It’s been a whirlwind of a year with many Australians impacted financially by COVID-19 which means this is going to be a Christmas like no other. While it is easy to understand why Christmas preparation and celebrations may not be top of mind for some, for others it’s the one good thing to look forward to in 2020. A time to celebrate with loved ones and spoil your family with presents.
However, this all comes at a cost.
The greater your understanding of your personal spending patterns the easier it is going to be for you to take a commanding role in the management of your money, especially at this time of the year. Personal income and expenses can remain a mystery if you’re not understanding how much money is being spent on clothing, presents, food, decorations… or anything for that matter.
The pattern-breaker for this type of behaviour is to complete a personal budget. It has nothing to do with changing your income and spending patterns, that will come later, it has everything to do with knowing where your money comes from, and where it goes to.
Put yourself in the elite minority of people who can account for their own personal finances by following these six simple steps:
Gather all your paperwork
The first step of budgeting is collating all your paperwork – that includes your bank statements, credit card statements, pay slips, utility bills etc. If you’ve been fortunate to have all your paperwork neatly filed away in alphabetical/chronological order, then this task will be simple. On the other hand, if it’s in a disorganised pile don’t let the thought of sorting them out overwhelm you. It may not be the most exciting of tasks, but you’ll feel a great sense of relief once it’s done!
Get to grips with your spending habits
It can be very easy to lose track of what you’re spending your hard-earned money on. To help you understand your spending habits, set up a spending diary to record what you spend and where. This will enable you to categorise all your transactions, so you know exactly what you’re spending your money on. Don’t leave anything out, no matter how small – you’ll be surprised how the little things add up. It’s worth doing this for about a month to help you get a detailed picture.
Make a list
Once you’ve come to grips with your spending habits, the next step is to make a list of all your regular fixed outgoings and earnings. It’s a good idea to calculate this as an annual figure rather than monthly, because monthly figures can vary considerably. For example, you might be paying out for a holiday in one month or Christmas presents the next. Once you’ve worked this out, you can divide the result by 12 (months) or 52 (weeks) to calculate your weekly or monthly expenditure.
It’s worth adding in an estimated cost for emergency expenses such as unexpected car repairs or a new hot water heater. It’s better to overestimate than underestimate, so be generous. And don’t forget about annual insurance policies, such as home insurance.
Are you spending more than you earn? If to your disbelief, the answer is yes, you’ll need to tackle this head on. To do this it’s worth examining your outgoings to see whether you can make any cutbacks. Perhaps you could reduce your discretionary spending or clothes purchases. It’s important to be realistic when you’re doing this – don’t set yourself an impossible task that you know you’ll never stick to.
Obviously, items such as utility bills will still need to be paid, but that doesn’t mean you can’t save money. Some companies provide discounts to customers if you pay your bill on time so make sure you check with them. Similarly, see if you can get a better broadband, mobile phone, or insurance deal.
If you’re lucky enough to have some spare cash at the end of each month, don’t leave your money sitting in your cheque account. Instead, move it to a savings account or pay off your credit card debt.
Finally, don’t forget that this is a fluid process
You should review your budget on a regular basis to make room for any changes in your outgoings or earnings. For example, if you receive a pay review, your rental income from your property assets increases, your landlord increases your rent, or your mortgage costs change. Reviewing your budget will help you to assess whether you’re on track with your finances.
If you need help understanding your finances and preparing a personal budget, speak to one of our financial advisers today.