for the next 4 years.
It might look something like this...
The hardcore way is time consuming and tedious.
You forget to estimate an expense and get upset when you miss your budget or you can’t work out the formula in your spreadsheet.
You give up after 4 weeks in despair. “Budgeting is not for me” you mumble in quiet desperation.
The easy way out
The truth is, if you make it too hard for yourself, you’re not going to be successful in budgeting and controlling your expenses.
I reckon there’s a good chance you didn’t even read the hardcore budgeting techniques and skipped straight to this section.
I’ve used the ‘easy’ method since I earned my first pay cheque.
The easiest way to budget is to simply work out how much you want to save, and spend the rest.
The idea is to effectively pay yourself first, so that your savings are moved to a separate account where they are not to be spent. Over time, you effectively learn to live off the rest.
In terms of establishing the automatic transfers, there are two main ways to achieve this.
First, you can set up an automatic transfer with your bank so that your desired savings amount (hopefully at least 20%) is automatically transferred to a savings account when you are paid.
If you do this option I recommend you set up the auto-transfer to occur the day after you are usually paid.
Or instead you could ask your employer to pay your wages into separate accounts.
Either or, same outcome.
Although there is no such thing as a ‘high’ interesting paying account right now, for your savings account, I definitely recommend you keep your savings in an interest bearing account, or better yet, an offset account to reduce interest on your mortgage.
Some like to transfer the savings amount to a different bank account so that the balance available isn’t easily seen or able to be transferred back to the spending account.
My personal approach:
For me, I only use two accounts:
My everyday account where my pay is deposited into. I know that I need to keep enough in there for my fortnightly mortgage withdrawal, and everything above and beyond this is living.
My savings account where 20% of my savings are automatically transferred the day after I’m paid.
Using this option, I know that my 20% savings are untouchable, and live within the means of my everyday account.
For some, they might prefer to go a step further and set up multiple bank accounts as it makes it easier for them to see their savings goals towards future expenses.
If you were to add another account, I would suggest it’s an account for long-term goals, such as an overseas holiday or new car. As a suggestion you could allocate 10% of your wages to this account each time you are paid.
Regardless of which option you pursue, once you’ve set up the allocations, try your best to never touch your savings.
The reason automatic allocation of your funds works is because you don’t have to do much heavy lifting. When your spending account is approaching $0, you know that it’s a sign you need to cut back. Use that sinking feeling in your stomach to motivate yourself to reduce your spending and delay major and unneeded purchases.
Oftentimes, there has been a big spend that I’ve wanted to purchase. It might be something like a new mountain bike. Rather than spending money which took time to build up, I used the motivation of wanting to keep those savings to find alternative ways to afford the new bike. It might be selling unused goods on Gumtree, or taking on an odd job to build up some extra cash.
Knowing how hard I had to work to save that amount, makes me not want to frivolously spend it.
General spending guide:
Although we aren’t going to go hardcore into the budgeting process, I believe it is worthwhile to provide a high level guide for managing the household finances.
I have always worked off the following (though savings tend to be higher these days):
30% of your pay towards housing costs This includes mortgage repayments, rates, electricity, water, body corporate etc
20% of your pay towards savings and investing If you can do more, great, but 20% is enough for the average Australian. Remember, the proof is in the maths. 20% should also be the minimum you aim for.
50% for living life This may include holidays, car purchases, food, transport, entertainment, school fees, kid costs etc
Make life easy for yourself.
Select an amount to save. Transfer it to a separate account. Don’t spend it.
Do this for the rest of your working life, and you’ll fast be on your way to financial prosperity.
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